What is the IRS Form 8938?
The IRS Form 8938, which was first required with the 2011 tax reporting year, is an information-only report of a US person’s ownership (in part or in whole) of ‘specified foreign financial assets,’ a technical term which covers a wide variety of foreign assets. Specified foreign financial assets include:
- Any financial account at any foreign financial institution, including:
- Foreign bank accounts,
- Foreign investment accounts (holding assets for investment, such as stocks, bonds, mutual funds, unit trusts, options and forward contracts)
- Foreign life insurances or annuity contract, if either have cash value
- Foreign retirement accounts or arrangements, including pensions of all kinds (personal, corporate, or public), even if the retirement account or arrangement is not currently taxable in the country where it is held/originated,
- Stocks, bonds or other securities, issued by any non-US person or entity, if not already held in an account at a financial institution (foreign or not),
- Partial or full ownership or interest in any kind of foreign entity, including foreign corporations, foreign partnerships, foreign trusts and foreign disregarded entities,
- Partial or full ownership of foreign hedge funds and foreign private equity funds,
- Foreign notes, debentures or other indebtedness, including:
- Financial instruments or contracts with an issuer or counterparty that is not a US person, including various financial ‘swaps’ including interest rate, currency, commodity or credit default swaps with a foreign counterparty, and,
- Options or other derivative instruments with respect to any of the previous examples
Failing to file the Form 8938 exposes you to enormous penalties. Form 8938 penalties begin at $10,000 per violation, and as of the 2018 reporting year, individuals who have been required to file this Form since 2011 face penalties of $80,000.
The triggers to the Form 8938 reporting obligation are broad and extremely complex. The Form itself is also extremely complex: it consists of six different Parts, sixteen different reporting thresholds (ranging from $50,000 all the way to $600,000), and requires fourteen pages of Instructions to (in theory) explain and guide compliance with this sprawling reporting regime.
Interesting, the Form 8938 is very similar to the Foreign Bank Account Report (FBAR). Unfortunately, the filing of one does not eliminate the obligation to file the other. Often, an individual with a mix of foreign bank accounts, foreign investment accounts and foreign retirement accounts will report the exact same set of accounts on both the FBAR and the Form 8938.
Rather than recite, at great length, the technical triggers to each of those six Form 8938 Parts, we recommend consulting with a Form 8938 tax attorney if you have any involvement with anything of value outside the United States. Call (415) 745-1924 for a free consultation with Form 8938 tax attorney Andrew L. Jones.
Form 8938 Tax Attorney and Form 8938 Tax Lawyer
If you failed to file a Form 8938, or filed one that was incorrect, incomplete, or late/delinquent, you are potentially subject to a $10,000 Form 8938 penalty from the IRS for each year of violation.
We invite you to read onward, but the surest way of determining if you have a Form 8938 problem is to actually talk with Form 8938 tax attorney and tax lawyer Andrew L. Jones. Call (415) 745-1924 now to determine:
- Did you actually have a Form 8938 filing obligation?
- If you did, has the Form 8938 deadline passed?
- If you filed before the deadline, was your Form 8938 filing incorrect or incomplete?
- And, whether you filed an incorrect or incomplete Form 8938, or didn’t file one at all, are you subject to Form 8938 penalties?
- Reasonable cause is a total defense to Form 8938 penalties, and a Form 8938 tax lawyer is best equipped to gather the relevant facts to that determination, and then write the explanatory attachment arguing against Form 8938 penalties. Additionally, if the IRS imposes a Form 8938 penalty, the Form 8938 tax attorney can represent you in the Form 8938 audit and negotiations with the IRS to remove the Form 8938 penalty assessment.
- If your specific facts and circumstances prevent you from making an effective Form 8938 reasonable cause argument to avoid penalties, you still have options. Your Form 8938 tax lawyer can advise you about making an IRS voluntary disclosure of your Form 8938 noncompliance through the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures.
- Finally, Form 8938 tax attorney Andrew L. Jones can also work with you to consider a final, critical question: should you file a delinquent/late or amended Form 8938 – or should you simply begin complying on a ‘go-forward’ basis, doing nothing about prior noncompliance?
In working with a Form 8938 tax expert, all options are on the table, and your discussions with tax attorney Andrew L. Jones – who will be your direct point of contact – are protected by the robust attorney-client privilege.
