IRS Form 8938: Your Complete Guide

Living in the US brings its own set of adventures and difficulties, especially when it comes to managing tax obligations. If you are an NRI or expat living in the US and hold financial assets outside the country, you need to familiarize yourself with IRS Form 8938. It is a key component of the Foreign Account Tax Compliance Act (FATCA) in the US.

Form 8938 is a frequent source of confusion, specifically when it comes to understanding which accounts and assets should be reported in it. Additionally, failing to fill out this form results in significant tax penalties.

Want to know about when and how this form applies to expats and what the qualifying foreign assets are that come under this? This blog provides you with complete information about the IRS Form 8938. So read on and clear all your doubts.

What is IRS Form 8938?

Officially known as your Statement of Specified Foreign Financial Assets, IRS Form 8938 is one of the forms expats use to tell the IRS about the financial assets they hold outside the US. The form was introduced under the FATCA in 2010 to help the IRS combat offshore tax evasion.

In simple terms, this form serves as a reporting tool for U.S. taxpayers and US-based NRIs with certain foreign financial assets in India and other countries. The biggest things that you need to know about IRS Form 8938 are:

• Not every expat needs to fill out this form. It depends on the asset type you hold and its value.
• You need to pay a hefty penalty if you are supposed to fill out the form and you do not do so.
• IRS Form 8938 and the FBAR/FinCEN Form 114 are different from each other.

Further, this form is filed with your tax return and has the same deadline as your tax return, including any extensions.

This was all about IRS Form 8938. Moving ahead, let's know who needs to fill out this form in the US.

Who Needs to File Form 8938?

US individuals need to file Form 8938 if the interest in their specified foreign financial assets is more than certain threshold during the year or at the end of it. U.S. individuals include:

• U.S. citizens
• U.S. resident aliens
• U.S. corporations, partnerships, and trusts
• Green cardholders
• Non-resident aliens who elect to be treated as US residents for tax purposes in the country
• NRIs on H-1B, L-1, or O-1 visas who meet the substantial presence test (SPT)

Here, an "interest" in a foreign asset means that income, capital gains, losses, or distributions from the assets. Additionally, it should be reportable on the Federal income tax return, even if there is no current-year tax item. If the total value of your specified foreign financial assets is more than the thresholds mentioned below for the tax year, you need to fill out this form.

So, if you come under any of the above-mentioned categories and hold foreign assets, you need to fill out IRS Form 8938. Moving further, now, let's know the form requirements for foreign financial assets.

What Are the Form 8938 Requirements for Foreign Financial Assets?

The IRS Form 8938 covers a wide category of "specified foreign financial assets." Considering this, for NRIs and Indian-origin US taxpayers, the most commonly reportable foreign financial assets include:

• Financial Accounts Held at Foreign Financial Institutions
  • NRO savings and fixed deposit accounts
  • NRE accounts (even though interest is tax-exempt in India, they still need to be reported)
  • Indian brokerage accounts holding mutual funds, stocks, or bonds
  • Foreign pension accounts, including NPS accounts (depending on their structure)
• Other Specified Foreign Financial Assets (Held Outside a Financial Institution)
  • Stocks or securities issued by Indian companies held directly
  • Financial instruments or contracts with a foreign counterparty
  • Any interest in a foreign entity, i.e., a partnership, corporation, or trust
  • Indian mutual funds, which are also likely PFICs.
• Assets Generally Not Reported on Form 8938
  • Foreign currency held directly
  • Real estate held directly in your name is not reported in Form 8938. However, if you held the real estate through a foreign entity, it is reportable on Form 8938.
  • Gold and other physical precious metals are held directly

*Important nuance on Indian property: While the property itself is not mentioned on the Form 8938. However, any financial account used to manage the rental or any other income from it, such as an NRO account, is reportable if it crosses the threshold limit.

These are the key IRS Form 8938 requirements for Indian financial assets. Moving forward, let's know how to fill out this form.

How to File Form 8938?

The IRS Form 8938 is attached to your Form 1040 or 1040-NR when filing your federal tax return in the US. No standalone submission. Here is how you can fill out Form 8938:

Step 1: Determine If You Meet the Filing Threshold

To fill out the FATCA Form 8938, first determine whether you meet the filing threshold limit or not. For this, you need to total the maximum value of all your specified foreign financial assets for the tax year. While calculating, make sure you use the year-end exchange rate stated by the US Treasury to convert your foreign currency amounts into USD.

