Co-Authors Sunil Patel and Jason Booth
Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, has been one of the primary reporting mechanisms imposed directly on taxpayers under the Foreign Account Tax Compliance Act (FATCA), which is designed to enhance tax reporting compliance with respect to certain foreign assets. Form 8938 is used to report foreign financial assets for certain taxpayers if the total value of all specified foreign assets is more than the appropriate threshold.
Previously, Form 8938 was only applicable to specified individuals. Specified individuals include: a U.S. citizen, a resident alien of the U.S. for any part of the tax year, a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return, or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. However, for tax years beginning after December 31, 2015, certain domestic corporations, partnerships, and trusts (“specified domestic entities” or “SDEs”) are now also required to file Form 8938.
SDEs include certain domestic corporations, partnerships, and trusts that are considered formed or availed of, for the purpose of holding, directly or indirectly, specified foreign financials assets. Specifically, an entity is a specified domestic entity if you are one of the following:
- a closely held domestic corporation or partnership that has at least 50 percent of its gross income from passive income;
- a closely held domestic corporation or partnership if at least 50 percent of its assets produce or are held for the production of passive income; or
- a domestic trust described in section 7701(a)(30)(E) that has one or more specified persons (a specified individual or a specified domestic entity) as a current beneficiary.
To clarify, a corporation or partnership is “closely held” if, on the last day of the corporation’s taxable year, a specified individual directly, indirectly, or constructively owns at least 80 percent of the total combined voting power of all classes of stock or 80 percent of the total value of stock of that corporation, or for a partnership, owns at least 80 percent of the capital or profits interest in the partnership. These specified domestic entities must file Form 8938 if the total value of its specified foreign financial assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. The discussion of what constitutes a specified foreign financial asset is outside of the scope of this article; however, some examples of specified foreign financial assets are, but not limited to: foreign financial accounts, stock of a foreign corporation, and an interest in a foreign entity.
Even though Form 8938 generally requires a broader range of assets to be reported than the Report of Foreign Bank and Financial Accounts (FBAR), the FBAR filing requirements are independent of Form 8938 in that the filing of Form 8938 does not relieve the taxpayer’s obligation to file any applicable FBAR reporting.
This change for who is required to file Form 8938 is especially important, as it may be a trap for the unwary. The penalties for failing to file Form 8938, or filing incorrectly, can not only be severe ($10,000) but the failure to file Form 8938, if required, can extend the period of time in which the IRS is allowed to audit your tax return and assess changes from three years to indefinitely. Further, if you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.
You may potentially abate penalties assessed for failure to file a complete and correct Form 8938 if the failure is due to reasonable cause and not willful neglect (you must affirmatively show the facts that support a reasonable cause claim). Lastly, depending on the facts and circumstances around a failure to file a complete and correct Form 8938, a taxpayer may be subject to accuracy related penalties, fraud penalties, and/or criminal penalties.
We recommend that any closely held domestic entity analyze annually its foreign investments and income/asset profile to determine if filing Form 8938 may be required. If you have any questions about the changes to Form 8938 or further filing requirements, please contact us at our contact details below.
About Sunil Patel (Tax Supervising Senior, GHJ)
Sunil Patel has over 5 years of experience in international tax with a specialization in M&A. Sunil has Big Four accounting experience and obtained his JD from Loyola Marymount University.
About Jason Booth (Principal, GHJ)
Jason Booth has over 13 years of experience in public accounting and specializes in international tax consulting assisting both U.S. companies with operations overseas as well as non-U.S. companies with various U.S. inbound issues.