Call (415) 745-1924 for an immediate, free and completely confidential conversation with experienced Form 8938 tax lawyer Andrew L. Jones.
Form 8938 Filing Thresholds
While the Form 8938 reports ‘specified foreign financial assets,’ not every US person who owns such foreign assets has to file a Form 8938. This is because below a certain level of aggregate asset value of foreign assets, the US person need not file a Form 8938. This aggregate value level is also known as the Form 8938 filing threshold.
The Form 8938 thresholds range from $50,000 (year-end value for a single US resident filer) all the way to $600,000 (peak value for a married couple residing outside the US).
To determine the applicable Form 8938 threshold, we look first to two details:
- First, is the US person married (to a US person) and files tax returns jointly with that US person, or is the US person either (a) unmarried or (b) married to a non-US person (and filing under married-filing-separately status)?
- Second, does the US person reside inside or outside the US?
The US person then reviews whether he exceeds the variable thresholds under either of two different valuation methodologies:
- Year-end value method, or,
- Peak value method.
Illustrating how all of this comes together, we will use the example of a US-resident single person. Due to his US residency and unmarried status, this person’s applicable Form 8938 thresholds are $75,000 (under peak value) or $50,000 (under year-end value).
This person owns only two specified foreign financial assets: foreign bank Account A and foreign bank Account B. On Day 1 of the reporting year, this person has $38,000 in Account A and zero value in Account B. On July 1 (mid-year) of the reporting year, the US person transfers the $38,000 in Account A to Account B, and ends the year with zero in Account A and $38,000 in Account B.
Under the year-end method, we would only find that the taxpayer had $38,000 of specified foreign financial assets at year-end, and would not – under this method – be obligated to file a Form 8938.
However, under the peak value method, we add together each of the account’s high values reached at any point during the year, without subtracting for double-counting. Here, the US person held $38,000 in Account A (at peak) and $38,000 in Account B (at peak), for a total of $76,000 of specified foreign financial assets.
Since this sum exceeds the applicable $75,000 peak-value threshold, this person does have a Form 8938 reporting obligation.
How is the IRS Form 8938 similar to, and different from, the Foreign Bank Account Report, FinCEN Form 114?
As just described, many types of common foreign assets are reportable on both the FBAR and the Form 8938: bank accounts, investment accounts, and retirement accounts.
However, the Form 8938 does expand the scope of foreign assets reported to the US. For example, an individual who holds stock in a ‘family corporation’ (in this example, without triggering the Form 5471 filing obligation) would be obligated to report that stock on a Form 8938, if the total value of his foreign financial assets exceeded the relevant threshold.
Typically, that stock interest would not be reportable on the FBAR unless that stock had somehow been deposited with a foreign custodial financial institution. (That would be improbable since small family corporations are not publicly traded and thus not typically eligible for deposit into a standard investment account). To emphasize: the FBAR serves to report foreign financial accounts, not assets as does the Form 8938.
Interestingly, the Form 8938 is actually narrower in scope than the FBAR in certain unusual instances. One example of those uncommon circumstances would be a US person who held a non-beneficial interest in a foreign account (often in the form of ‘signature authority’ or ‘power of attorney.’) This kind of non-beneficial entanglement is commonly seen in two types of cases:
- The aging foreign parent who needs a US person child’s assistance or management of the parent’s foreign financial assets
- An aging foreign relative chooses to do informal estate planning by simply adding a US person relative’s name to the joint title of his or her foreign bank account, so that the US relative will receive these funds seamlessly upon the relative’s death. All parties with a relationship with the account understand that the account is to be used only by or for the benefit of the foreign relative, and always act in accordance with this understanding.
For FBAR purposes, such entanglements would almost certainly be reportable because joint title or signatory authority on a foreign financial account is reportable. However, these (and similar) non-beneficial interest scenarios would not be reportable on the Form 8938.
This is because the Form 8938 only serves to report those foreign financial assets in which the US person has a beneficial interest. Notice that in neither of the two scenarios above does the US person intend to (or actually) use any of the foreign accounts’ funds for his own benefit.
What is ‘beneficial interest’ for purposes of analyzing the Form 8938 reporting requirement?
