The Foreign Account Tax Compliance Act (FATCA)[LR1] is generally associated with reporting requirements for foreign banks and foreign entities to disclose the names of U.S. individuals using such foreign vehicles to hide U.S. financial accounts. (See all three blog posts in this series on FATCA compliance.)
However, there is an important FATCA reporting requirement, the Statement of Specified Foreign Financial Assets, Form 8938, that affects U.S. individuals and certain U.S. entities that own foreign financial assets.
Failure to timely submit this form may lead to significant penalties and could open up the possibility of an IRS audit.
Form 8938 basics
Section 6038D of the Internal Revenue Code requires a U.S. individual to report any interest in a specified foreign financial asset to the extent such assets exceed a certain threshold.
Beginning with the 2012 tax year, this reporting is satisfied by filing Form 8938 with the Internal Revenue Service (IRS).
A specified foreign financial asset is defined as including any of the following:
- a financial account maintained by a foreign financial institution, such as foreign savings, deposits, checking, and brokerage accounts;
- stock or securities issued by a foreign person, such as shares issues in a foreign corporation;
- financial instruments or contracts held for investment purposes whose issuer is a foreign person, such as a promissory note issued by a foreign person; and
- any interest in a foreign entity, such as an interest in a foreign partnership or a foreign trust).
The filing threshold for filing Form 8938 for an unmarried individual is $50,000 on the last day of the year (or more than $75,000 at any time during the tax year), and higher if the individual is married and/or living outside the United States. The statute provides that future regulations may be issued to require reporting by domestic entities formed for the purpose of holding a specified foreign financial asset. However, no such regulations have been issued to date.
Taxpayers with a Form 8938 filing obligation need to attach this form to their annual individual income tax return (Form 1040). If Form 8938 is not timely filed by the due date, the IRS may impose penalties of $10,000.
Perhaps even more alarming, the failure to file Form 8938 may extend the statute of limitations (i.e., the period during which the IRS can audit a) until the form is submitted. This is particularly significant because the scope of the IRS audit does not have to be limited to the individual’s foreign bank accounts.