In the overview of the series, we advised that in addition to filing income tax returns, U.S. citizens residing outside the U.S. are required to file various reports in respect of foreign holdings. Failure to file these reports can result in onerous penalties. In part II of the series, we will discuss the requirements to file the Form 8938: Statement of Foreign Financial Assets.
I. Foreign Bank and Financial Account Report, FBAR -Form 114
II. Statement of Foreign Financial Assets, Form 8938
III. Interest in Foreign Canadian Corporation, Form 5471
IV. Interest in Foreign Partnerships, Form 8865
V. Interest in Foreign Trust, Form 3520
VI. Interest in Mutual Funds, Form 8621
The following is a brief overview of when a taxpayer needs to file Form 8938, and reporting details.
Form 8938: Statement of Foreign Financial Assets
In addition to filing the FBAR reports discussed in Part I, U.S. persons with specified foreign assets need to file Form 8938, Statement of Foreign Financial Assets. However, this does not replace a taxpayer’s obligation to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts).
What are ‘Specified Foreign Financial Assets’?
Specified foreign assets include foreign financial accounts and other non-account assets, such as: stocks, financial instruments or interests in other foreign entities not held in foreign accounts.
Who must file Form 8938?
Any U.S. person holding specified foreign financial assets that exceed certain threshold limits during a tax year need to file Form 8938.
What are the ‘threshold limits’ for Form 8938?
For resident and citizen taxpayers, filing as:
- ‘Single’ – $50,000 (year-end account balance) or $100,000 (anytime during the year account balance)
- ‘Married Filing Joint – $100,000 (year-end account balance) or $200,000 (anytime during the year account balance)
For non-resident U.S. person, filing as:
- ‘Single’ – $200,000 (year-end account balance) or $300,000 (anytime during the year account balance)
- ‘Married Filing Joint – $400,000 (year-end account balance) or $600,000 (anytime during the year account balance)
When and where to file Form 8938?
Form 8938 is attached along with Form 1040: Annual Income Tax Return. It is due on the date of that return, i.e. April 15 every year, including any applicable extensions.
How are assets reported on Form 8938?
Firstly, all the ‘specified foreign financial assets’ mentioned above need to be reported on Form 8938 if the asset value is above the threshold limits. Unlike FBAR reports, foreign financial accounts are only reported if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on an income tax return.
The U.S. person can rely on the periodic account statements for the foreign financial accounts in order to determine if the total value of the assets exceed the threshold limit to file Form 8938.
While, in the case of specified foreign financial assets not held in financial accounts, the year-end value of the asset is used if it reasonably approximates the maximum value of the asset during the tax year.
These asset values are reported on Form 8938 along with the name, address, and description of the asset.
Special rules apply for reporting the maximum value of an interest in a foreign trust, a foreign retirement plan, or a foreign estate.
What are the penalties for Form 8938 non compliance?
Failure to file Form 8938 could result in penalties of up to $10,000 for failure to disclose. Also, an additional penalty of $10,000 may apply for each day up to 30 days in case of non-compliance after receiving the IRS notice. This penalty could reach a maximum of $60,000.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian cross-border compliance as well as U.S. and Canadian tax laws.
Furthermore, as a full service accounting firm, AG Tax is dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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