Form 8938, Statement of Specified Foreign Financial Assets, must be filed with your annual income tax return if you have an interest in specified foreign financial assets with an aggregate value of over $50,000. If a specified foreign financial asset was sold during the year, you must take the asset sold into consideration when calculating the aggregate value of specified foreign financial assets you held during the year.
While most tax forms report income you receive, Form 8938 is different; it is an informational disclosure that is not used to calculate any part of your tax liability. It is used to provide information to the IRS on a range of foreign accounts and assets that may or may not actually generate taxable income.
Reportable specified foreign financial assets include, but are not limited to, financial accounts located at foreign financial institutions; interests in foreign mutual funds, hedge funds, and private equity funds; directly owned foreign stock or foreign partnership interests; and beneficial interests in foreign trusts or estates. Reportable assets also include financial instruments or contracts with a foreign issuer or counterparty, a category which may include derivatives offered by non-U.S. persons, foreign deferred compensation, or pension plans and insurance contracts purchased from a foreign insurance company.
If you fail to report foreign financial assets on Form 8938, you may be subject to a penalty of $10,000, and potentially an additional $50,000 penalty for continued failure to report after receiving IRS notification to file. In addition, underpayments of tax attributable to nondisclosed foreign financial assets are subject to a substantial understatement penalty of 40%.
You may also have a U.S. Treasury Department filing obligation to report your financial interest in or signature authority over any financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. It is important to note that this rule applies to any financial accounts that you hold as an individual or through a partnership in which you have a greater than 50% ownership interest. You must report that relationship each calendar year by electronically filing a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (often referred to as the “FBAR”). FinCEN Form 114 supersedes TD F 90-22.1 (the FBAR form that was used in prior years) and is only available online through the BSA E-Filing System website. The system allows the filer to enter the calendar year reported, including past years, on the online FinCEN Form 114. It also offers an option to “explain a late filing,” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program.
On July 29, 2013, FinCEN posted a notice on their internet site that introduced a new form to filers who submit FBARs jointly with spouses or who wish to have a third-party preparer file their FBARs on their behalf. The new FinCEN Form 114a, Record of Authorization to Electronically File FBARs, is not submitted with the filing but, instead, is maintained with the FBAR records by the filer and the account owner, and made available to FinCEN or the IRS on request.
Previous IRS guidance clarified that, although foreign mutual funds remain reportable financial accounts for the purpose of this reporting obligation, interests in private equity funds, hedge funds, and other “commingled funds” are not subject to reporting.
The FBAR is not filed with your income tax return. Rather, this form must be electronically filed separately with the Department of the Treasury on or before June 30 of the succeeding year. A substantial penalty may apply if you fail to completely disclose your foreign accounts or file the FBAR on time. Therefore, you should file a complete and accurate FBAR as early in June as possible in order to allow adequate time for electronic submission.