The Foreign Account Tax Compliance Act of 2010 (FATCA) requires certain US taxpayers to disclosure their foreign bank accounts or other foreign financial assets to the IRS. Taxpayers need to deal disclosure this foreign financial information on Form 8938, which is filed with an individual’s annual federal income tax return Form 1040.
For single taxpayers residing in the US, they need to file Form 8938 if their foreign financial assets exceed $50,000 on the last day of the year or if their foreign financial assets exceed $75,000 at any time during the year. Married taxpayers filing separately have the same filing threshold as single taxpayers do. For married taxpayers filing jointly residing in the US, Form 8938 is required when foreign financial assets exceed $100,000 on the last day of the year or $150,000 at any time during the year.
For taxpayers living abroad the threshold to file is higher. For single and married filing separately taxpayers, Form 8938 is required if on the last day of the year a taxpayer’s foreign financial accounts exceed $200,000, or if they exceed $300,000 at any point during the year. For married filing jointly taxpayers, Form 8938 is required if on the last day of the year the taxpayer’s foreign financial accounts exceed $400,000, or if they exceed $600,000 at any point during the year.
The foreign accounts Form 8938 covers includes bank accounts, but also securities held outside of a financial institution, interests in foreign corporations or partnerships, and foreign pensions. Although if an individual only has signature authority over an account but does not have an ownership interest, then Form 8938 does not require that account to be reported.
Form 8938 requires the disclosure of the following information: name and address of the foreign financial institution, account number, maximum value during the year, if the account was opened or closed during the year, and any interest or dividend derived from the account. For foreign assets that are not financial accounts, such as an interest in a foreign entity, Form 8938 requires the description of the asset, maximum value of the asset during the year, and any income or gains associated with the asset.
Failing to file a required Form 8938 comes with severe penalties. The initial penalty for failing to file is $10,000. But if the IRS sends a notice about the failure to file and Form 8938 is not filed within 90 days of the notice, then there is an additional penalty of $10,000 for each 30-day period until Form 8938 is filed. The IRS can impose a maximum additional penalty of $50,000. So the IRS can impose a total penalty of $60,000 (the $10,000 original penalty and $50,000 additional penalty) for each Form 8938 the taxpayer failed to file.
Given the complexities of Form 8938 reporting, and the severe penalties associated with noncompliance, it is important to review your reporting obligations with a tax professional annually.