Your Lifeline for Form 8938

Your Lifeline for Form 8938
Module I

A Five-Part Webinar Series

Table of Contents
• Module I: The Elements (Part I)
• Module II: The Elements (Part II)
• Module III: Reporting Thresholds
• Module IV: Penalties & Statute of Limitations
• Module V: Comparison of Form 8938 & FBAR Requirements

Form 8938
(1) Form 8938, Statement of Specified Foreign Financial Assets
– Background:
• The U.S. government is miffed about widespread international tax
noncompliance, and it is not holding back how it feels about those
who continue to play tax “hanky panky.” It has taken major steps
to address the problem.
• One such step was the enactment of FATCA (Foreign Account Tax
Compliance Act). FATCA, sometimes referred to by the nickname,
“Fat Cat,” was the culmination of a three-year campaign by
Washington to combat offshore tax evasion.

Form 8938
• FATCA was loaded to the hilt with various
tax provisions, including Code Sec. 6038D.
• 6038D requires certain U.S. individual
taxpayers to report information to the IRS
about their foreign financial assets by filing
an annual Form 8938.

Form 8938
– Why is it important to comply with the Form 8938 filing
requirement?
– Violations trigger a parade of horribles:
• Information-reporting penalties,
• Increased sanctions for understatements,
• Extended period for IRS enforcement, and
• Potential criminal charges.

A Labyrinth of Overlapping Rules
– The general rule might appear innocent enough, but it is chock full of
abstract principles and vague concepts that have led many to call it “a
riddle wrapped in a mystery inside an enigma.”
– Even though Code Sec. 6038D was enacted back in 2010, the IRS has
not provided taxpayers with clear guidance on Form 8938’s complex
rules. Where does that leave us? With a jumble of convoluted
temporary regulations issued in 2011, final regulations promulgated in
December 2014, and countless iterations of the Instructions for Form
8938.

Form 8938
–Rule: Any individual who, during any taxable
year, holds any interest in a specified
foreign financial asset shall attach to such
person’s tax return … 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.

Form 8938
– Let’s break the rule down into manageable pieces so that we’re not
forced to drink water out of a fire hose:
• Any specified individual (“SI”)
• Who holds an interest
• During any portion of a tax year
• In a specified foreign financial asset (“SFFA”)
• Must attach to his timely Form 1040 (or Form 1040NR)
• A complete and accurate Form 8938
• If the aggregate value of all SFFAs
• Exceeds the applicable filing threshold.

Form 8938
• Who must file a Form 8938?
– According to the final regulations, a specified individual
includes any one of the following categories of individuals:
• U.S. citizens;
• Individuals who are not U.S. citizens but who are U.S. residents for
any portion of the relevant year;
• Nonresident aliens who affirmatively elect under Code Sec.
6013(g) or Code Sec. 6013(h) to be treated as U.S. residents for
federal tax purposes;
• Nonresident aliens who are bona fide residents of Puerto Rico; and
• Nonresident aliens who are bona fide residents of a so-called
“Section 931 Possession” (i.e., American Samoa).

Form 8938
• No tax return requirement = No Form 8938
requirement
– Specified individuals who have no duty to file Form
1040 or Form 1040NR need not file a separate Form
8938.
– Instructions for Form 8938 enlarges this idea as
follows: If a specified individual has no tax return filing
duty, then he has no Form 8938 filing duty, even if the
value of the SFFA’s exceeds the applicable reporting
threshold.

Form 8938
• What period of time does a Form 8938 cover?
– It starts each tax period beginning on January 1
and ends on December 31.

Form 8938
• When does an individual “hold an interest” in
an SFFA?
– “Holding an interest” varies significantly when it
comes to Form 8938.
– This has caused enormous confusion among
taxpayers and practitioners alike since “holding an
interest” for purposes of Form 8938 is not the
same as “holding an interest” in an asset when it
comes to the FBAR-reporting requirements.

Form 8938
– Generally speaking, a specified individual has an
interest in a “SFFA” if any income, gains, losses,
deductions, or credits attributable to holding or
disposing of the SFFA are (or should be) reported,
included, or reflected on the specified individual’s
annual tax return.
– This is a trap for the unwary!

