This chapter is a continuation about the form you may need to submit if you are filing a FBAR, which is Form 8938 Statement of Specified Foreign Assets Form.
U.S. citizens, resident aliens and certain non-resident aliens who have an interest in specific foreign financial assets and meet the filing thresholds must file this report yearly with their income tax returns.
The IRS is very strict in regard to the reporting of foreign assets. It is in response to the number of cases they investigate regarding undisclosed assets being hidden overseas. I will be quick to point out that while the number of cases is not huge, the amounts recovered are.
Here is a link to instructions provided by the IRS to guide you in completion of the form.
In this chapter, I will explain the situations where Form 8938 is required and how to complete it. If you have any questions, please reach out to me.
Differences Between Form 8938 and FBAR
As one could deduce by the existence of the two distinct forms, not all taxpayers who file FBAR will have to file Form 8938 or vice versa. Although there are several differences between the two forms, two of the notable distinctions are that foreign partnership interests, foreign hedge funds and foreign private equity funds must be reported on Form 8938 but not on FBAR.
On the other hand, accounts for which a taxpayer merely has signature authority generally must be reported for on FBAR (with some exceptions) but generally not on Form 8938 (with some exceptions). To understand the differences between the FBAR and Form 8938, here is a chart which illustrates the comparison of requirements under both.
Filing Criteria for Those with Foreign Assets
Persons and Entities
U.S. citizens, U.S. residents, certain residents of U.S. Possessions and nonresidents who elect to be treated as U.S. residents will have to fill out this form if they hold financial accounts or certain assets held for investment (deemed “specified persons”). At the business level, those that must file Form 8938 are those deemed “specified domestic entities.”
A specified domestic entity is defined by statute as “domestic corporation, a domestic partnership, or a trust described in section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.” See 26 CFR § 1.6038D-6.
Closely held domestic corporations and partnerships that derive 50 percent or more of their gross income from passive income or have 50 percent or more of their assets producing (or are being held for the production of) passive income will be deemed specified domestic entities. See Instructions for Form 8938 (2020), Specified Domestic Entity.
Passive income can include dividends, interest, income equivalent to interest, and annuities, among other examples. See the instructions for Form 8938 for a complete list of what qualifies as passive income.
Specified Foreign Financial Assets
Specified foreign financial assets include financial accounts maintained by foreign financial institutions, and certain foreign financial assets that are held for investment as opposed to in accounts maintained by financial institutions. Among these foreign financial assets include interests in foreign entities, stocks or securities issued by non-US persons, financial instruments or contracts in which a non-U.S. person is an issuer or counterparty, foreign corporation-issued stocks, and interests in foreign trusts or estates.
Other examples include forms of debt issued by foreign persons and interests in foreign partnerships.
Exempt Accounts and Assets
On the other hand, certain accounts and assets need not be reported. These include financial accounts held by U.S. financial institutions such as U.S. mutual funds accounts, Roth and traditional IRAs, 401(k) retirement accounts, and brokerage accounts held in U.S. financial institutions.
Furthermore, financial accounts, as well as assets not held in financial accounts, that are subject to mark-to-market accounting rules for dealers in securities or commodities or an election under 26 U.S. Code 475(e) or (f) do not need to be reported. See Instructions for Form 8938 (2020), “Assets Not Required to Be Reported”. 26 U.S. Code 475(e) and (f) discuss “[e]lection of mark to market for dealers in commodities” and “[e]lection of mark to market for traders in securities or commodities,” respectively.
Owning such financial assets, alone, will not trigger a filing requirement. Rather, the assets you hold must be valued above the monetary threshold which will vary based on your place of residence, marital status, and whether you are filing as an individual or a “specified domestic entity.”
For example, Form 8938 is required if the total foreign-held asset value was $50,000 on the last day of the tax year, or $75,000 at any time during the tax year. If you are married and file jointly with your spouse, the threshold is $100,000 on the last day of the year or $150,000 at any time during the tax year.
If your tax home is a foreign country under the IRS’s rules, an unmarried taxpayer is required to report only if their assets were more than $200,000 on the last day of the tax year or more than $300,000 at any point during the year.
The threshold for married taxpayers living abroad is $400,000 on the last day of the tax year or $600,000 at any time during the tax year.
Review the IRS’ page on Statement of Specific Foreign Assets for the filing criteria for corporations and for more detail on what constitutes specified foreign assets.
You must report the maximum value of the foreign financial assets or financial accounts with foreign financial institutions, and certain other foreign non-account investment assets. The assets are reported in U.S. dollars using the end of the taxable year exchange rates.
Like FinCEN Form 114, there are reporting exemptions, but they differ from those of Form 114. You do not have to report an account held in a foreign branch of a U.S. bank.
Domestic mutual funds that invest in foreign stocks or securities or private equity funds are exempt. If held directly, personal property, such as jewelry and art, real estate, currency, and precious metals held abroad are all exempt.