By Nick Hodges, CPA/PFS, MBA, CFP
Summary: The IRS has added ANOTHER required form, Form 8938, to be filed WITH your annual tax return.
Expat Taxes - New IRS FATCA Rule is ANOTHER Way to Penalize You $10,000
The IRS continues to roll out new ways to identify Americans holding financial and investment accounts abroad. These disclosure reporting requirements all come loaded with the highest IRS penalties, starting at $10,000 per non-filing or incorrect filing incident.
Many of you are fully aware of the filing requirements of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). You know if the aggregate value of your foreign bank and financial accounts reach $10,000 in any one year, you must file this report with the Treasury Department (not the IRS) the following year. Non-filing or incorrect filing of this form bears a statutory $10,000 penalty.
The IRS has added ANOTHER required form, Form 8938, to be filed WITH your annual tax return. This form is also loaded with $10,000 non-filing or incorrect filing penalties. Additional penalties may be assessed, up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. A special statute of limitation also applies to the filing of Form 8938. Here are some other points to note:
Foreign Financial Institutions will begin reporting your financial accounts to the IRS.
Starting in 2013, foreign financial institutions will need to be compliant with IRS reporting regulations or abandon working with the U.S. markets and U.S. citizens abroad. Some large foreign financial institutions have already determined that complying with the IRS regulations is not worth the cost of doing business with U.S. citizens abroad. Some of our clients have received notices from their foreign banks and institutions requesting that they close their accounts. However, we anticipate the majority of foreign financial institutions will become compliant and report your information to the IRS beginning in 2013. Per IR-2011-53, these regulations have been delayed until 2014.
You will be required to file NEW IRS form 8938 with your tax return.
Beginning with the 2010 tax year – yes, beginning with your 2010 tax return – you need to file Form 8938 OR pay a $10,000 penalty to the IRS.
Did YOU miss filing this form with YOUR 2010 tax return? Don't panic.
While you were required to file this form with your 2010 tax return, the IRS has not completed the final version of the form nor the instructions. Lucky you, you cannot YET file this form. However, in the year that the IRS actually does finalize this form and its instructions, ALL prior year reports will be due. So, keep your 2010 (and each year after) foreign financial accounts information handy; you may be filing several years' worth of forms at once. IR-2011-117 was released on 12/15/11, The IRS tells us that this document is ‘still coming' and may be only days away. They are stating that it will need to be filed with your 2011 tax return, but it's still NOT READY.
Who Should File Form 8938?
Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.
You may need to file…
If you are required to file a U.S. tax return,
If you own specified foreign financial assets, AND
If your aggregate year-end values or highest aggregate values on these assets meet the filing thresholds
What's a specified foreign financial asset?
The best way to describe a specified foreign financial asset is straight from the IRS text:
Any financial account maintained by a foreign financial institution.
Other foreign financial assets, which include any of the following assets that are held for investment and not held in an account maintained by a financial institution.
Stock or securities issued by someone other than a U.S. person,
Any interest in a foreign entity, and
Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.
What are the value thresholds?
The aggregate value thresholds of specified foreign financial accounts vary depending on how you file your tax return.
Filing Status: Unmarried/Single
Aggregate Value at Year End: $50,000
Highest Aggregate Value at Any Time During the Year: $100,000
Filing Status: Married Filing Joint
Aggregate Value at Year End: $100,000
Highest Aggregate Value at Any Time During the Year: $200,000
Filing Status: Married Filing Separate
Aggregate Value at Year End: $50,000
Highest Aggregate Value at Any Time During the Year: $100,000
Filing Status: Taxpayer Living Abroad (Non-Joint)
Aggregate Value at Year End: $200,000
Highest Aggregate Value at Any Time During the Year: $400,000
Filing Status: Taxpayer Living Abroad (Joint)
Aggregate Value at Year End: $400,000
Highest Aggregate Value at Any Time During the Year: $600,000
If I'm currently filing the FBAR (TD F90-22.1) does Form 8938 replace it?
NO. Both forms are required to be filed. The FBAR will still be filed directly with the Treasury Department. The 8938 will be attached to your U.S. tax return and filed with the IRS.
What happens if the IRS finds out I didn't file or if I under-reported my foreign interest, dividends, capital gains, and business earnings?
If you don't file a complete and correct Form 8938, it is an automatic $10,000 penalty that can grow to a $50,000 penalty if not dealt with immediately. You will be required to pay the regular tax that would have been due on these assets plus interest and incur an additional penalty of 40% of the tax due. Don't forget there may be criminal penalties for non-compliance.
What ELSE should I know?
Form 8938 is required to be attached to your U.S. income tax return, but only required if you would otherwise be required to file a U.S. income tax return. So, if you are not required to file a U.S. tax return, you are not required to file form 8938 with it.
Do I have to report a specified foreign financial asset on Form 8938 if I report it on other IRS disclosure forms?
Maybe not. Please see a qualified tax professional to help you determine if you need to file form 8938. Remember, failure to file a correct and complete Form 8938 may result in $10,000 or more in penalties.
For most American expats, the annual filing of their U.S. tax return is not the real issue to worry about – it's the required disclosure reporting! Some of the most draconian IRS penalties are associated with the non-filing or incorrect filing of the various disclosure reports that you need to file if you hold foreign investments, foreign bank accounts, or foreign business interests. Don't risk losing your hard-earned international financial accounts to IRS penalties, work with a tax professional experienced in the international reporting requirements.
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