Form 8938
– Very simply, a SFFA need not affect a taxpayer’s tax
liability for the tax year in order to trigger a Form 8938
filing requirement
– All that’s necessary in order for a specified individual to
have an interest in a SFFA is for the income, gains,
losses, deductions, or credits attributable to holding or
disposing of the SFFA to be reportable on the
individual’s tax return.

Form 8938
Special Rules about “holding an interest”
(1) No entity attribution
– Rule: An interest in a SFFA is not automatically attributed to a
specified individual merely because he owns an interest in an
entity that actually holds a SFFA.
– Example: Fred is the majority shareholder of a foreign
corporation that holds an interest in a SFFA. Is Fred treated as
having an interest in the SFFA as a result of his status as a
shareholder of the foreign corporation? No.
– Contrast this with the FBAR-reporting requirements: The FBAR
requirements generally require the reporting of foreign financial
accounts, regardless of whether the taxpayer holds them
directly or indirectly (i.e., through an entity).

Form 8938
(2) Disregarded entities holding SFFAs
– Rule: A SI who owns a “disregarded entity” is
treated as having an interest in any SFFA that is
held by such entity.
– Instructions: “If you are the owner of a
disregarded entity, you have an interest in any
[SFFAs] owned by the disregarded entity.”

Form 8938
(3) Grantor Trusts Holding SFFAs
– Generally speaking, a SI who is the owner (full or
partial) of a grantor trust is considered to hold an
interest in any SFFA that is actually held by such
trust.

Form 8938
(4) SFFAs Held by Children
– A SI who makes the “kiddie tax” election under
Code Sec. 1(g)(7) – i.e., elects to include certain
passive income of his child as his own gross
income for U.S. income tax purposes – is
considered to “hold an interest” in any SFFA held
by such child.
– This is stated clearly in the Instructions for Form
8938.

Form 8938
(5) Certain Nonvested SFFAs
– Issue: Does a specified individual “hold an
interest” in property that has been transferred to
him in exchange for the performance of personal
services if the specified individual’s interest in that
property has not yet vested?

Form 8938
– Two rules for nonvested SFFAs:
• First rule: A SI who receives property for the performance of
personal services is considered to “hold an interest” in the
property for purposes of Code Sec. 6038D on the first date
that the property is substantially vested.
• Second rule: To the extent that a specified individual elects
to be taxed immediately at present value on the entire
amount that will eventually vest, the specified individual is
deemed to “hold an interest” on the date the property is
transferred.

Tel. 973.783.7000
MJDeBlis@DeBlisLaw.com
www.DeBlisLaw.com

Your Lifeline for Form 8938:
Module II

Form 8938
• What types of assets constitute SFFAs?
– Two main categories
• # 1: Foreign financial accounts maintained at a foreign
financial institution (FFI); and
• # 2: Other foreign financial assets, which are held for
investment purposes.

Form 8938
– Thus, any item that falls within one of these two
categories must be reported on Form 8938.
– Let’s begin by defining Foreign Financial
Institution

Form 8938
Definition of Foreign Financial Institution
A non-U.S. entity that:
– Accepts deposits in the ordinary course of a banking
or similar business;
– Holds financial assets on behalf of others as a
substantial portion of its business;
– Is engaged primarily in the business of investing,
reinvesting or trading securities, partnership interest,
commodities or any interest in such securities,
partnership interests or commodities.

Category # 1: Foreign Financial
Accounts Maintained at FFI
List of Items Considered “Financial Accounts”
1. Depository accounts
– Commercial accounts;
– Savings accounts;
– Time-deposit accounts;
– Thrift accounts;
– Accounts evidenced by a certificate of deposit, thrift
certificate, investment certificate, passbook, certificate of
indebtedness, or any other instrument used to place
money in the custody of an entity that is engaged in the
business of banking and that is obligated to extend credit
(regardless of whether the instrument generates interest);
and

– Any amount held by an insurance
company under a guaranteed investment
contract (or similar agreement) to pay or
credit interest.

