In the complex landscape of U.S. tax laws, it's essential for U.S. citizens and U.S. lawful permanent resident "green card holders" to be aware of their reporting obligations to the Internal Revenue Service (IRS). One of these crucial requirements involves IRS Form 8938, which pertains to reporting foreign financial assets. In this high-level overview, we will delve into what Form 8938 is, who needs to file it, the thresholds and penalties associated with non-compliance, and what steps to take if you've forgotten to file this form.
What is Form 8938?
Form 8938, officially known as the "Statement of Specified Foreign Financial Assets," is a tax form that the IRS introduced as part of the Foreign Account Tax Compliance Act (FATCA) in 2010. Its primary purpose is to combat tax evasion by requiring U.S. taxpayers to disclose certain foreign financial assets that they hold or have an interest in. These assets may include bank accounts, securities, trusts, and other investments located outside the United States.
Who Needs to File Form 8938?
Form 8938 is mandatory for U.S. citizens and U.S. lawful permanent resident "green card holders" who meet specific criteria related to their foreign financial assets. The key criteria for filing Form 8938 are as follows:
- Filing Status: You must file Form 8938 if you are a specified individual, which includes U.S. citizens, resident aliens, and non-resident aliens who meet the substantial presence test and elect to be treated as a resident for tax purposes.
- Threshold Amounts: You must file Form 8938 if the total value of your specified foreign financial assets exceeds certain thresholds. These thresholds vary depending on your filing status and whether you live in the United States or abroad. For instance, if you are single and live in the United States, you must file if the total value exceeds $50,000 at the end of the tax year or $75,000 at any time during the year. The thresholds are higher for those living abroad, starting at $200,000.
- Type of Asset: Specified foreign financial assets include a wide range of assets such as foreign bank accounts, foreign stocks and securities, foreign mutual funds, foreign partnerships, and foreign-issued life insurance contracts.
Thresholds & Penalties
Understanding the thresholds for filing Form 8938 is critical to ensure compliance with U.S. tax laws. Here are the threshold amounts based on filing status and location:
- Single taxpayers residing in the United States: Total value exceeding $50,000 at the end of the tax year or $75,000 at any time during the year.
- Married taxpayers filing jointly residing in the United States: Total value exceeding $100,000 at the end of the tax year or $150,000 at any time during the year.
- Single taxpayers living abroad: Total value exceeding $200,000 at the end of the tax year or $300,000 at any time during the year.
- Married taxpayers filing jointly living abroad: Total value exceeding $400,000 at the end of the tax year or $600,000 at any time during the year.
- Penalties for Non-Compliance:
Failure to file Form 8938 when required can result in severe penalties. The IRS imposes both monetary and non-monetary penalties, which can add up quickly. The penalties include:
- Failure-to-File Penalty: A penalty of $10,000 for each year you fail to file Form 8938. This penalty can go up to $50,000 for continued non-compliance after the IRS sends you a notice of failure to file.
- Accuracy-Related Penalty: If the IRS determines that you understated your foreign financial assets, you could face a 40% penalty on the underpayment of tax resulting from the understatement.
- Criminal Penalties: In cases of willful non-compliance, the IRS may pursue criminal charges, which can result in fines and even imprisonment.
What to Do If You Forgot to File Form 8938
If you've realized that you should have filed Form 8938 in previous years but failed to do so, it's essential to take corrective action as soon as possible. The IRS encourages taxpayers to come forward voluntarily and correct their tax reporting errors through the Streamlined Filing Compliance Procedures. Here's what you should do:
- Review Your Foreign Financial Assets: Gather all the necessary information about your foreign financial assets, including account statements, investment records, and any other relevant documentation.
- File Amended Tax Returns: Prepare and file amended tax returns for the years in which you should have reported your foreign financial assets on Form 8938. Make sure to attach Form 8938 to each amended return.
- Submit a Statement: Along with your amended returns, submit a statement explaining why you are filing the amended returns and why you failed to report your foreign financial assets in the first place. Be honest and clear in your explanation.
- Pay Any Taxes and Penalties: Calculate and pay any taxes and penalties owed as a result of the amended returns. Interest may also apply to any overdue tax payments.
FBAR Late Filing Reasonable Cause
In addition to Form 8938, U.S. taxpayers with foreign financial interests may also need to file a Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114. FBAR is a separate requirement from Form 8938, and it has its own set of rules and deadlines.
If you missed the FBAR filing deadline, you can seek relief through the FBAR late filing reasonable cause procedure. To establish reasonable cause, you must demonstrate that your failure to file was due to non-willful conduct and that you have a valid reason for not complying with the deadline.
Willful vs. Non-Willful
It's crucial to understand the distinction between willful and non-willful violations when it comes to foreign financial asset reporting. Willful violations involve intentional acts to evade taxes or conceal assets. Non-willful violations, on the other hand, typically result from negligence, oversight, or misunderstanding of tax requirements.
Willful violations can lead to much more severe consequences, including substantial fines and criminal charges. Non-willful violations, while still subject to penalties, are generally less severe.
Form 8938 is a vital tool in the IRS's efforts to ensure transparency and compliance with U.S. tax laws regarding foreign financial assets. U.S. citizens and green card holders must be aware of their obligations to report these assets accurately and in a timely manner. Failure to do so can lead to significant financial penalties and even criminal charges.
If you find that you've forgotten to file Form 8938 or need assistance with any aspect of tax compliance, Castro & Co., our experienced tax attorneys, are ready to assist you. It's always advisable to seek professional guidance when dealing with complex tax matters to ensure that you meet your obligations and avoid potential legal issues. Remember, it's never too late to rectify tax reporting errors and get back on the path to compliance with IRS requirements.
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Disclaimer: This article is intended for informational purposes only and does not constitute financial or tax advice. Readers are advised to consult with qualified tax professionals before making any financial decisions.