What if I Didn’t File IRS Form 8938?
Failure to Disclose Foreign Financial Accounts on IRS Form 8938 Can Have Serious Consequences
The obligation to file IRS Form 8938 applies to US taxpayers that own specified foreign financial assets, including foreign bank accounts. Failure to disclose foreign accounts to the IRS when required can have serious consequences. As a result, for taxpayers who are behind on their filings, coming into compliance needs to be a priority.
International Tax Team Lead
Former DOJ Attorney
International Tax & CPA Team Lead
International Tax Team
Former Special Agent (IRS)
Taxpayers who own offshore bank accounts and certain other foreign financial assets are required to file Form 8938 with the Internal Revenue Service (IRS) when they file their annual income tax return. While filing thresholds apply, these thresholds will be easily exceeded in most cases.
As a result, if you have a bank account in a foreign country, if you own shares in a foreign entity, or if you have any other assets that may be subject to disclosure on IRS Form 8938, you need to prioritize compliance. Failure to do so can lead to steep penalties—including criminal penalties in some cases.
IRS Form 8938 is Required for Domestic Corporations, Domestic Individual Taxpayers, and Taxpayers Living Abroad
Under the Foreign Account Tax Compliance Act (FATCA), domestic corporations, domestic individual taxpayers, and taxpayers living abroad may all be required to file IRS Form 8938. Crucially, this is in addition to the requirement to file an FBAR. While the FBAR filing requirement applies specifically to foreign bank accounts, IRS Form 8938 covers a much wider range of foreign assets, including:
- Securities issued by a foreign corporation (i.e., foreign stocks)
- A partnership interest in a foreign partnership
- Foreign currency
- Foreign financial instruments
- Foreign brokerage accounts
- Foreign retirement accounts and foreign retirement plans (including foreign pension plans)
- Foreign real estate
- Foreign-issued insurance contracts
- Other “specified foreign assets” in which a US taxpayer has a beneficial interest
If the value of your (or your business’s) foreign financial assets exceeded the applicable IRS reporting threshold in any tax year, you were required to file IRS form 8938 with your US tax return for that year. If you failed to file (or failed to file a complete and correct form) by the due date for your federal tax return in any tax year, you could be facing serious consequences, and you will want to consult with an international tax lawyer promptly about coming into compliance.
Failure to File IRS Form 8938 Can Have Serious Consequences
Whether you are a US citizen, a resident alien, or a US taxpayer living abroad, if you are behind on FATCA compliance, you could be facing either civil or criminal penalties based on your individual circumstances. The penalties for failing to disclose offshore bank accounts that hold domestic or foreign income and other foreign financial assets that are subject to disclosure under FATCA include:
- Civil Penalties – Up to $10,000 for the initial failure and an additional $10,000 for each 30 days of noncompliance after receiving a Notice of a Failure to Disclose from the IRS, for a potential maximum penalty of $60,000. A 40% accuracy-related penalty may also apply if failure to disclose foreign assets lead to underpayment of tax. The IRS may be able to assess certain other penalties indefinitely if Form 8938 is never filed.
- Criminal Penalties – Criminal penalties vary depending on the specific charges that federal prosecutors choose to pursue. Generally, criminal penalties include substantial fines and federal imprisonment.
Civil penalties apply in cases involving inadvertent violations (including good-faith reliance on the advice of a tax professional), while criminal penalties apply in cases involving willful noncompliance with US taxpayers’ reporting obligations. In criminal cases, establishing reasonable cause can be a viable defense strategy, though this can still leave taxpayers exposed to civil liability.
Options for Correcting a Failure to Disclose Foreign Bank Accounts to the IRS
If you are behind on your foreign financial asset disclosures under FATCA, you should consult with an experienced international tax attorney about coming into compliance. While filing a delinquent or amended return may be an option in some cases, most taxpayers will need to pursue one of the following alternatives:
Streamlined Filing Compliance Procedures
The IRS’s Streamlined Filing Compliance Procedures provide a way for taxpayers to voluntarily resolve inadvertent noncompliance. While taxpayers must still generally pay what they owe, submitting a streamlined filing can potentially mitigate taxpayers’ liability while also protecting against the risk of facing an audit or investigation in the future.
