Form 8938

Form 8938 is the annual disclosure a US taxpayer attaches to a federal income tax return to report interests in foreign financial assets whose total value crosses a threshold. Its official title is Statement of Specified Foreign Financial Assets, and its authority is Internal Revenue Code section 6038D, added by the 2010 legislation commonly known as FATCA. The statute requires any individual holding an interest in a specified foreign financial asset to attach the information "if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe)", and the regulations set four higher pairs of thresholds that depend on filing status and on whether the filer lives abroad.

Form 8938 is not the FBAR, and filing one never satisfies the other. FATCA is the wider regime, of which Form 8938 is the individual taxpayer's half; the form is filed with the IRS, while the FBAR goes to a different Treasury bureau on a different schedule with a different threshold and a different definition of what counts. Most people who file one of them should check whether they owe the other.

What a "specified foreign financial asset" actually is. Section 6038D(b) builds the category in two layers. The first is any financial account maintained by a foreign financial institution, and an asset held inside such an account is not separately listed, because the account already carries it. The second layer is the part people miss: assets held for investment and not held in an account. Regulation 1.6038D-3(b) names three, and the IRS fills them out with examples. Stock or securities issued by someone who is not a US person. A financial instrument or contract held for investment with a foreign issuer or counterparty, which reaches notes and bonds issued by a foreign person, swaps and options with a foreign counterparty, and a foreign-issued life insurance or annuity contract with a cash-surrender value. And any interest in a foreign entity, which covers a partnership interest in a foreign partnership, an interest in a foreign estate, and an interest in a foreign retirement or deferred compensation plan.

"Held for investment" is a real limit, not decoration. Under Regulation section 1.6038D-3(b)(3) an asset is held for investment only if it is not used in, or held for use in, the conduct of a trade or business, and the regulation spells out when an asset is instead held in a direct relationship to a business. Note also the regulation's flat rule that stock is never treated as used in a trade or business for this test.

What is not reportable, which is where most confusion lives. The IRS answers these directly. Foreign real estate held directly is not a specified foreign financial asset, so a personal residence or a rental property abroad is not reported. If that property is held through a foreign entity, the interest in the entity is reportable and the property's value feeds into the entity's value, but the property is not listed separately. Foreign currency held directly is not reportable. Directly held precious metals such as gold are not, though a gold certificate issued by a foreign person can be. Directly held tangible property such as art, antiques, jewelry, cars and collectibles is not. A foreign government's social-security-equivalent benefit is not either, but a foreign pension is, and the instructions add the distinction that matters: the social-security exclusion "does not include an interest in a foreign pension plan."

A financial account at a US payor is outside the form even when it is abroad. Regulation 1.6038D-3(a)(3)(i) excepts an account maintained by a US payor, and the instructions define that to include a domestic branch of a foreign bank or foreign insurance company and a foreign branch or foreign subsidiary of a US financial institution. So a euro account at the London branch of a US bank is not a specified foreign financial asset for Form 8938. It is still a foreign financial account for FBAR purposes, which is exactly the kind of split the table below exists to make visible.

The thresholds, and the trigger for the higher pair. Regulation section 1.6038D-2(a) sets four pairs, each with a year-end figure and a higher any-time-during-the-year figure. A single filer living in the United States reports above $50,000 on the last day of the year or $75,000 at any time; a joint return above $100,000 or $150,000. Those quadruple for a filer living abroad, to $200,000 or $300,000 single and $400,000 or $600,000 joint. The abroad test is precise and is easy to state too loosely: the regulation applies the higher thresholds to a specified individual who is a qualified individual under section 911(d)(1), which means a foreign tax home plus either the bona fide residence test or the physical presence test. A foreign tax home on its own is not enough.

You still report even if you owe no tax, and even if the asset is worth nothing. Regulation 1.6038D-2(a)(8) requires the form "even if none of the specified foreign financial assets that must be reported affect the specified person's tax liability", and 1.6038D-2(a)(5) requires reporting an asset with no positive value. Valuation generally uses the maximum value during the year, and a taxpayer may rely on periodic account statements unless they know the statements do not reflect a reasonable estimate.