To determine whether a US person has a beneficial interest in a foreign financial asset, we would look to whether the person literally benefits from the asset.
For example, does the US person ever make economic use of the account such as by withdrawing funds from the account? Or, expressed another way, we would ask whether the US person would be required to show the earnings or other tax-related events arising from the asset on her US tax return. Obviously, an individual who is not the beneficial owner of an account would have no obligation to report the earnings of that account on her US tax return. After all, in plain language, the account is not ‘hers’ and in turn, neither is the earnings.
Form 8938 Deadline and Form 8938 Statute of Limitations
The Form 8938 is filed as an attachment to the US person’s annual income tax return. It is due, therefore, on April 15 (or, if properly extended, October 15) of the year following the reporting year.
The Form 8938 statute of limitations (the period of time in which the IRS may assess penalties for noncompliance with this reporting requirement) typically expires 3 years from that April 15th date – or the later date if the due date of the tax return was timely extended.
This means that even if the IRS later has questions or concerns about the Form 8938, as long as it was filed timely and correctly, once this three-year statute of limitations has passed, the IRS cannot assess failure-to-file penalties.
Critically, if the required Form 8938 was never filed, the statute of limitations will never expire, until three years after that Form 8938 is filed late or delinquent. Additionally, for all tax return years beginning from 2011 forward, the failure to file the Form 8938 has the effect of freezing the statute of limitations on the entire tax return.
The only defense to this ‘frozen statute of limitations’ provision is that if the failure to file the Form 8938 was due to reasonable cause, then only the statute of limitations for the Form 8938 (rather than the entire tax return) will be frozen as described.
Finally, in a related matter, if a US person fails to report $5,000 or more of income derived from a specified foreign financial asset, then the tax return’s statute of limitations is extended to six years.
Late Form 8938 and Delinquent Form 8938
As noted above, if the Form 8938 was due but never filed, then its statute of limitations (for penalty assessment by the IRS) remains open forever, until it is filed. When a Form 8938 is filed after the deadline, the statute of limitations expires three years after the Form is late-filed. Until that time, the IRS can and will audit and assess the major Form 8938 penalties we describe below.
However, the late-filing or non-filing of a Form 8938 may not be penalized if the taxpayer can make a showing of reasonable cause. This of course is something that a Form 8938 tax attorney is best equipped to do, as discussed below.
Form 8938 Audit and Form 8938 Examination
A Form 8938 filing may be audited by the IRS at any time within the statute of limitations. While extremely unlikely, a timely-filed Form 8938 could be found so incomplete or inaccurate that it could be treated as a failure to file and subject the US person to Form 8938 penalties.
Such a Form 8938 examination can also occur when a person obligated to file the Form 8938 didn’t file the Form 8938 when he or she should have.
In all cases (filing or non-filing), the IRS’ focus in a Form 8938 audit is whether the failure to file a timely, correct and complete Form 8938 is excused by reasonable cause. If reasonable cause exists, the IRS may not impose a Form 8938 penalty.
This means, implicitly, that the Form 8938 penalty regime is indifferent to whether the failure to file the Form 8938 was willful or negligent. This is in sharp contrast to the Foreign Bank Account Report penalty regime, in which a negligent failure to file is treated very differently from a willful failure to file.
In essence, the failure to timely file a complete and correct Form 8938 is a penalizable act/omission unless the taxpayer had reasonable cause for his noncompliance.
Form 8938 Penalty and Form 8938 Fine
The failure to timely file a Form 8938 (or timely filing a Form 8938, but one which was incorrect or incomplete) is subject to a $10,000 penalty for each year of noncompliance.
As an example of the enormous potential size of Form 8938 penalties, consider a US person who had a Form 8938 reporting obligation since 2011, the first year of the Form’s existence.
If this failure to file the required Form 8938 was negligent, the IRS may impose and collect penalties of $70,000 (based on seven years inclusive in the 2011 through 2017 reporting years, at $10,000 penalty per year). This enormous penalty is possible, of course, because while the taxpayer may have filed Form 1040 tax returns in each of the last seven years, he did not file the Form 8938. This failure to file the Form 8938 means the statute of limitations has never expired in any year since 2011.