2. Custodial accounts
– Definition: An arrangement whereby a person
holds a financial instrument, contract, or
investment for the benefit of another person.
– Examples:
• Shares of corporate stock;
• Promissory notes;
• Bonds;
• Debentures;
• Credit default swaps.

3. Equity or debt interests in a foreign financial
institution, other than interests regularly
traded on securities markets.
4. “Cash-value insurance contracts” and certain
types of annuity contracts issued or
maintained by an insurance company, a
holding company for an insurance company,
or certain foreign financial institutions.

5. Tax-favored foreign retirement accounts,
foreign pension accounts, and foreign non-
retirement savings accounts that meet
special conditions.

6. Tax-favored foreign retirement accounts,
foreign pension accounts, and foreign
non-retirement savings accounts that
have already been excluded from the
definition of “financial account” pursuant
to an “IGA” between the U.S. and a
foreign country to implement FATCA are
still considered “financial accounts” for
Form 8938 purposes.

– Takeaway: While certain foreign governments and
financial institutions are not required to provide
data to the IRS pursuant to FATCA when it comes to
certain retirement-type accounts, specified
individuals who hold an interest in such accounts
are not as fortunate. They must still report these
accounts on a Form 8938.

Items Not Considered “Financial Accounts”
1. Below is a list of times not considered “financial accounts.” Thus,
they need not be reported on Form 8938:
– Certain term life insurance contracts.
– Accounts held by an estate of an individual if the
documentation for such accounts includes a copy of the
decedent’s will or death certificate.
– Certain escrow accounts.
– Non-investment-related, nontransferable, immediate life
annuity contracts that monetize certain types of
retirement or pension accounts.

– Accounts or products that are excluded from
the definition of “financial account” under an
IGA (other than certain tax-favored foreign
retirement accounts, foreign pension
accounts, and foreign nonretirement savings
accounts).
– Accounts held with “U.S. payors.”
– Accounts whose holdings are subject to the
mark-to-market rules under Code Sec. 475.

Category # 2: SFFAs Other Than
Foreign Financial Accounts
Items that are considered other SFFAs held for investment
purposes (must be reported)
1. Stocks or securities issued by a non-U.S. person;
– Example: Stock issued by a foreign corporation.
2. Financial instruments or contracts held for investment
purposes whose issuer or counterparty is a non-U.S.
person; and
– Example: Notes, bonds, debentures or other forms of debt
issued by a foreign person.
3. Any interest in a foreign entity.
– Example: A capital interest or profits interest in a foreign
partnership.
– Example: An interest swap, currency swap, or a basis basis swap

Items that are not considered other SFFAs held for
investment purposes (need not be reported)
1. Interests in foreign social security, social
insurance, or other similar programs of a foreign
government.
2. Interests in a foreign trust or a foreign estate,
unless the SI either knows or has reason to
know of the existence of the interest based on
readily accessible information.

• Note well: A common mistake that taxpayers
make is believing that IRAs and other
retirement plans are included in the definition
of “specified foreign financial
assets.” However, to the extent that such an
interest represents a social security, social
insurance, or other similar program of a
foreign government, that is incorrect. Such
accounts are exempt from the Form 8938
reporting requirements.

A Trap for the Unwary
Foreign Real Estate: Oh The Agony!
• Issue: Must foreign real estate owned directly
by a SI be reported on Form 8938?
– No. A personal residence or a rental property
need not be reported on Form 8938.
– In Form 8938 jargon, neither is deemed a
“specified foreign financial asset.”

• If it were only that easy, the discussion would
end here.
• However, there are a few caveats, such as
when the real estate is held through a foreign
entity, like a corporation, partnership, trust or
estate.

– Note well: If the real estate is held through a foreign entity
and the taxpayer owns an interest in that entity, then the
taxpayer can be said to own the real estate indirectly
through the entity.
– In that case, the taxpayer’s interest in the entity – and only
the entity – is deemed a “specified foreign financial asset.”
And if the taxpayer’s interest in the entity exceeds the
reporting threshold that applies to him, then he must
report it on Form 8938.
– While the real estate itself is not reported on Form 8938,
that does not make it chopped liver. It still has a purpose.
Very simply, the value of the real estate must be taken into
consideration for purposes of determining the value of the
taxpayer’s interest in the foreign entity.