The duplicative-reporting exception. An asset already reported on a timely-filed Form 3520, Form 5471, Form 8621 or Form 8865 is not listed again on Form 8938. What the taxpayer does instead is identify on Form 8938 which of those forms was filed and how many. The value of an asset excluded this way still counts toward the aggregate that decides whether the threshold is met, for an individual filer.

The penalty stack is three provisions, not one. Section 6038D(d) imposes $10,000 for a failure to furnish the information, then $10,000 for each 30-day period, or part of one, that the failure continues more than 90 days after the IRS mails notice, capped at $50,000 of continuation penalty. Section 6038D(g) allows a reasonable-cause exception, and states expressly that a foreign jurisdiction's own penalty for disclosure is not reasonable cause. Separately, section 6501(c)(8) holds the assessment period open until three years after the required information is finally furnished, which can keep an entire return open for years. And section 6662(j) raises the accuracy-related penalty from 20 percent to 40 percent for an understatement attributable to an undisclosed foreign financial asset.

Form 8938 against the FBAR, side by side. Both reports exist; neither substitutes for the other. The IRS publishes the comparison, and these are the rows that decide most real cases.

The other structural differences: the threshold is an aggregate over $10,000 at any time for the FBAR against the four Form 8938 pairs; the FBAR treats US territories as part of the United States and Form 8938 does not; and the FBAR is filed electronically with the Financial Crimes Enforcement Network, due April 15 with an automatic extension to October 15, while Form 8938 rides along with the tax return and its extensions.

The order of operations is: identify the assets, add up their maximum values, compare the total against the threshold pair that matches your filing status and residence, and if you are over either figure in the pair, attach the form. Part I of Form 8938 summarizes foreign deposit and custodial accounts and Part II summarizes other foreign assets, with the per-asset detail in the later parts. The form carries an attachment sequence number of 938 and is filed with the return.

A hypothetical example. Devon is single, lives in Ohio, and holds three things abroad during the year: a German bank account with a maximum balance of $31,000 that stood at $28,000 on December 31; shares in an Irish company held directly, not in an account, worth $22,000 at year end and never more; and a vacation apartment in Spain worth roughly $180,000.

The apartment drops out first, because foreign real estate held directly is not a specified foreign financial asset. That leaves the bank account and the Irish shares. On the last day of the year the two total $28,000 + $22,000 = $50,000, which does not exceed the $50,000 year-end figure. But the any-time-during-the-year test uses maximum values: $31,000 + $22,000 = $53,000, which is under the $75,000 any-time figure for a single US-resident filer. Devon is below both and files nothing.

Now change one fact. Devon takes a two-year posting to Berlin, so his tax home is in Germany, and he satisfies the physical presence test. That makes him a qualified individual under section 911(d)(1), the abroad thresholds apply, and they rise to $200,000 and $300,000. His numbers do not move, and he is far below. The apartment still does not count. What would change the answer is selling the apartment and leaving the roughly $180,000 in the German account, because proceeds sitting in a foreign account are a specified foreign financial asset even though the property that produced them never was.

Pros

• It is a disclosure, not a tax. An honest filer who reports correctly owes nothing extra because of the form.
• The scope is published in detail. The regulations and the IRS's own question and answer material settle most edge cases without guesswork.
• The duplicative-reporting exception means an asset already disclosed on Form 3520, 5471, 8621 or 8865 is identified rather than described twice.

Cons

• The penalties are severe relative to the omission. $10,000 for a missed form is the starting point, and the continuation penalty reaches $50,000 more.
• Section 6501(c)(8) keeps the assessment period open until three years after the information is furnished, so an unfiled Form 8938 can leave an entire return exposed indefinitely.
• It overlaps heavily with the FBAR without matching it, so many taxpayers have to prepare two reports on two definitions with two thresholds for largely the same assets.
• Valuing assets that are not accounts, such as an interest in a foreign pension or a private foreign company, can be genuinely difficult.
• Reporting is required even when the assets produce no income and no tax, which makes the obligation easy to overlook.