To add insult to injury, the failure to file the Forms 8938 also leaves the statute of limitations open on the Form 1040 tax return itself. Where the Form 1040 statute of limitations has not expired, the IRS can collect unpaid tax on the earnings of the foreign financial assets in any or all years from 2011 forward.
Form 8938 Criminal Penalties
Under Internal Revenue Code Section 7203, the intentional (willful) failure to file a required Form 8938 can, if successfully prosecuted, result in a prison sentence of up to one year and a penalty (for individuals) of up to $25,000. Under IRC 7206, any person who filed a Form 5471 filing that was fraudulent or false may, if successfully prosecuted, be sentenced up to three years in prison and face a penalty (for individuals) up to $100,000.
In the alternative, any person who filed a Form 5471 that was fraudulent may, if successfully prosecuted, be sentenced up to a year in prison and pay a penalty (for individuals) of up to $10,000.
Failure to File Form 8938: Was It Negligence (Non-Willful) or Reasonable Cause?
If you filed a late, incomplete, incorrect Form 8938 – or didn’t file one at all – you face significant penalties. A reasonable cause argument can help you avoid those penalties – but that argument is best written by a Form 8938 expert tax attorney who has gathered relevant facts, analyzed the error, and can make a winning argument to the IRS.
Involving a Form 8938 tax lawyer will ensure that you have an expert working for you – an expert who knows what facts matter for determining whether your Form 8938 filing violation was (1) willful, (2) negligent (also referred to as non-willful), or (3) occurred for reasonable cause.
Remember that whether a Form 8938 violation was willful or negligent does not change the penalty outcome. (Although a willful failure to file a Form 8938 may be penalizable under other general Internal Revenue Code provisions, such as a fraudulent return filed with the IRS, a false statement to the IRS, etc.)
Instead, the only way to avoid a $10,000-per-year Form 8938 penalty is making a winning reasonable cause argument.
Negligent Failure to File Form 8938
To understand reasonable cause, it will be helpful to contrast it against the legal concept of negligence. Generally stated, negligence (in missing a legal obligation) is characterized by:
- ‘Missing’ clues,
- ‘Failing to put two and two together’ or ‘connect the dots’ and/or
- Failing to make reasonable inquiries or otherwise failure to be aware of generally known facts or law.
Reasonable Cause for Failure to File Form 8938
By contrast, reasonable cause can (generally and simplistically) be said to exist where there was no reasonable pathway to become aware of an obligation. At a bare minimum, reasonable cause requires that the taxpayer have missed no reasonably-apparent clues to his or her obligation, particularly clues that he or she documentably encountered at any point.
Additionally, the IRS views certain obligations (like the existence of the annual income tax return Form 1040) as so universally known to individuals of average sophistication that failure to comply cannot generally occur for reasonable cause. By contrast, quality fact-gathering and argumentation can convince the IRS that a taxpayer who failed to comply with more obscure Form filing obligations (like the Form 8938) nonetheless did meet the reasonable cause standard of exercising ‘ordinary business care and prudence.’
Interestingly, we think that the actions of the average US taxpayer would not meet this ‘ordinary business care and prudence’ standard. In our view, the average US taxpayer is routinely sloppy and non-diligent and makes errors on his tax returns (or fails to report or file certain income items altogether).
For this reason, we can say (again, generally and simplistically) that the reasonable cause standard requires the taxpayer behave in an above-average manner – arguably in a manner well above that of the average US taxpayer.
As should be apparent even from this brief discussion, whether the reasonable cause defense to the Form 8938 penalty exists, and whether it can be proven to the IRS is a hyper-technical matter. The fact-gathering, analysis, and (ultimately) write-up for IRS review is thus best left to a Form 8938 tax lawyer.
In short, the reasonable cause defense is beyond the limits of self-advice or self-help – get a professional involved!
Form 8938 Penalty Abatement and Form 8938 Amnesty
‘Standard’ IRS penalty abatement is available for three types of common Form 1040 penalties – the failure-to-file, failure-to-pay, and failure-to-deposit tax penalties. They are routinely granted on a ‘just this once’ basis, provided a handful of other conditions of good tax-related behavior are met.
Penalties for failure to timely and correctly file the Form 8938 are, by contrast, not granted on a similar ‘for the asking’ or ‘just this one time only’ basis.