– And because the taxpayer’s interest in the foreign entity
must exceed a specific reporting threshold before the
taxpayer has a duty to report it, the value of the real estate
directly impacts whether there is a Form 8938 reporting
requirement.
– Is the value of the real estate held by the entity taken into
account for purposes of determining the value of the
taxpayer’s interest in the entity? Yes.
– However, the real estate itself is not separately reported
on Form 8938.

• Example: If the reporting threshold that applies
to the taxpayer is $ 50,000 and the fair market
value of the foreign real estate is $ 49,000, then
the taxpayer has no obligation to report his
interest in the entity that owns the real estate on
Form 8938.
• But if the fair market value of the foreign real
estate is $ 51,000, then the taxpayer must report
his interest in the entity that owns the real estate
on Form 8938.

Gray Area
– Is “virtual currency,” such as Bitcoin, considered a
SFFA for purposes of Code Sec. 6038? The IRS has
reserved judgment at this time.

Form 8938
• How do you value an SFFA?
– This is deceptively complicated, thanks to different
rules that apply to different types of SFFAs.
– General valuation principle: The value of an SFFA
is normally its fair market value (FMV) on the last
day of the tax year, which can be determined from
a “reasonable estimate.”

Your Lifeline for Form 8938:
Module III

Form 8938
• How large (or valuable) must an SFFA be in order
to trigger a Form 8938 reporting requirement?
– Even if an individual is considered an “SI” and holds an
interest in certain SFFAs during a given year, he need
only file Form 8938 if the aggregate value of the SFFAs
exceeds certain reporting thresholds.
– The thresholds vary based on three variables: an SI’s
location, civil status, and return-filing status.
– There are six reporting thresholds.

Form 8938
• Example
– An unmarried taxpayer living in the United States
satisfies the reporting threshold if the total value
of his specified foreign financial assets is (1)
greater than $50,000 (USD) on the last day of the
tax year or (2) greater than $75,000 (USD) at any
time during the tax year.

Form 8938
– However, if that same taxpayer lived outside
the United States as opposed to in the United
States, he would only satisfy the reporting
threshold if the total value of his specified
foreign financial assets was (1) greater than $
200,000 (USD) on the last day of the tax year or
(2) greater than $ 300,000 (USD) at any time
during the tax year.

Description of Reporting Thresholds
1. Unmarried specified individual living in the
U.S.
The SI must file Form 8938 if the aggregate
value of the SFFAs exceeds:
– $ 50,000 on the last day of the year, or
– $ 75,000 at any time during the year.

2. Unmarried specified individual living abroad
A specified individual who is a “qualified
individual” under Code Sec. 911 during the
relevant year must file Form 8938 if the
aggregate value of the SFFAs exceeds:

– Who is a “qualified individual” for purposes of
Code Sec. 911?
• A U.S. citizen who has been a bona fide resident of a
foreign country or countries for an uninterrupted
period that includes an entire calendar year, or
• A U.S. citizen or U.S. resident who is present in a foreign
country or countries for at least 330 full days during any
consecutive 12-month period.

3. Married SI living in the U.S. filing separate
Form 1040 from his or her spouse
The married SI must file Form 8938 if the

4. Married SI living abroad filing separate Form
1040 from his or her spouse
The married SI who is a “qualified
relevant year must file Form 8938 if the

5. Married SIs living in the U.S. and filing joint
Forms 1040
The married SIs must file Form 8938 if the
– $ 100,000 on the last day of the tax year, or

6. Married SIs living abroad and filing joint Forms
1040
The married SI who is a “qualified
relevant year and his or her spouse must file
Form 8938 if the aggregate value of the
SFFAs held by either spouse exceeds:

Reporting Specified Foreign Financial
Assets on other Forms Filed with the
IRS
• If you are required to file Form 8938 and you have already
reported your specified foreign financial asset on any one
of the following forms – Form 3520, Form 3520-A, Form
5471, Form 8621, Form 8865, or Form 8891 – you need not
report the asset on Form 8938. However, you must identify
on Part IV of your Form 8938 which and how many of these
form(s) report the specified foreign financial assets.
• Even if a specified foreign financial asset is reported on a
form listed above, you must still include the value of the
asset in determining whether the aggregate value of your
specified foreign financial assets is greater than the
reporting threshold that applies to you.

