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The Who, What, When and Where of IRS Form 8938, Statement of Specified Foreign Financial Assets

By Joel N. Crouch on February 10, 2020
IRC Section 6038D requires any taxpayer who has an interest in a “specified foreign financial asset” to disclose that asset to the IRS on a Form 8938 attached to the taxpayer’s annual tax return. The penalty for failure to file Form 8938 is $10,000. If failure continues for more than 90 days after notification by the IRS, an additional penalty of $10,000 will apply for each 30-day period during which the failure continues. The maximum penalty for a continuing failure to file a Form 8938 is $50,000.

1. Who is required to file Form 8938?
  • A specified person (either a specified individual or a specified domestic entity) that has an interest in specified foreign assets and the value of those assets exceed the applicable reporting threshold.
 
2. Who is a specified individual?
  • A U.S. citizen.
  • A person who is a resident alien for any portion of the tax year.
  • A nonresident alien who has elected to be taxed as a U.S. resident for purposes of filing a joint income tax return.
  • A nonresident alien who is a bona fide resident of Puerto Rico or a § 931 U.S. possession.
3. What is a specified domestic entity?
  • A domestic trust (subject to some exceptions) that has one or more specified persons as a current beneficiary.
  • A closely held domestic corporation, or a closely held domestic partnership, is a specified domestic entity if:
    • At least 50% of its gross income is from passive income, or
    • At least 50% of its assets produce or are held for the production of passive income.
4. What is a closely held entity?
  • A domestic corporation is closely held if, on the last day of the corporation’s tax year, a specified individual directly, indirectly, or constructively owns at least 80% of the total stock (voting or value).
  • A domestic partnership is closely held if, on the last day of the partnership’s tax year, a specified individual directly, indirectly, or constructively owns at least 80% of the partnership (capital or profits interest).
5. What is a specified foreign financial asset?
  • Any financial account maintained by a foreign financial institution.
  • Stocks and other securities issued by someone other than a U.S. person.
  • Any financial instrument or contract held for investment with any issuer or counterparty that is not a U.S. person.
  • Any other interest in a foreign entity.
6. What is not a specified foreign financial asset?
  • Directly held tangible assets.
  • A financial account held through a foreign branch or foreign affiliate of a U.S. financial institution.
  • A financial account maintained by a U.S. branch or U.S. affiliate of a foreign financial institution.
  • An interest in a social security or similar social interest program administered by a foreign government.
7. What does it mean to have an interest in a specified foreign financial asset?
  • For purposes of Form 8938, a taxpayer has an interest in the asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the asset are or would be required to be reported, included, or otherwise reflected on the taxpayer’s annual return.
  • A reportable interest exists even if no income, gains, losses, deductions, credits, gross proceeds, or distributions are attributable to the holding or disposition of the asset during the taxable year at issue.
8. What is the Form 8938 reporting threshold? 
  • A specified person living in the U.S. and filing as single, head of household, or married filing separate must file Form 8938 if the aggregate value of specified foreign assets exceeded $50,000 on the last day of the tax year, or $75,000 at any time during the tax year.
  • A specified person living in the U.S. and filing as married filing joint must file Form 8938 if the aggregate value of specified foreign assets exceeded $100,000 on the last day of the tax year, or $150,000 at any time during the tax year.
  • A specified person who did not live in the U.S. and filing as single, head of household, or married filing separate must file Form 8938 if the aggregate value of specified foreign assets exceeded $200,000 on the last day of the tax year, or $300,000 at any time during the tax year.
  • A specified person who did not live in the U.S. and filing as married filing joint must file Form 8938 if the aggregate value of specified foreign assets exceeded $400,000 on the last day of the tax year, or $600,000 at any time during the tax year.
  • A specified domestic entity must file Form 8938 if the aggregate value of specified foreign assets exceeded $50,000 on the last day of the tax year, or $75,000 at any time during the tax year.
9. When and where is Form 8938 filed?
  • Form 8398 is included with the taxpayer’s annual tax return.
  • An extension of time to file the taxpayer’s annual tax return also extends the deadline for filing Form 8938.
  • If a taxpayer is not otherwise required to file a tax return, the taxpayer is not required to file Form 8938.
  • Form 8938 is required even if the assets to do not affect the taxpayer’s tax liability.
For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.