Instead, Form 8938 penalties can only be ‘abated’ by a finding that they are not legally justified. The grounds for not assessing a Form 8938 or granting Form 8938 amnesty is a finding by the IRS that the failure is due to reasonable cause, a legal concept described immediately above.
In summary, Form 8938 abatement or Form 8938 amnesty are not truly correct terms to describe the actual law (for defending against Form 8938 penalties). They are also not truly correct terms for describing defense against penalties on the grounds of reasonable cause.
Instead, we mention them here to aid the layman in understanding that it is possible to obtain a no-penalty outcome for delinquent or incorrect/incomplete Form 8938 filing. This requires proving reasonable cause.
Form 8938 Amendment
While Form 8938 amendments are rare, there are certain instances in which it might become necessary or at least advisable to amend an original and timely-filed Form 8938 – perhaps the filer receives corrective source documents from the foreign trust, or discovers that his calculations of income (as originally reported) were incorrect.
Filing a Form 8938 amendment is a problematic act, insofar as the IRS’ automated systems are generally set up to detect a ‘late’ filing (here, the amendment itself) and to automatically assess the Form 8938 penalties outlined here.
For this reason, we typically recommend that when submitting a Form 8938 amendment, the filer also submit (physically attached to the amendment) a detailed legal argument for why it is not the filer’s fault that the original filing contained inaccurate, incomplete, or missing information.
Such a statement should cite to the concepts of reasonable cause as outlined above – indeed, we can call it, for simplicity, a reasonable cause statement.
This statement is a legal argument with large IRS penalties at stake. For this reason, the person filing an amended Form 8938 should strongly consider consulting with and/or hiring a Form 8938 tax lawyer. This attorney will first consider the critical question of whether to file an amendment at all. If this is the best path, the attorney will also gather facts, apply the law to these facts, and ultimately write the necessary reasonable cause statement to avoid Form 8938 penalties.
Form 8938 Voluntary Disclosure
A Form 8938 voluntary disclosure is a filing of an amended or delinquent/late Form 8938 to the IRS. Very literally, the person is voluntarily disclosing a failure to either file a timely Form 8938 by the deadline, or voluntarily disclosing that an earlier, timely-filed Form 8938 contained substantial errors or omissions.
Any time a US person submits a late/delinquent or amended Form 8938 to the IRS in a Form 8938 voluntary disclosure, that person should consider hiring a Form 8938 voluntary disclosure attorney to draft a reasonable cause statement as a defense to the penalties the IRS might impose for the late or amended filing.
This is because the IRS’ data systems often automatically assesses penalties for late-filed or amended Forms 8938. Very simply, when a US person submits a delinquent or corrective Form 8938 without a reasonable cause statement, that filing is entered into the IRS’ computer systems at the processing center and the IRS computers may automatically assess the Form 8938 penalty. All of this occurs without the substantive involvement of an actual human IRS employee.
Knowing that (1) a Form 8938 voluntary disclosure submitted late and without a reasonable cause statement is likely to be met with an automatically-assessed penalty and knowing that (2) you’ll want to fight back against that penalty by making an argument of reasonable cause, it makes logical sense to simply submit a reasonable cause statement at the same time you submit the late Form 8938.
To do anything else is simply delaying the inevitable confrontation, and wasting your time and mental bandwidth.
Form 8938 Quiet Disclosure and Form 8938 Silent Disclosure
In a Form 8938 quiet disclosure or Form 8938 silent disclosure, the filer submits an amended or late Form 8938, and hopes that the IRS simply (somehow) doesn’t notice the delinquency or assess a penalty.
The IRS is increasingly aware of late or amended Form 8938 filings and has programmed its data management systems to assess penalties for late filings which contain no explanation of why the IRS shouldn’t assess the penalty. Thus, simply stated, Form 8938 quiet disclosure and Form 8938 silent disclosure doesn’t work.
The smart choice is working – from the beginning – with a Form 8938 tax attorney who can make a winning Form 8938 reasonable cause argument. Every single client for whom Andrew Jones has submitted a delinquent or amended return and a reasonable cause statement has avoided IRS penalty assessments.
Expertise is at a premium here. Make the call and speak now – for free – with Form 8938 expert Andrew L. Jones at (415) 745-1924.