Form 8938, Statement of Foreign Financial Assets, Basics
In 2010, Congress enacted The Foreign Account Tax Compliance Act (FATCA), which requires U.S. taxpayers, whether living abroad or in the United States, who own financial assets outside of the United States and meet the filing requirements listed below, to report the fair market value of those assets on an annual basis to the IRS. The assets are reported on the new IRS Form 8938 which is submitted with the taxpayer’s income tax return.
FATCA also requires foreign financial institutions, such as banks, insurance companies, mutual funds and brokers/dealers to report certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The IRS believes Billions of tax dollars illegally escape through foreign banks. So the IRS expects FATCA to reduce this area of tax avoidance.
I am living overseas. When must I file Form 8938, Statement of Specified Foreign Financial Assets?
Individuals who are required to report their foreign assets to the IRS under FATCA on the Form 8938 currently include:
• U.S. citizens
• any non-citizen who meets the substantial presence test
• a non-resident alien who makes an election to be treated as a resident alien for purposes of filing a joint tax return, and
• a non-resident alien who is a bona fide resident of American Samoa or Puerto Rico.
If you are a taxpayer living abroad:
• You are filing a return other than a joint return and
The total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
• You are filing a joint return and
• the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
Which types of foreign assets are reportable?
How do I determine the total value of my specified foreign financial assets?
The taxpayer must report the maximum fair market value for the taxable year of their foreign financial assets converted to US dollars. To convert to US dollars, the taxpayer will use the end of the taxable year exchange rate.
If I file the Form 8938, Statement of Specified Foreign Financial Assets, do I still have to file the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)?
Yes. If the filing requirements for the FBAR are met, you are still required to file the FBAR in addition to Form 8938. The Form 8938 does not replace the FBAR.
When is the Form 8938 due?
The Form 8938 is due by the due date, including the extended due date, if applicable, of your income tax return. It is filed together with you income tax return.
What are the penalties if I do not comply with the filing requirements?
The taxpayer can be penalized up to $10,000 for their failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. In addition, criminal penalties may also apply
Declaring interest in a foreign entity to the U.S.
How are U.S. taxpayers supposed to report their interest in a French (or other country) entity? The first thing to note is that this is a reporting requirement that does not necessarily lead to being taxed in the U.S. The taxpayer must identify what kind of entity it is: an SCI (Société Civile Immobilière, a real estate holding) partnership (form 8865) or a family business organized as an SARL (Société à Responsabilité Limitée) or an SAS (Société par Actions Simplifiée), both considered corporations (form 5471).
If the U.S. taxpayer owns any share, or the non-U.S. spouse or other family member owns any share of such an entity, then the declaration may be necessary. Direct ownership means the taxpayer owns a share, or more; indirect ownership means a family member owns a share, or more; constructive ownership means the taxpayer owns very little, but the family owns the rest. Sometimes an entity may own other, smaller entities. In that case, all the entities must be declared. Filing is required if: the U.S. taxpayer has 10% direct, indirect, or constructive ownership or a controlling interest or it is a controlled foreign corporation or the taxpayer is an officer or director. In addition to form 5471, the corporation’s balance sheet and income and expense sheet for the year are required. The penalty for not filing is $10K per entity.
On form 8938 (FATCA), the taxpayer needs to check the box indicating which form (8865 or 5471) is in the file.
If you own or have an interest in a family business or an SCI, you should get professional advice about how to declare it. This overview simply helps you see if you are concerned, or not.
Form 5471 must be filed by anyone who has 10% or more shares in a company. This form is for information purposes only, and you will not be taxed on the information declared here.
Form 3520 is used for reporting gifts or legacies, if the giver is a non-U.S. person. This form is also for information purposes only.
Form 8865 is used to declare interest in a partnership.
Under FATCA, the foreign financial institutions must identify their U.S. person clients. They are doing this by using the W-9 form. This is the form that financial institutions use for bank reporting to the IRS in the U.S. The banks send the customer and the IRS the 1099 form each year and the IRS make sure the bank’s 1099 and the taxpayer’s tax declaration match. French banks, though, do not report to the IRS; they report to French fiscal authorities, which in turn report to the IRS, according to the IGA. The same is true in all the countries where IGAs apply. The IGA does not specify the social security number; it only asks for a tax identification number. The social security number has nine digits (XXX-XX-XXXX) and so does our passport number, which also identifies us as Americans.
According to the Taxpayer Bill of Rights, economic reality checks, such as prying questions that were used to see if a taxpayer was hiding sources of income, are now banned. FATCA, by requiring the declaration of the value of accounts, not just the income, is a form of economic reality check, therefore, it is illegal.
The lawsuits against FATCA, and more broadly, against citizenship-based-taxation. Countries, such as France, are seeing that this form of taxation by the United States is a form of extraterritoriality, an encroachment on their sovereignty. By taxing a U.S. person residing in another country, the U.S. is removing money from that country’s economy. If an American sells his primary residence in Canada and has a non-taxable capital gain, but the U.S. taxes that gain if it is greater than $250K, then that money is removed from Canada, where the resident could have spent it. In France, the National Assembly has created a commission to look into this issue. Countries suing the United States about this practice could have much more impact than taxpayer suits against the IRS.