Reporting Specified Foreign Financial
Assets on other Forms Filed with the
IRS
Filing Form 8938 does not relieve a taxpayer of
the requirement to file an FBAR if the taxpayer is
otherwise required to file an FBAR!

Module IV

Penalties for Violating Code Sec.
6038D
• While the penalties for those who don’t follow
the Form 8938 filing requirements might not
be as severe as those for failing to file an
FBAR, they are nothing to shake a stick at.
• As tempting as it might be to look up at the
sky and begin wringing your hands in utter
despair, and put down any information about
foreign assets on Form 8938, that would be a
recipe for disaster.

6038D
• It could trigger some – or all – of the parade of
horribles described below.

6038D
• Like other penalties in the international arena,
the penalty for failing to file Form 8938 brings
with it all the fury of a gigantic tsunami rising
out of the ocean and crashing onto the shore.

6038D
• If the taxpayer fails to file Form 8938 in a
timely manner, then he must pay a penalty of
$ 10,000 (USD).

6038D
• The penalty increases exponentially if the taxpayer
doesn’t “fix” the problem expeditiously after the IRS
brings it to his attention.
• Example: If the taxpayer does not file Form 8938 within
90 days after the day on which the IRS sends a notice
about the missing return, then the taxpayer must pay
an additional penalty of $ 10,000 for each 30-day
period (or portion thereof) that passes without the
filing of Form 8938.
• This is in addition to the initial $ 10,000 penalty!
• Note, however, that it is capped at $ 50,000.

Hypothetical
Facts
• For purposes of this hypo, assume that there are
30 days in a month.
• Dan is a specified individual who has an interest
in a SFFA. He does not file Form 8938.
• On February 1, 20xx, the IRS sends Dan a letter
informing him about his missing Form 8938 and
advising him that he has until May 2, 20xx – i.e.,
90 days from February 2, the day after which the
notice was sent – to cure the defect.

Hypothetical
• Scenario # 1: It is May 30 and Dan has still not
filed his Form 8938. In other words, May 2 came
and went without him filing Form 8938. What, if
any penalties is Dan subject to?
– An initial $ 10,000 (USD) penalty for failing to file
Form 8938.
– A second penalty of $ 10,000 (USD) because Dan
failed to file Form 8938 within the 90-day grace period
and the first 30-day period beyond the grace period –
i.e., the month of May – has now passed without Dan
filing Form 8938.
– Note: May is the first month that triggers the penalty.

Hypothetical
• Scenario # 2: Dan files his Form 8938 on May 1. What,
if any penalties is Dan subject to?
– An initial $ 10,000 (USD) penalty for failing to file Form
8938.
– Dan is not subject to a second penalty because he had
until 90 days after the day on which the IRS sent the notice
to file a Form 8938 in order to avoid the second penalty.
The IRS mailed the notice on February 1. The day after is
February 2. 90 days from February 2 is May 2. Because Dan
filed his Form 8938 on May 1 and May 1 falls within the
90-day grace period, Dan does not pay a second penalty.

Hypothetical
• Scenario # 3: Dan files his Form 8938 on June
15. What, if any penalties is Dan subject to?
–An initial $ 10,000 (USD) penalty for failing
to file Form 8938.
–A second penalty of $ 10,000 because the
first 30-day period beyond the grace period
– that being the month of May – came and
went without Dan filing Form 8938.
–A third penalty of $ 10,000. How come?

