As discussed in an earlier article, Form 8938 is used by specified individuals to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount.
Similarly to most international tax forms issued by the IRS, Form 8938 has its own system of penalties. What makes Form 8938 penalties stand out are the scope of coverage, the severity of penalties, and the effect on the IRS statute of limitations.
A. Scope of Form 8938
Form 8938 is much more intrusive than the now-famous FBARs. While the threshold amount for filing the FBAR is much lower (only $10,000), the type of information requested by Form 8938 is much broader. The FBARs only require disclosure of foreign bank and financial accounts.
Form 8938, however, requires the disclosure not only of the interest held in foreign bank and financial accounts (which may also be somewhat different from the FBAR definition), but also of the interest held in foreign entities and “other foreign financial assets” – the definition of which includes an array of varies types of swaps, contracts, and stocks.
Moreover, Form 8938 directly ties assets disclosed on Forms 3520, 3520-A, 5471, 8621, 8865 and 8891 to the assets that need to be reported on Form 8938 (pursuant to the “duplication” rule, the taxpayers do not need to report on Form 8938 the assets already reported the five aforementioned forms). Therefore, Form 8938 makes it much easier for the IRS to to uncover potential issues with the other six forms (all of which have their own applicable penalty standards).
A word of caution: even if a specified foreign financial asset is reported on any of the six forms listed above, the taxpayer must still include the value of the asset in determining whether the aggregate value of the taxpayer’s specified foreign financial assets is more then the reporting threshold that applies to the taxpayer.
Thus, it becomes obvious that Form 8938, which popularly known as a “Son of FBAR”, far excels its father-FBAR in enhancing the IRS capacity to gather additional taxpayer data, use this data for deeper analysis of the taxpayer non-compliance, and imposing civil and criminal penalties on non-compliant taxpayers.
B. Form 8938 Penalties
Form 8938 has a severe penalty system.
1. Failure-to-File Penalty
If the taxpayer is required to file Form 8938, but fails to file a complete and correct Form 8938 by the due date (including extensions), he may be subject to a penalty of $10,000.
If the IRS discovers non-compliance and mails the corresponding notice to the taxpayer, but the taxpayer still does not file Form 8938 within 90 days after the mailing of the notice, additional penalties of $10,000 may be imposed for each 30-day period (or part of a period) of non-compliance after the expiration of the 90-day period. This additional penalty is currently capped at $50,000.
What about the situations where the taxpayer believes that the assets in question are below the threshold amount but the IRS asks the information about the assets in any case? In this case, if the taxpayer fails to respond to the IRS inquiry, the IRS has the power to presume that the taxpayer owns specified foreign financial assets with a value of more than the reporting threshold (even if it is not so in reality). Hence, the IRS can impose failure to file penalties if Form 8938 is not filed.
Common to other forms, From 8938 instructions provide for the reasonable cause exception. However, to avoid the penalties, the taxpayer must affirmatively show the facts that support a reasonable cause claim. The IRS does not consider the potential imposition of civil and criminal penalties by a foreign jurisdiction as a reasonable cause.
Keep in mind that the married taxpayers who file a joint income tax return have a joint and several liability for all IRS penalties.
2. Accuracy-Related Penalty
While Form 8938 is a purely reporting requirement, it contains a provision related to enhancing the accuracy-related penalties. If the taxpayer underpays his tax as a result of a transaction involving an undisclosed specified foreign financial asset, the IRS may impose a penalty of 40% of the underpayment.
For example, if the taxpayer does not report a foreign pension on Form 8938 and he receives a taxable distribution from the pension plan that he did not report on his income tax return, the taxpayer will be subject to the 40% penalty on the underpayment.
The same would be true with respect to any specified foreign financial asset, including ownership of shares in a foreign corporation or an interest in a foreign partnership.
3. Civil Fraud Penalty
If the taxpayer commits civil fraud which results in non-payment of penalties and involves Form 8938, the taxpayer will be subject to the civil fraud penalty of 75% of the underpayment due to fraud.
4. Criminal Penalties
In addition to civil penalties, the IRS may initiate a criminal prosecution of (and impose criminal penalties on) the taxpayers who fail to file Form 8938, fail to report an asset on Form 8938 or have an underpayment of tax.
C. Form 8938 Effect on the Statute of Limitations
Similar to other FATCA provisions (with respect to Forms 5471, 8621, 8865, et cetera), the IRS greatly extended the statute of limitations for the purposes of Form 8938. Unlike the other forms, however, Form 8938 contains a singular provision without a precedent.
The IRS sets forth this general rule in its instructions: the failure to file Form 8938 or the failure to report a required specified foreign financial asset keeps the statute of limitations open for all or a portion of the taxpayer’s income tax return. Once the correct Form 8938 is filed, the statute of limitations is subject to the common three-year rule (i.e. the IRS has three years to audit the taxpayer’s tax return and assess additional tax and penalties), subject to the aforementioned singular provision.
This provision states that, if the taxpayer does not include in his gross income an amount relating to one or more specified foreign financial assets and this amount is more than $5,000, then the statute of limitations is extend to six years after the taxpayer files a complete tax return that contains Form 8938.
Furthermore, for the purpose of the six-year extended statute of limitations provision, “specified foreign financial assets” include any such asset regardless of: (i) the reporting threshold that applies to the taxpayer, or (ii) whether this asset is excepted from reporting because it was reported on certain other forms (such as Form 5471, 8621, 8865, et cetera).
These provisions constitute an incredible increase in the IRS power to extend the statute of limitations and assess additional tax and penalties on the taxpayers.
Contact Sherayzen Law Office For Legal Help With Form 8938
Given the severe penalties that accompany Form 8938, it is very important that you properly comply with the Form’s requirements. Therefore, if you need to file Form 8938, contact Sherayzen Law Office for legal help. Our experienced international tax compliance firm will guide you through the complex web of the U.S. international tax reporting requirements and assist you in bringing your tax affairs in full compliance with the U.S. tax system.