What Is a 8938 and When Do I Need to File One?
Few things are as exciting as leading a life overseas as an expat, experiencing things most will never have a chance to experience, working an interesting job in a culture different from your own, and being able to travel to unique places. While all of this is true, no matter where you go, there are still responsibilities related to one’s taxes. In particular, while overseas, you will at some point likely open up a foreign financial account, such as a bank account or pension. In this scenario, you may have additional filing requirements in the U.S. This may be the case whether you are an American living overseas, or you are a non-American who has assets overseas and decides to then move to the U.S.
But what is considered a foreign financial account? The nomenclature used on form 8938 is “specified foreign financial assets,” and these include financial accounts maintained by a foreign financial institution, such as foreign bank accounts and foreign pension accounts. This would even include foreign financial assets not held in an account maintained by a foreign financial institution, such as stock issued by a foreign corporation, a profit interest in a foreign partnership, an interest in a foreign trust, and so forth.
However, some assets are not required to be reported on Form 8938, and those are financial accounts maintained by a U.S. domestic financial institution, such as U.S. mutual funds, IRAs, 401(k) accounts, brokerage accounts maintained by U.S. financial institutions, and foreign Social Security. This is an important distinction, because you may have certain assets that need to be reported on Form FinCEN 114 (FBAR) but not on Form 8938, such as a bank account held at the foreign branch of a U.S. financial institution. Similarly, you may have certain assets that do not need to be reported on an FBAR but need to be reported on Form 8938, such as foreign partnership interests.
Another difference from the FBAR is that Form 8938 is filed together with your federal tax return and therefore, if you filed an extension for your federal tax return, then you will automatically receive an extension to file Form 8938.
But who needs to file a Form 8938? Depending on your filing status and whether you live inside the United States or overseas, the filing threshold can vary greatly. For instance, unmarried taxpayers in the U.S. would need to file a Form 8938 if the total value of their foreign financial assets exceeded $50,000 on the last day of the year or $75,000 at any point during the year. However, unmarried taxpayers living outside the U.S. would need to file a Form 8938 only if the total value of their foreign financial assets exceeded $200,000 on the last day of the year or $300,000 at any point during the year. Taxpayers filing jointly have a much higher filing threshold. For instance, taxpayers living outside the U.S. who file jointly have a filing threshold of $400,000 (on the last of the year) and $600,000 (at any point during the year).
However, one thing to be careful of is the fact that filing a Form 8938 does not mean that you can avoid filing an FBAR. In fact, if you met the threshold to file a Form 8938, then you would have also probably met the threshold to file an FBAR. However, the converse is not necessarily true. Specifically, if you met the threshold to file an FBAR, you would not necessarily have met the threshold to file a Form 8938, given the filing threshold for filing a Form 8938 is higher than that of the FBAR.
But what happens if one is required to file a Form 8938 and does not file one on a timely basis? In this scenario, you may be subject to a $10,000 failure-to-file penalty. And what happens if you do not report a foreign financial account on your Form 8938 and there is unreported income related to that foreign financial account? In this scenario, you may have to pay a penalty equal to 40 percent of the underpayment of tax.
Therefore, if you are an American living overseas and you have an ownership in foreign financial accounts, or if you live in the U.S. and hold foreign financial accounts, it behooves you to seek professional help when filing this form, as the consequences of not filing a timely and correct Form 8938 can be severe.