Of all the international information return obligations, the IRS Form 8938, Statement of Specified Foreign Financial Assets, is a relative newcomer. Enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act in 2010, the applicable statutory provision under section 6038D of the Code requires certain persons to report their interests in specified foreign financial assets if the person holds an interest in a threshold amount of such assets in a tax year. A failure to timely and accurately file an IRS Form 8938 can result in significant civil penalties and open statute of limitations periods. The following provides some helpful information about the IRS Form 8938.

Who Must File

The most common filers for IRS Form 8938 include U.S. citizens, green-card holders, and individuals who meet the substantial presence test under the Code (so-called “specified individuals”). However, “specified domestic entities” must also file the form if other requirements apply.

For these purposes, a specified domestic entity includes a U.S. corporation, partnership, or trust. Generally, domestic corporations or partnerships have an IRS Form 8938 filing obligation if the entity meets two requirements. First, a specified individual must effectively have 80% or more of the control or value of the corporation or partnership—i.e., for a corporation, 80% or more of the total combined voting power of all classes of stock or 80% or more of the total value of the corporation’s stock and, for a partnership, 80% of the capital or profits interests in the partnership.

Second, the corporation or partnership must derive at least 50% of its gross income from passive income (i.e., dividends, interest, certain rents and royalties) or must hold at least 50% of its assets for the production of such income.

Generally, a specified domestic entity includes a domestic trust if the trust has one or more specified individuals or specified domestic entities as current beneficiaries of the trust. A specified person is considered a current beneficiary if the person is entitled to mandatory or discretionary distributions from the trust during the tax year.

What Is A Specified Foreign Financial Asset

Significantly, the list of specified foreign financial assets differs from the separate FBAR reporting requirements, although in some instances they may overlap. Where they overlap, the taxpayer may have two separate reporting obligations.

For IRS Form 8938 reporting, a “specified foreign financial asset” includes: (i) financial and investment accounts with foreign financial institutions; (ii) direct holdings in non-U.S. stocks or securities; (iii) interests in foreign entities, such as foreign partnerships and foreign trusts; and (iv) interests in foreign pensions or deferred compensation plans.

The interest in the foreign asset must be disclosed on the form only if the income, gain, loss, deduction, credit, gross proceeds or distributions attributable to the asset would be required to be reported, included, or otherwise reflected on the specified person’s tax return.

What Are The Threshold Reporting Requirements

Even if a specified person has an interest in a specified foreign financial asset, such person will not have an IRS Form 8938 filing obligation unless certain threshold reporting requirements are met. At least with respect to specified individuals, these threshold amounts depend largely on the individual’s filing status for the year of reporting. The threshold reporting amounts are based on the fair market value of the assets.

For those filing single or married filing separately, an IRS Form 8938 is required if the individual either has $50,000 of specified foreign financial assets at the end of the tax year or $75,000 at any time during the tax year. The filing threshold is doubled for married-filing-jointly couples—that is, the amounts are increased to $100,000 at the end of the year or $150,000 at any time during the year. Individuals who permanently reside overseas have even higher thresholds.

Specified domestic entities have the same thresholds as those that apply for a single-filer or an individual filing married filing separately.

Penalties For Failure To Timely and Accurately File

Significant civil penalties may apply for the failure to file a timely and accurate IRS Form 8938. For such failures, the IRS may impose a civil penalty equal to $10,000 for each non-compliant tax year. In addition, if the IRS discovers the non-compliance, it may send a notification to the taxpayer requesting a proper IRS Form 8938 filing. If the taxpayer refuses to comply with the request after 90 days from the notice, the IRS may apply continuation penalties equal to $10,000 for each 30-day period after the 90-day window until the form is properly filed or until the cumulative amount of the continuation penalties reaches $50,000.

Taxpayers with understatements of tax attributable to a non-filed or improperly filed IRS Form 8938 also run the risk of enhanced accuracy-related penalties. More specifically, in these instances, the IRS may impose accuracy-related penalties equal to 40% of the underpayment of tax (as opposed to the general 20% accuracy-related penalty).

Statute Of Limitations Remains Open For Failures to Timely File

In addition to the civil penalties mentioned above, the statute of limitations for the IRS to make an additional assessment continues indefinitely until the IRS Form 8938 is properly filed and for three years thereafter. If the taxpayer can show reasonable cause for the non-compliance, the statute of limitations remains open only as to the amounts that should have been reported on the IRS Form 8938. But if the taxpayer cannot show reasonable cause, all items on the tax return remain open for audit.

Taxpayers who have missed an IRS Form 8938 filing deadline have options. Initially, such taxpayers should consider whether they meet the requirements of the IRS’ Streamlined Filing Compliance Procedures. A successful submission under this program often results in the IRS waiving the penalties entirely. Moreover, even taxpayers who fall outside this program may qualify for a waiver or abatement of the penalties based on reasonable cause.

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