Understanding IRS Form 8938 (Good Luck)
Tax season is over, but many U.S. taxpayers remain confused about the new IRS Form 8938…including many tax professionals, it seems, given the number of e-mails I’m getting from readers asking questions to make sure their tax preparers completed their forms correctly. This new form is a catch-all intended to capture information about offshore financial assets that aren’t required to be reported on any other IRS form. If you own some offshore entity that requires you to complete a related form (5471 for an offshore corporation or 3520 or 3520-A for an offshore trust, for example), you’re already reporting the existence of the asset and don’t have to file a Form 8938 for it…if that’s the only offshore asset you hold. If you meet the requirements for the form and have additional assets that aren’t already being reported elsewhere…then, yes, you need the new 8938.
Start by determining whether you meet the requirements for Form 8938 overall. This means understanding the rules and making some calculations.
First is the fixed number threshold. For those residing in the United States, that number is US$50,000 of Foreign Financial Assets (FFA) on the last day of the tax year or US$75,000 of Foreign Financial Assets at any point during the tax year. Those figures are for people filing single, including married people filing separately. The figures double for people filing jointly.
If you don’t reside in the United States, then the numbers jump to US$200,000 of FFA on the last day of the tax year or US$300,000 at any point during the year. Again, the figures double for people filing jointly.
While the minimum threshold for filing is higher than that for the FBAR form for reporting foreign bank accounts, foreign bank accounts are included in the definition of an FFA. Therefore, even if you don’t qualify for the FBAR because you have, say, one bank account overseas with only US$8,000 in it (the threshold for reporting, remember, is an account with US$10,000 or more), you would be required to report that bank account on Form 8938 if you meet the requirements for the new form overall.
FFAs also include stock certificates that you hold directly for foreign corporations even if the corporation doesn’t qualify as a U.S.-controlled foreign corporation (USCFC). This could be stocks of a Canadian junior mining stock you purchased directly from the company that now sit in a drawer in your home office. This example is critical as it’s not uncommon to have invested in stocks in this manner and forgotten about the certificates sitting in a file drawer somewhere. A friend whose mother died recently found old certificates for a foreign stock that his mom had bought years before and hidden in her bedroom. No one else knew they existed.
The catchall part of the definition for an FFA is “Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.” This definition would include, for example, an offshore life insurance policy that has a cash value. It would not include physical assets held in your own name…such as real estate and metals if you hold the physical metal rather than a certificate.
Debate continues about whether physical metal held by a third party qualifies as an FFA. If you have a contract with a third party to store the metal, it could be considered to fall under the catchall definition. However, physical gold is clearly not a financial instrument, so most experts agree that physical metals need not be reported on Form 8938.
Real Estate Requirements
Real estate is much more black and white. It is not reportable…as long as you hold the property in your individual name. If you hold it in an entity, then the shares of the entity qualify as an FFA and do need to be reported. The real estate then would be disclosed on the forms for the entity.
While the above explanations are as clear as I can make them, they probably only bring up more questions. With so much uncertainty as to what should be included on Form 8938 and so much worry (thanks to IRS fear-mongering tactics) over the consequences of not reporting something that is deemed reportable, some taxpayers are opting simply to report any and all assets they hold outside the United States. That may seem like overkill…and repulsive if you retain any expectations of privacy in the United States.
I’d agree…except that I’ve already given up on any delusion that anything resembling personal privacy remains possible in the current climate in the States. Further, I believe it will be only a short time before that will be the requirement anyway–to report any and all offshore assets, in anticipation of the imposition of a wealth tax.
With the U.S. government drowning in debt, many believe a wealth tax similar to the ones in France, Colombia, and elsewhere (including, at one time, in the state of Florida) is just around the corner. I count myself among them.
Meanwhile, remember: Failure to include even one required disclosure on Form 8938 can result in a fine of as much as US$10,000 to US$50,000.