Step 2: Gather Asset Details

For each reportable asset, you will need:

• Name and address of the foreign financial institution
• Identifying information or account number
• Maximum value of the asset during the year
• Asset type
• Whether the income from the asset was generated and where it was reported on your income tax return

Step 3: Fill Out Form 8938

Form 8938 consists of four parts. You need to mention the following information in each section:

• Part I: Foreign deposit and custodial accounts.
• Part II: Other specified foreign financial assets.
• Part III: Summary of tax items associated with specified foreign financial assets.
• Part IV: Expected specified foreign financial assets.

Step 4: Attach to Your Tax Return

File Form 8938 along with Form 1040 by the standard deadline, i.e., April 15, or October 15 with an extension. In case you are not in the US, the two-month extension to June 15 applies, with a further extension on written request available to December 15.

Further, let's understand how to fill out IRS Form 8938 with an example.

For instance, Mr. A is an Indian-origin software engineer who is living in California on a green card. In India, he holds the following assets:

• NRO savings account with approx balance of $12,000
• NRO fixed deposit balance of approx $45,000
• Indian equity mutual funds with an approximate balance of $30,000
• PPF account balance with approx $18,000

At the end of the financial year, his total Indian assets were about $105,000, which is more than the $100,000 threshold for married filing separately taxpayers in the US. So, here Mr. A should file IRS Form 8938.

Considering this, in the form, he will report his NRO savings account, fixed deposits, and mutual fund holdings on Form 8938 and attach it to Form 1040. Additionally, he also needs to report his PPF account. Apart from this, for his NRO account, he also needs to file FBAR (FinCEN Form 114) separately, as FBAR and Form 8938 have different requirements and threshold limits.

This was all about how you can fill out IRS Form 8938. Moving ahead, let's know the difference between Form 8938 and FBAR.

Difference Between Form 8938 and FBAR

This is one of the most common questions asked. While Form 8938 and FBAR both include the reporting of specified foreign financial asset information, they have different requirements, reporting thresholds, and asset types they cover. To provide you with a better idea of this, the table below showcases the difference between Form 8938 and FBAR.

Understanding the differences between Form 8938 and FBAR is vital for compliance with U.S. tax laws and avoiding potential penalties. Each form served a specific purpose in the wider aim of preventing tax evasion and boosting financial transparency.

Moreover, not all foreign financial assets are reportable in Form 8938. Exceptions include foreign assets held by specified domestic entities like partnerships and corporations, and assets below the threshold limit. Additionally, if you do not file a U.S. income tax return, you do not need to fill out this form.

However, those who file tax returns to avoid civil or criminal penalties like fines and imprisonment need to ensure full compliance. If you are not sure about foreign asset reporting obligations, it is advisable to consult a tax professional.

Now, moving further, let's know the penalties for not filing Form 8938.

Penalties for Not Filing Form 8938

Here are the penalties for not filing Form 8938:

• For initial failure penalty of $10,000.
  • For continued noncompliance after getting an IRS notice (civil penalty assessment before further enforcement) is $10,000 per 30-day period, with a maximum of $50,000 per tax year.
• For willful reporting violations, criminal penalties may apply.
• If you need to fill out Form 8938 but have not filed it, the statute of limitations not only applies to your foreign assets but opens indefinitely on your tax return. This means the IRS can audit any part of your income tax return for any year in which you do not fill out this form.

Furthermore, the penalties on you may be waived if you can provide reasonable cause for non-filing and that it was not your willful act. Additionally, for prior years, if you have an unfiled Form 8938, the IRS Streamlined Filing Compliance Procedures may be available for you to bring into compliance with reduced penalties. However, the eligibility depends on whether the non-compliance was non-willful or willful.

Final Thoughts

Lastly, IRS Form 8938 might not be as popular as FBAR, but if you are an NRI living in the U.S. with overseas assets, it is one of the important forms for you. It not only helps you avoid tax penalties but also helps you have a smooth tax journey in the US.

Furthermore, if you are not sure whether your Indian assets cross the reporting threshold or if you have unfiled Form 8938 from prior years, connect with Savetaxs. We have helped thousands of NRIs file the form accurately and avoid costly mistakes. We have a team of US CPA with cross-border NRI tax experience to guide you through every step.