We all lie in specific situations for “n” number of reasons, however, ask any mathematician and he/she will agree that “Numbers never lie”. In fact, the government has caught criminals in the past simply based on this logic. Evasion of taxes or inaccurate reporting of income on your annual tax returns can land you in deep trouble not only with heavy penalties, but can end up landing you in prison. As per tax laws, many US taxpayers, including American Indians, are unaware of the tax laws that apply to them and might be unknowingly breaking laws, which could have disastrous consequences. The filing of Form 8938 along with your annual income tax return is an important form for many NRI’s and US expats. This guide will explain what form 8938 and the filing process.
Expats, US Resident and US Citizens having foreign financial assets, including foreign accounts, crossing the reporting threshold limit, must file Form 8938 with their annual income tax return to the IRS. The information is very critical as it was designed to combat tax evaders. For example, the information disclosed on Form 8938 can be cross referenced against other foreign tax compliance forms and if a taxpayer has willfully not disclosed information on the other forms, form 8938 will catch them red-handed, so to speak. For example, a simple question such as the date of account opening, can land you in trouble, as FBAR requires you to report income from 2010 onwards and if a specified account was not reported then penalties can be levied and in worst case scenarios, include jail time.
The IRS counts specified foreign financial assets as:
Note: Foreign investments held through American investment accounts do not need to be reported.
The value of the foreign assets held by an individual need to be determined by its value in US dollars, as per the currency exchange rate on the last day of the year, however it is advisable to use the currency rate declared by the treasury department. To calculate the fair market value, taxpayers need to know the highest value of the asset during the year as well as the value on the last day of the year. While filling out the details of the amounts, the individual must report which foreign currency was used to convert the amount into US dollars and the currency exchange rate site used.
Any US taxpayer impacted by FATCA needs to file form 8938, however the IRS mandatorily requires the following individuals to report their foreign financial assets:
When filling out form 8938, to determine which assets/accounts need to be declared, two values need to be calculated: the maximum value of all financial assets during the year and at the end of the year. If the total of these two values exceeds the reporting threshold, then all foreign financial assets need to be declared to the IRS.
|Type of Person||Value of all assets on last day of the year||Total value above limit at any point in the year|
|Married – Filing Separately – Living in US||$50,000||$75,000|
|Married – Joint Filing – Living in US||$100,000||$150,000|
|Married – Joint Filing – Living in Foreign Country||$400,000||$800,000|
|Married – Separate filing – Living in a Foreign Country||$200,000||$300,000|
|Unmarried – Living in a Foreign Country||$200,000||$300,000|
|Unmarried – Living in US||$50,000||$75,000|
Form 8938 should be filed at the time of filing form 1040. An extension can be filed for filing form 8938, during tax return filing.
The main parts of Form 8938 are as follows:
Part 1 – Foreign deposits and custodial accounts summary with the foreign financial institution
Part 2 – A summary of all foreign assets
Part 3 – A detailed summary of income from all foreign assets
Part 4 – Foreign assets that are excepted from reporting, but reported in another section of tax return.
The most easily differentiable factor between form 8938 and FBAR is that the latter is filed with the treasury department containing details of only foreign accounts, while form 8938 is filed with the yearly tax returns, containing details of all foreign accounts and assets. Form 8938 requires US citizens in foreign countries to be compliant with US expat tax laws, whereas FBAR is used to determine financial crimes, such as tax evasion.
[ Read: FBAR vs 8938 ]
For taxpayers who fail to furnish form 8938 in their tax return or if the details of the form are incomplete, the IRS can levy fines between $10,000 – $50,000. For every thirty-day period of delay, after the issuance of notice from the IRA, an additional $10,000 can be levied, up to a maximum of $50,000. Failure to file form 8938 will result in the IRS presuming that the foreign financial assets exceed the threshold limits. However, if a taxpayer can show cause for the delay in filing or non-filing, then penalties can be waived.