SEE ALSO >>> International Tax
If you hold assets such as bank and other financial accounts or securities from companies outside the United States, you may need to report them to the IRS. The Foreign Account Tax Compliance Act (FATCA) requires some U.S. taxpayers who have interests in “specified foreign financial assets,” or SFFAs, to provide information on them to the IRS via Form 8938, “Statement of Specified Foreign Financial Assets.”
Among the assets the IRS considers SFFAs are foreign financial accounts and instruments, as well as foreign stocks and securities held for investment rather than for use in a business.
Foreign financial institutions
FATCA was enacted in 2010 to make it more difficult for individuals to evade U.S. taxes by keeping assets in offshore financial accounts that aren’t reported to the IRS. According to a 2014 press release from the U.S. Treasury that accompanied a package of FATCA regulations, “This international tax evasion is illegal, contributes to the federal debt, and creates inequity within the tax system.”
Thus, as part of FATCA, foreign financial institutions, as well as some nonfinancial institutions, must provide information about their U.S.-owned accounts and assets to the IRS. This includes the identities of account holders.
Who needs to report
Not everyone with foreign financial assets needs to report them to the IRS, however. If you aren’t required to file a U.S. income tax return for the year, you don’t need to file Form 8938.
In addition, some types of foreign assets don’t need to be reported. These include financial accounts maintained by U.S. payers, such as the U.S. branches of foreign financial institutions or the foreign branches of U.S. financial institutions. In addition, any interest you have in a foreign social insurance program doesn’t need to be reported.
Even if you meet the other reporting requirements, you won’t need to include Form 8938 with your tax return unless the following conditions apply:
- You’re an unmarried taxpayer who held SFFAs of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year, or
- You’re married, filing jointly and held SFFAs of more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.
The thresholds are higher for U.S. taxpayers living outside the United States. For instance, single taxpayers living abroad must file Form 8938 if they held $200,000 in SFFAs on the last day of the year, or more than $300,000 in SFFAs at any point during the year.
Some foreign financial assets that are reported to the IRS on other forms also don’t need to be reported on Form 8938. One example is interest in trust and foreign gifts reported on Form 3520 or Form 3520-A. However, the value of these assets is included when determining whether you meet the SFFA reporting threshold, and the number of these forms filed is listed on Form 8938.
Form 8938 asks for the number and value of deposit and custodial accounts, as well as the interest, dividends and royalties attributable to these assets. It also requires that you indicate the currency in which the accounts are maintained.
To determine whether the reporting requirement applies, the value of the assets is calculated in U.S. dollars. Assets denominated in different currencies should be converted using the U.S. Treasury’s foreign currency exchange rate. If the Treasury doesn’t have such a rate, you typically can use another publicly available rate.
If you hold financial assets outside the United States, it’s worth reviewing them to determine whether the FATCA reporting requirements apply. After all, many financial institutions will be providing information on these accounts directly to the IRS.
In addition, the penalties for failing to report are steep, starting with a $10,000 failure-to-file penalty. An additional penalty of up to $50,000 can be imposed if you continue to not report after being notified by the IRS. The statute of limitations is lengthy, extending to six years if you don’t include gross income from a foreign asset of more than $5,000 on your tax return.
Follow the rules
As you can see, it’s important to follow the rules if you hold foreign assets. Your accounting professional can answer questions and provide guidance on FATCA’s reporting requirements.
Don’t forget about FBAR
The Foreign Account Tax Compliance Act (FATCA) isn’t the only regulation with which taxpayers with foreign assets may need to comply. Some will also need to report these assets on what’s known as the “FBAR,” or Form 114, “Report of Foreign Bank and Financial Accounts.”
The FBAR typically comes into play if an individual or entity, such as a trust or estate, has a financial interest or signing authority over an offshore financial account(s), and the total value of all foreign financial accounts exceeded $10,000 at any time during the calendar year. What’s more, an FBAR may need to be filed even if the account hasn’t produced taxable income during the year.
It’s possible that a foreign account will need to be reported on both Form 8938 and Form 114, though the information required on each may differ slightly. Form 114 should be filed electronically by June 30 — it’s not filed with your federal tax return.