Are you a U.S. citizen or U.S. resident alien who held assets outside the USA at any time during 2011? If so, you need to know about a rapidly approaching deadline for filing Form 8938, “Statement of Specified Foreign Financial Assets.” Non-resident aliens may need to file this return as well in certain circumstances. See the instructions for Form 8938 for details.
Form 8938 is NOT the same as the more familiar foreign bank account reporting form (FBAR), Treasury Form TD F 90-22.1. The requirement to file Form 8938 is in addition to the FBAR filing requirement, as I’ll discuss in my next blog entry.
If you’re subject to the Form 8938 filing requirements, you must submit this form with your 2011 individual tax return (Form 1040 and supporting schedules) by April 17, 2012. This deadline is extended until June 15 if you live abroad or October 15 if you file a request for extension. Temporary instructions for Form 8938 now make it clear that filing is generally NOT retroactively required for 2010. Fortunately, you don’t need to file Form 8938 if your income is below the IRS filing thresholds for Form 1040, no matter how much wealth y0u keep offshore.
As the name indicates, Form 8938’s focus is on foreign financial assets. As discussed in the instructions, these assets constitute:
1. Any financial account maintained by a foreign financial institution. A “financial account” is any depository or custodial account maintained by a foreign financial institution. This term also encompasses any equity or debt interest in a foreign financial institution (other than interests that are regularly traded on an established securities market). If you have an interest in a financial account that holds specified foreign financial assets, you don’t have to report separately the assets held in the account.
In most cases, a foreign financial institution is any financial institution that is not a U.S. entity and satisfies one or more of the following.
- It accepts deposits in the ordinary course of a banking or similar business.
- It holds financial assets for the account of others as a substantial part of its business.
- It is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
A foreign financial institution includes investment vehicles such as foreign mutual funds, foreign hedge funds, and foreign private equity funds.
2. Other specified foreign financial assets held for investment and not maintained in a financial account, including:
- Stock issued by a foreign corporation.
- A capital or profits interest in a foreign partnership.
- A note, bond, debenture, or other form of indebtedness issued by a foreign person.
- An interest in a foreign trust or foreign estate.
- An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty.
- An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.
- Stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity not otherwise reported on an IRS reporting form (e.g., Form 5471 for certain interests in a foreign corporation). However, you must identify on Form 8938 which and how many of these form(s) report the specified assets. You must also include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more then the reporting threshold that applies to you.
- Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
Fortunately, the threshold for filing Form 8938 is relatively high, especially if you live outside the USA and are married and filing a joint tax return. The rules that apply to determine if you live abroad appear to be the same as those that apply to the foreign earned income exclusion (FEIE).
| Filing Status | Living In | Value on Last Day of Year | Value on Any Day of Year |
| Unmarried or Married Filing Separately | USA | $50,000 | $100,000 |
| Married Filing Jointly | USA | $100,000 | $200,000 |
| Unmarried or Married Filing Separately | Foreign Country | $200,000 | $400,000 |
| Married Filing Jointly | Foreign Country | $400,000 | $600,000 |
Even if you meet or exceed these thresholds, you need not file Form 8938 if your foreign assets are hold by:
- A U.S. domestic financial institution or other “U.S. payer.”
- The foreign branch of a U.S. financial institution, or
- The U.S. branch of a foreign financial institution.
Oh, yes—in case you “forget” to complete Form 8938, you face a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. The IRS may also impose a 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. In addition, the statute of limitations for auditing your tax return may remain open for three years after the date you file Form 8938.
In my next blog entry, I’ll compare and contrast the FBAR and Form 8938 requirements, and identify some apparently non-reportable offshore investments under either reporting regime. I’ll also engage in a bit of speculation about why Congress enacted these reporting requirements at all. Hint: Contrary to what you’ve probably read, it has very little to do with offshore tax evasion, at least not under current law.
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Copyright © 2012 by Mark Nestmann