Hypothetical
– Didn’t Dan file his Form 8938 before June
30, which marks the end of the second 30-
day period beyond the grace period? Yes.
But the rule says, “or portion thereof.” In
other words, a full 30-day period need not
pass in order for the taxpayer to be liable
for the $ 10,000 “monthly special.” This
means that Dan could have filed his Form
8938 on June 4, just two days into the
second 30-day period, and still be liable for
the $ 10,000 penalty.

Hypothetical
• Scenario # 4: Dan files his Form 8938 on
December 2, seven months after the grace
period. What penalties must he pay?
– An initial $ 10,000 (USD) penalty for failing to file
Form 8938.

Hypothetical
Period Month Penalty
First 30-day period beyond
grace period
May 3-June 3 $ 10,000
Second 30-day period
beyond grace period
June 4- July 4 $ 10,000
Third 30-day period
beyond grace period
July 4- August 5 $ 10,000
Fourth 30-day period
beyond grace period
August 6-September 6 $ 10,000
Fifth 30-day period beyond
grace period
September 7-October 7 $ 10,000
TOTAL $ 50,000

Hypothetical
• Remember: Penalties are capped at $ 50,000
• Thus, even though two more 30-day periods
passed without Dan filing his Form 8938, the $
10,000 “monthly special” stops aggregating
with the fifth month beyond the grace period,
here the month of September.
• In other words, the fifth month is the last
possible month for a $ 10,000 penalty.

Hypothetical
Dan’s total penalties:
$ 10,000 (initial penalty)
+ $ 50,000 (five “monthly specials,” which
aggregate to $ 50,000)
__________________________________________
$ 60,000 (USD)

6038D
Presumption of Violation
• The combination of Code Sec.
6038D(e) and the Final
Regulations packs a “one-two
punch” by creating a
presumption of noncompliance
in certain situations.

Example:
– Jack is an unmarried specified individual who lives
in the U.S. He holds an interest in a SFFA, which he
claims never exceeded the applicable reporting
threshold that applies to him at any time during
2013 (i.e., $ 75,000).
– He writes the IRS a letter memorializing this and
telling them that his interest in the SFFA is only $
40,000 (USD).

– In response, the IRS writes Jack a letter rejecting
the letter that he provided as being insufficient to
prove the aggregate value of the SFFA.
– Under these circumstances, the IRS may presume
that the value of Jack’s interest in the SFFA
exceeded $ 75,000 and assert the $ 10,000
penalty.

Reasonable Cause Defense to Code
Sec. 6038D Penalties
• May the taxpayer assert a defense to Code
Sec. 6038D penalties?
• An SI who unintentionally fails to file a timely
and accurate Form 8938 can have his Code
Sec. 6038D penalties waived if he can
demonstrate that the violation was due to
reasonable cause and not due to willful
neglect.

Reasonable Cause Defense to Code
Sec. 6038D Penalties
• However, the burden of making “an
affirmative showing of all the facts alleged as
reasonable cause” falls on the Specified
Individual.

Beware of the accuracy-related
penalty!
• As if the Code Sec. 6038D penalties were not
bad enough, they can get even worse.
• Violations may also lead to other penalties,
the most common of which is the accuracy-
related penalty.
• Definition of accuracy-related penalty: To the
extent that there is a tax underpayment, then
the IRS may assert a penalty equal to 20% of
the amount of such underpayment.

penalty!
• Question: How is the IRS able to extend the
accuracy-related penalty to the
understatement of an undisclosed foreign
financial asset?

penalty!
• Here’s how:
– Step 1: Code Sec. 6662(b) lists the items that give rise to a
tax underpayment for purposes of the accuracy-related
penalty.
– Step 2: FATCA expanded this list by adding Code Sec.
6662(b)(7). Code Sec. 6662(b)(7) says that any
“undisclosed foreign financial asset understatement” can
be grounds for an accuracy-related penalty.
– Step 3: FATCA also introduced Code Sec. 6662(j). Under
6662(j), “undisclosed foreign financial asset” is defined as
any asset with respect to which information must be
reported to the IRS under various tax provisions, including
Code Sec. 6038D, but wasn’t.

