If you have substantial wealth, spend a lot of time overseas, or both, there’s a fair chance that you have one or more foreign bank accounts. Whether it’s due to convenience or investing opportunities, you may have a legal obligation to report those accounts to the United States government.
The most well-known duty is often referred to as FBAR, or the Report of Foreign Bank and Financial Accounts. The Bank Secrecy Act requires eligible individuals and institutions to file an FBAR with the Treasury Department using Financial Crimes Enforcement Network Form 114. If you’re required to file an FBAR, you might also have to file a special form with the IRS, specifically Form 8938, Statement of Specified Foreign Financial Assets. Let’s take a brief look at this form and what it requires.
What is Form 8938?
This IRS form allows eligible taxpayers who have an interest in certain foreign financial assets to report those assets to the IRS. Often, but not always, if a taxpayer is required to file an FBAR, they’ll also need to file Form 8938.
When to File Form 8938
Form 8938 is usually filed along with the annual income tax return, typically due on April 15 each year. However, if a taxpayer isn’t required to file an income tax return for a particular tax year, then they don’t need to file Form 8938 for that year, either.
Who Must File Form 8938?
A covered individual or entity must file Form 8938 if they have an interest in a specified foreign financial asset and the value of that asset exceeds a certain threshold. There’s a lot of information here, so let’s break it down to better understand these requirements.
A covered individual or entity includes U.S. citizens, resident aliens of the United States, nonresident aliens who choose to be treated as resident aliens so they can file joint income tax returns, nonresident aliens who are bona fide residents of American Samoa or Puerto Rico, and specified domestic entities.
Specified domestic entities are closely held domestic corporations and partnerships with at least 50% of their gross income coming from passive income (or at least 50% of their assets producing or being held to create passive income) and certain domestic trusts with one or more specified persons or domestic entities as a current beneficiary.
Assuming a taxpayer is covered by Form 8938’s requirements, they must also have an interest in a specified foreign financial asset. In this context, “interest” means holding or disposing of a foreign account or asset that results in any income, gains, losses, deductions, credits, gross proceeds, or distributions that would normally need to be reported on an income tax return.
In addition to the above two requirements, there’s also a dollar value threshold for the foreign accounts and assets that must be reported. For individual filers (unmarried or married filing individually), the reportable assets or accounts for taxpayers living in the United States must have a total asset value of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. These thresholds rise to $100,000 and $150,000 respectively for married taxpayers filing joint returns.
Taxpayers living outside the United States have thresholds that are quadruple in amount. So, individual filers (unmarried or married filing individually) must have a total asset value of more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. Married taxpayers filing joint returns have thresholds of more than $400,000 on the last day of the tax year and more than $600,000 at any time during the year.
Only after all three of these requirements have been met will a taxpayer usually need to file Form 8938.
Are There Any Other Tax Filing Requirements in Addition to Form 8938?
Possibly. Depending on the type of tax return that taxpayer is required to file, they may need to answer questions relating to their foreign bank accounts and other overseas financial assets. Examples of other tax forms that may ask for information about foreign financial accounts include Form 1041, U.S. Income Tax Return for Estates and Trusts; Schedule B (Form 1040), Interest and Ordinary Dividends; Form 1065, U.S. Return of Partnership Income; and Schedule N (Form 1120), Foreign Operations of U.S. Corporations.
All of this can be quite complicated, and the above discussion is only an overview of Form 8938 and the IRS tax reporting requirements for foreign assets and bank accounts. Failing to comply can result in penalties of up to $60,000 and even criminal charges. Therefore, it’s strongly recommended that if you think you might be subject to Form 8938’s reporting and filing requirements, you should consult with a tax professional.
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