Voluntary Disclosure
IRS Criminal Investigation (IRS CI) maintains a voluntary disclosure program that allows taxpayers to proactively resolve willful tax law violations, including violations of FATCA. Submitting a voluntary disclosure can help minimize the penalties for willful non-filing. However, taxpayers must be very careful, as immunity from federal prosecution is not guaranteed.
Defending Against an IRS Audit or Investigation Involving an Account Held at a Foreign Financial Institution
If you are facing an IRS audit or IRS CI investigation, it is too late to submit a streamlined filing or voluntary disclosure. In this scenario, you will need to focus your efforts on building and executing a defense that avoids unnecessary consequences.
Crucially, in this scenario, you may need to defend against allegations of FBAR noncompliance as well. Taxpayers who need to file Form 8938 with the IRS will also typically need to file an FBAR with the Financial Crimes Enforcement Network (FINCEN), which is an independent US Treasury bureau. Both forms may require reporting the same foreign assets (i.e., foreign bank accounts), and the FBAR filing threshold is just $10,000 in aggregate account value.
Our attorneys are available to defend taxpayers in the US and abroad accused of FATCA and FBAR noncompliance. If you need experienced international tax counsel, we encourage you to contact us right away.
FAQs: Disclosing Foreign Financial Assets to the Federal Government
What are the reporting thresholds for IRS Form 8938?
The reporting thresholds for IRS Form 8938 have not changed since 2011. They vary for US taxpayers living domestically and abroad, and they also vary based on filing status (i.e., for taxpayers filing separately and married taxpayers filing jointly).
For taxpayers living in the US, the reporting thresholds are as follows:
- Unmarried individuals and married individuals filing separately: Total value of reportable assets exceeded $50,000 on the last day of the tax year or $75,000 at any time during the year.
- Married individuals filing a joint income tax return: Total value of reportable assets exceeded $100,000 on the last day of the tax year or $150,000 at any time during the year.
For taxpayers living abroad, the reporting thresholds are as follows:
- Unmarried individuals and married individuals filing separately: Total value of reportable assets exceeded $200,000 on the last day of the tax year or $300,000 at any time during the year.
- Married individuals filing a joint tax return: Total value of reportable assets exceeded $400,000 on the last day of the tax year or $600,000 at any time during the year.
Specified domestic entities must file IRS Form 8938 to disclose their offshore bank accounts to the IRS as well. For these entities, the reporting thresholds are an aggregate value of $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Are the reporting thresholds based on the maximum value of your specified accounts (and other specified assets) during the tax year?
Yes, the reporting thresholds for IRS Form 8938 are based on maximum account value during the relevant tax year. If the aggregate value of your specified foreign financial assets exceeded the relevant threshold at any time, you must timely file Form 8938 on or before the tax deadline for your federal return.
What “specified domestic entities” need to file IRS Form 8938?
The term “specified domestic entity” is defined in the IRS’s Instructions for Form 8938. The definition includes a closely held domestic corporation or domestic partnership that earns at least 50% of its gross income from passive income, among other qualifying domestic corporations, partnerships, and trusts.
Do I need to file IRS Form 8938 if I have an account at a foreign branch of a US bank?
Yes, the FATCA reporting requirements apply to qualifying bank accounts held at foreign branches of US banks. They also apply to certain foreign assets other than accounts held at foreign branches of US banks, such as physical assets and certificates of deposit.
What if I inherited a foreign estate or own foreign assets other than an offshore bank account (i.e., mutual funds or other investment assets)?
Interests in foreign estates, foreign mutual funds, and other foreign investment assets are all subject to the mandatory reporting requirements under FATCA. If you were required to disclose any of these assets under FATCA and failed to do so, you should consult with an experienced international tax lawyer promptly.
Speak with a FATCA Compliance Lawyer at Oberheiden PC
If you have questions or concerns about the IRS Form 8938 filing requirement, we encourage you to contact us promptly for more information. To speak with an experienced FATCA compliance lawyer at Oberheiden PC in confidence, call 888-680-1745 or request a free consultation online today.
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