Penalties Doubled In Certain Situations
• Congress has added “teeth” to Code Sec.
6662(j). How so?
• By doubling the size of the accuracy-related
penalty from 20% of the underpayment to
40% if the underpayment was due to the
failure to report an SFFA on Form 8938.

Penalties Doubled In Certain Situations
• Below is an example of when the accuracy-
related penalty would be doubled:
John did not report the ownership of his
shares in a foreign company on Form
8938, despite selling the shares for a
gain. Nor did he report the gain on his
income tax return.

Don’t Forget the Criminal Penalties!
• As uncomfortable as it might be to discuss this
topic, it is absolutely necessary.
• Aside from leaving a taxpayer with nothing
more than the shirt on his back, Code Sec.
6038D can unleash its holy wrath on taxpayers
in an even worse way: by taking away their
freedom.

Don’t Forget the Criminal Penalties!
• Violations of Code Sec. 6038D can lead to
potential criminal penalties.
• A cursory review of the Instructions for Form
8938 erases any doubt: “If you fail to file Form
8938, fail to report an asset, or have an
underpayment of tax, you may be subject to
criminal penalties.”

Extension of the Assessment Period
• The FATCA tornado wreaks havoc not just on
penalties, but also on assessment periods.
• While the IRS generally has three years from
the time a taxpayer files his tax return to
initiate an examination and to make an
assessment, there are countless exceptions
that all but swallow up the general rule.

Extension of the Assessment Period
• FATCA modified the assessment period rules in
two major ways:
– First, it modified Code Sec. 6501(c)(8) to include
violations of Code Sec. 6038D, and
– Second, it added a new code section to Code Sec.
6501 – Code Sec. 6501(e)(1)(A). The latter
concerns “substantial omissions” of income from
returns.

Unlimited Assessment Period if No
Form 8938 Filed
• General rule: The IRS has three years from the
time a taxpayer files his tax return to initiate
an audit and to propose adjustments.

Form 8938 Filed
• The first modification extends the assessment
period indefinitely for not just Form 8938 but
the entire tax return if:
– The specified individual fails to file Form 8938, or
– Files an incomplete Form 8938.

Form 8938 Filed
• Note well: The extended assessment period
applies even if the taxpayer’s failure to file
Form 8938 was a mere oversight.
• However, the taxpayer gets a minor reprieve if
his failure to file Form 8938 was unintentional.
In such cases, the extended assessment period
applies only to Form 8938 and not to the
entire tax return.

Six-Year Assessment Period for Certain
Income Omissions
• The second modification extends the
assessment period for substantial omissions of
income from returns from three to six years.

Six-Year Assessment Period for Certain
Income Omissions
• The IRS may assess tax within six years of the
time the taxpayer filed a Form 1040 if:
(1) The taxpayer omits from gross income amounts
that otherwise should have been included, and
(2) Either
a. Such omitted amount exceeds 25% of the gross income
actually reported on the return, or
b. Such omitted amount is attributable to one or more SFFAs
that were required to be reported under Code Sec. 6038D …
and exceeds $ 5,000.

Module V

Comparison of Form 8938 & FBAR
Requirements
Form 8938, Statement of
Specified Foreign Financial
Assets
FinCEN Form 114, Report
of Foreign Bank and
Financial Accounts (FBAR)
Who Must File? Specified individuals, which
include U.S citizens,
resident aliens, and certain
non-resident aliens that
have an interest in
specified foreign financial
assets and meet the
reporting threshold
U.S. persons, which include
U.S. citizens, resident
aliens, trusts, estates, and
domestic entities that have
an interest in foreign
financial accounts and
meet the reporting
threshold
Reporting Threshold (Total
Value of Assets)
$50,000 on the last day of
the tax year or $75,000 at
any time during the tax
year (higher threshold
amounts apply to married
individuals filing jointly and
individuals living abroad)
$10,000 at any time during
the calendar year

Requirements
Assets
of Foreign Bank and
When do you have an
interest in an account or
asset?
If any income, gains,
losses, deductions, credits,
gross proceeds, or
distributions from holding
or disposing of the account
or asset are or would be
required to be reported,
included, or otherwise
reflected on your income
tax return.
Financial interest: you are the
owner of record or holder of
legal title; the owner of record
or holder of legal title is your
agent or representative; you
have a sufficient interest in
the entity that is the owner of
record or holder of legal title.
Signature authority: you have
authority to control the
disposition of the assets in the
account by direct
communication with the
financial institution
maintaining the account.

