FATCA Form 8938 & IRC 6038D
FATCA Form 8938 & 6038D: When US Taxpayers research about foreign account reporting rules, oftentimes it leads them to the FBAR. But, the FBAR and Form 8938 are not the same — and not mutually exclusive. In fact, the FBAR is not actually an IRS form and has nothing to do with tax. The FBAR form was developed back in 1970 by FinCEN (Financial Crimes Enforcement Network) to track reporting a foreign account balances. Taxpayers are not required to include income or any taxes paid with respect to the particular account that is required to be included on the FBAR. The only reason the form has anything to do with the IRS, is because the IRS is the organization tasked with enforcement.
What is FATCA?
To further expand Taxpayer reporting requirements, the IRS developed FATCA and Form 8938.
FATCA is the Foreign Account Tax Compliance Act. The purpose of the act is to facilitate compliance between the United States and foreign countries — with the goal is to reducing and eliminating offshore tax evasion. From a US tax perspective, these bilateral agreements (known as IGAs) require the foreign financial institutions of each country in which the US has entered into the agreement to report foreign accounts held by US persons.
This information is then reported to the IRS so that the IRS is aware of US persons who have a reporting requirement.
26 U.S.C. 6038D (IRC 6038D)
6038D is a new code section that was developed in accordance with the enactment of FATCA. The purpose of the code section is to require US persons who have to file tax returns to include their foreign account and income information on a specific form that is then submitted to the IRS.
The name of the form that was developed to complete their reporting for submission to the IRS is Form 8938.
(a) In general
Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe). (b)Specified foreign financial assets For purposes of this section, the term “specified foreign financial asset” means—
(1)any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
(2)any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—
(A)any stock or security issued by a person other than a United States person,
(B) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
(C) any interest in a foreign entity (as defined in section 1473).
What does this mean?
IRC 6038D essentially means that if a US person has interest in a specified foreign financial asset, and the asset (or annual aggregate total of all foreign assets combined) exceeds the threshold for reporting, then the individual must file a form to report this information to the IRS.
As provided by the IRS:
“The Foreign Account Tax Compliance Act, enacted in 2010, created new IRC Section 6038D and requires individuals to file a statement with their income tax returns to report interests in specified foreign financial assets if the aggregate value of those assets exceeds certain thresholds.
Temporary regulations implementing IRC 6038D have been issued. Under the regulations, specified individuals (U.S. citizens, residents and certain non-resident aliens) are required to complete and attach Form 8938, Statement of Specified Foreign Financial Assets, to their income tax returns. This is effective for tax years starting after March 18, 2010, which for most people will be their 2011 tax returns filed during the 2012 filing season.
In developing the regulations IRS considered the potential burden this new self-reporting requirement could have on affected taxpayers. To balance reporting burden and the need for compliance improvement, there are higher asset thresholds for married couples and those residing abroad. There are also exceptions that relieve taxpayers from reporting certain assets, and special rules for valuing assets.”
What if Form 8938 is Not Timely (or Accurately) Filed?
Taxpayer may receive either a CP15 Notice or Soft Letter — although with the 8938 being a newer form, the soft-letter is a bit more common than with other international reporting forms, such as Form 5471 or 3520/3520-A.
The soft letter is not a penalty letter such as a CP15 Notice, but rather is “soft reminder” that a Foreign Financial Institution has reported the taxpayer to the IRS as being a U.S. person who has an ownership interest in an account or asset at that institution — but either the US person did not include it on their tax return or did not report it accurately (or correctly).
Form 8938 Amnesty Program Summary
The Form 8938 “FATCA” Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Form 8938 Expands Offshore Reporting
In conclusion, the US government continues to increase enforcement of offshore compliance related matters each year. Taxpayers may have one or several reporting requirements on various international information reporting forms — with one of the more common forms being IRS Form 8938. The 8938 Form requires Taxpayers to disclose specified foreign financial assets to the IRS. Noncompliant have various IRS tax amnesty programs available to them that can help them safely get back into compliance.
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