Tax Form 8938 Reporting Requirements Explained 2023

Tax Form 8938 is used by the IRS to help track foreign financial assets. If you have a financial interest in or signature authority over certain foreign financial accounts, you may need to file this form. The purpose of this form is to ensure that taxpayers with foreign financial assets report those assets on their federal tax return. The penalties for not filing Form 8938 can be steep, so it’s important to make sure you understand the requirements and file the form if necessary.

To put it simply, Tax Form 8938 is essentially an informational IRS tax form. This is greatly applicable to a US national with a certain threshold, who owns a foreign financial asset value. The most common financial assets include:

• Foreign Brokerage Account
• Foreign Bank Account
• Foreign-issued life insurance
• Foreign financial instruments 
• Foreign annuity contracts with cash value 
• Shares in foreign hedge funds and private equity funds
• Foreign Mutual Funds 
• Foreign Trust
• Foreign Retirement Plans

The main requirement of the form comes under the Foreign Account Tax Compliance Act-FATCA. This body has been created to ensure that taxpayers do not get away by hiding their assets and income overseas to escape taxes.

Tax Form 8938: Who Needs to File them?

The basic threshold for filing the form directly depends upon the filing rules and your residency:

Following are the threshold for filing for the US individuals residing in the Country:

• Single or Married Filing Separately: If the total value of the foreign assets exceeds $50000 then it is required to file form 8938. This is as on the last day of the tax year or more than $75000 at any time during the year.
• Married Filing Jointly: In case the total value of the asset that you and your spouse own exceeds $100000, as on the last day of the tax year, then it is required for either of the partners to file the form. This same applies if the foreign asset exceeds more than $150000 during any time of the year.

The following are the threshold for the US national living outside of the US:

• Single or Married Filing Separately: It is mandatory that one file form 8938, in case the total value of the foreign asset exceeds more than $200000 as on the last day of the tax year. The same applies in case the asset increases to $300000 anytime during the year.
• Married Filing Jointly: You must file the form in case the foreign asset owned by you and your spouse exceeds $400000 on the last day of the tax year. The same applies if the assets are worth $600000 at any time during the tax year.

Read More : Tax Form 8621

The Tax Form 8938: The Information Within

With the help of Form 8938 one can easily list the various details and balances of any foreign financial accounts. This will also enlist the income earned from each account for that particular year. This income should tally with the report on Schedule B (Dividend and Interest) of the income tax return.

The Due Date

Form 8938 must be filed along with the income tax return form 1040 and the due date is around the same time. Generally, the deadline is April 15, but the date has been shifted to April 18 in 2023. Nevertheless, an automatic two-month extension to June 15 is received for the expats. If required, one can also request an additional filing extension until October or even December.

Note: The extension to file does not apply to an extension to pay. Irrespective of the extension the individual still has to estimate and pay the annual taxes according to the original deadline.

Failing to File: What are the Penalties?

One will have to face severe penalties if failed to file form 8938. This is generally a fine of $10000 per year. 90-day compliance is granted in case the IRS notifies the taxpayers about the delinquency. In case of repeated refusal to pay them on time, an additional fine of $10000 for every 30 days of noncompliance is levied, which can go up to a maximum of $50000. This amount is exclusive of the original $10000 per year. 

Also, according to the IRS, “underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial underpayment penalty of 40%.”

There are also times and cases when Criminal penalties might also be applied. Hence, the individual should file the form as and when mandated.

Form 8938: The Steps to File

Form 8938 comprises six parts:

Part 1: This is to report financial accounts

Part 2: This is to report the other financial assets which include bonds, stocks, and various other financial instruments

Part 3: This comprises the summary of the income derived from the foreign Financial assets

Part 4: This comprises the summary of the financial assets that have been exempted from Form 8938 reporting. The reason is, that the individual has already reported them somewhere else on the tax return

Parts 5 and 6: These are the parts that contain further details about the foreign accounts and the financial instruments.

Once the forms have been duly filled out with the required details, you need to attach them to your annual income tax returns and file them simultaneously. For further details, you can go ahead and check out the official website of the IRS.

Note: It is advised that you file form 8938 under the supervision of an expert professional. This is because this particular form is especially complicated to file and determining its application itself is a task.

Form 8938: The Reporting Requirements for 2023

While most of the basics of the reporting requirements are the same for the year 2023, nevertheless, here is a brief about the same for the year 2023

The Threshold Filing Requirements for the Form for the year 2023:

Those US taxpayers who have met the threshold requirement, need to file the tax return and also include the specified foreign asset reporting with the tax return. However, as mentioned previously the threshold requirements are different for US and non-US residents, along with the taxpayers filing status. Hence, it is important to note that form 8938 is not the same as that of FBAR. Some people will have to file both form types, while others need to file only one form type, and also certain taxpayers do not need to file any of the form types.

The Deadline 2023

As for the deadline, not much has changed:

• April-US residents
• June-Foreign Residents
• October-Extension
• December-Special circumstances extension

The Penalties for late filing 2023

The penalties as stated by the IRS are as below:

• “Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D.
• In case of failing to file each of this information a penalty of $10000 and an additional $ 10000 is also added for every month. This is initiated 90 days after the notification has been sent to the taxpayer about the delinquency with up to a maximum of $50000 per return.

The Exception Cause for Late Filing

The penalties can be limited with the reasonable cause, however, the IRS limits the ability to claim reasonable causes:

• While these might be vague as stated by the IRS however, it is worth taking a look at some of the exceptions caused for late filing.
• One of the prime reasons includes if you meet the requirements to be treated as an exempt beneficial owner. (e.g. as a foreign central bank of the issue described in Treas. Reg. § 1.1471-6(d), as a controlled entity of a foreign government under Treas.

What is Categorized as a Foreign Financial Asset?

According to the IRS, any financial asset that is ‘specified foreign financial asset is categorized under this:

• This includes the Financial accounts that are maintained within the institutes located outside of the US. This includes bank accounts, investment accounts, deferred compensation plans, investment accounts, and mutual funds.
• Notes or bonds that are owned by the foreign individual.
• Interest arising from a foreign entity like any foreign corporation, foreign estate or trust, or foreign partnership. 
• A financial instrument or contract that has an issuer or a counterparty who is not a US resident.
• Any personal or rental properties if they are owned by a foreign partnership, trust, estate or corporation.

Note: If the taxpayer earns income less than the income requirement does not have to file form 8938. Here the requirements are the same as that of the standard deduction for most non-dependants as of 2022.

How to Get the Form 8938

This form can be easily downloaded from the official IRS website or can be acquired from an accountant. These are also easily available at libraries, grocery stores, Post offices, Print Centers or Office Supply stores. Other platforms like TurboTax ensure that the forms are included automatically if you file your form through online software. 

The next best part is that the form can also be ‘E-filed’. This can be done with the rest of your annual tax returns using any reputed tax filing software. But, once again, be sure to take note of the deadline, which is usually April 15. 

Once the form has been duly filed, you can mail the same manually along with the rest of the tax returns and the tax payment, according to the annual Federal tax filing deadline. Likewise, it can also be e-filed, as mentioned previously.

Also Read : Capital Gains Rollover

Conclusion

Filing form 8938 can be tricky and complicated, to say the least. For this reason, it is advised to take assistance from a tax professional who can explain to you all the details along the way. However, in case you still have any queries, feel free to reach out to our team of experts and we will be more than happy to assist you.

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