Requirements
Specified Foreign
Financial Assets
of Foreign Bank and
What is Reported? Maximum value of specified
foreign financial assets, which
include financial accounts
with foreign financial
institutions and certain other
foreign non-account
investment assets.
Maximum value of financial
accounts maintained by a
financial institution physically
located in a foreign country.
How are maximum
account or asset values
determined and
reported?
Fair market value in U.S.
dollars in accord with the
Form 8938 instructions for
each account and asset
reported.
Convert to U.S. dollars using
the end of the taxable year
exchange rate and report in
U.S. dollars.
Use periodic account
statements to determine the
maximum value in the
currency of the account.
Convert to U.S. dollars using
the end of the calendar year
exchange rate and report in
U.S. dollars.

Requirements
Specified Foreign
Financial Assets
of Foreign Bank and
Financial Accounts
(FBAR)
When Due? By due date, including
extension, if any, for
income tax return
Received by June 30 (no
extensions of time
granted)
Where to File? File with income tax
return pursuant to
instructions for filing the
return
File electronically through
FinCEN’s BSA E-Filing
System. The FBAR is not
filed with a federal tax
return.

Requirements
Assets
of Foreign Bank and
Penalties Up to $10,000 for failure
to disclose and an
additional $10,000 for
each 30 days of non-filing
after IRS notice of a failure
to disclose, for a potential
maximum penalty of
$60,000; criminal penalties
may also apply.
If non-willful, up to
$10,000; if willful, up to
the greater of $100,000 or
50 percent of account
balances; criminal
penalties may also apply

Types of Foreign Assets and Whether They
are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Financial (deposit and
custodial) accounts held
at foreign financial
institutions
Yes Yes
Financial account held at
a foreign branch of a U.S.
No Yes

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Financial account held at
a U.S. branch of a foreign
No No
Foreign financial account
for which you have
signature authority
No, unless you otherwise
have an interest in the
account as described
above
Yes, subject to exceptions

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Foreign stock or securities
held in a financial account
at a foreign financial
institution
The account itself is
subject to reporting, but
the contents of the
account do not have to be
separately reported
The account itself is
subject to reporting, but
the contents of the
account do not have to be
separately reported
Foreign stock or securities
not held in a financial
account
Yes No

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Foreign partnership
interests
Yes. No.
Indirect interests in
foreign financial assets
through an entity
No. Yes, if sufficient ownership
or beneficial interest (i.e.,
a greater than 50 percent
interest) in the entity.

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Foreign mutual funds Yes. Yes.
Domestic mutual fund
investing in foreign stocks
and securities
No. No.

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Foreign accounts and
foreign non-account
investment assets held by
foreign or domestic
grantor trust for which
you are the grantor
Yes, as to both foreign
accounts and foreign non-
account investment assets
Yes, as to foreign accounts
Foreign-issued life
insurance or annuity
contract with a cash-value
Yes. Yes.

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Foreign hedge funds and
foreign private equity
funds
Yes. No.
Foreign real estate held
directly
No. No.

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Foreign real estate held
through a foreign entity
No, but the foreign entity
itself is a specified foreign
financial asset and its
maximum value includes
the value of the real
estate
No
Foreign currency held
directly
No. No.

are Reportable
Specified Foreign
Financial Assets
of Foreign Bank and
Precious Metals held
directly
No. No.
Personal property, held
directly, such as art,
antiques, jewelry, cars
and other collectibles
No. No.

Types of Foreign Assets and Whether
They are Reportable
Assets
of Foreign Bank and
‘Social Security’- type
program benefits
provided by a foreign
government
No. No.

Your Lifeline for Form 8938

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