Draft:Form 8938

Form 8938 is an Internal Revenue Service form that needs to be included by some United States persons (natural persons such as citizens, permanent residents, and residents for tax purposes, and institutions such as a corporations, partnerships, limited liability companies, trusts and estates) as part of their annual federal income tax return; couples filing jointly submit a single Form 8938 as part of their joint tax return. The criterion is that the filer must have "an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold."

Legislative basis: IRC Section 6038D
The legislative basis for Form 8938 is from the Internal Revenue Code Section 6038D. This section was added as part of the Hiring Incentives to Restore Employment Act (HIRE Act) of 2010 (PL 111-147, signed into law March 18, 2010); see the section for more.

Section 6038D of the Internal Revenue Code gives details on how specified foreign financial assets are defined, sets a penalty of $10,000 for noncompliance, and gives a dollar threshold of $50,000 while allowing the Secretary to set higher thresholds; however, it does not specify the form number.

"(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).

(c)Required information The information described in this subsection with respect to any asset is: (1)In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account. (2)In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part. (3)In the case of any other instrument, contract, or interest— (A)such information as is necessary to identify such instrument, contract, or interest, and (B)the names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest. (4)The maximum value of the asset during the taxable year.

(d)Penalty for failure to disclose (1)In general If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.

(2)Increase in penalty where failure continues after notification If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period. The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.

(e)Presumption that value of specified foreign financial assets exceeds dollar threshold If— (1)the Secretary determines that an individual has an interest in one or more specified foreign financial assets, and (2)such individual does not provide sufficient information to demonstrate the aggregate value of such assets, then the aggregate value of such assets shall be treated as being in excess of $50,000 (or such higher dollar amount as the Secretary prescribes for purposes of subsection (a)) for purposes of assessing the penalties imposed under this section.

(f)Application to certain entities To the extent provided by the Secretary in regulations or other guidance, the provisions of this section shall apply to any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual.

(g)Reasonable cause exception No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.

(h)Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of— (1)classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures, (2)nonresident aliens, and (3)bona fide residents of any possession of the United States."

Regulatory basis in the Code of Federal Regulations
The regulations governing Form 8938 are in 26 CFR § 1.6038D-2 - Requirement to report specified foreign financial assets; other parts of 26 CFR § 1.6038D also cover related information. These were added by the IRS through a proposed regulation in November 2011 leading to a final rule published in December 2014.

Relation with tax obligations
Form 8938 does not directly change obligations to pay taxes; it only adds an additional reporting requirement. Even prior to the introduction of Form 8938, United States persons were required to report and pay taxes on their worldwide income, with various treaty exclusions and credits for taxes paid in other countries. For instance, interest and dividend income was required to be reported on Form 1040 Schedule B. However, since these foreign institutions were not required to issue Forms 1099 to the taxpayer and the IRS, disclosing and paying taxes on the income was completely up to the taxpayer, with no nudge in the form for the taxpayer to collate and report on the income.

Moreover, even with the introduction of Form 8938, a United States person is required to report and pay income on foreign assets (possibly with treaty exclusions and credits for taxes paid in other countries) whether or not that person meets the threshold needed to file Form 8938. Crossing the threshold for filing Form 8938 does not directly change the person's tax obligations.

Introduction of IRC Section 6038D as part of the FATCA portion of the HIRE Act (March 18, 2010)
Section 511 of the Hiring Incentives to Restore Employment Act (HIRE Act) of 2010 (PL 111-147, signed into law March 18, 2010) enacted Section 6038D of the Internal Revenue Code; this created the authority that would lead to the IRS introducing Form 8938. Specifically, Section 511 is part of Title V ("Offset Provisions") of the HIRE Act, which is called the Foreign Account Tax Compliance Act (FATCA), Part II ("Under Reporting with respect to Foreign Assets"). The overall goal of FATCA is to address issues of underpayment of taxes on the earnings on foreign financial assets (such as interest and dividend income) in the hope of increased tax revenue that could fund the other provisions of the HIRE Act. Other parts of FATCA would impose reporting requirements on foreign financial institutions about their account holders who are United States persons.

Distinction in purpose with the FBAR (introduced as part of the Bank Secrecy Act of 1970)
JCX-4-10, Technical Explanation Of The Revenue Provisions Contained In Senate Amendment 3310, The "Hiring Incentives To Restore Employment Act," Under Consideration By The Senate, published February 23, 2010, contains a technical explanation of the revenue provisions. Among other things, this technical explanation describes the differences in purpose from the FBAR (then TD-F 90-22.1, now FinCEN Form 114) which also requires reporting on foreign financial accounts. The two forms differ in their reporting thresholds, the way that foreign financial accounts are defined, and purpose. FBAR was part of the Bank Secrecy Act, with the goal of obtaining self-reporting of information with a high degree of usefulness in criminal, tax, or regulatory investigations and proceedings. FATCA and Form 8938, in contrast, are focused on increasing tax compliance for money earned in foreign financial accounts.

Comment request by the IRS for Form 8938 (November 2010)
On November 1, 2010, a comment request for Form 8938 by the IRS was published in the Federal Register. In the comment request, the IRS estimated that the form would be applicable to 350,000 respondents per year and take each respondent an estimated 1 hour 5 minutes, for a total of 378,000 hours per year. The IRS sought comments, with a deadline of January 3, 2011, on: "(a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency's estimate of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information."

Suspension by the IRS of reporting requirements until the release of Form 8938 (June 2011)
On June 21, 2011, the IRS published a notice (Notice 2011-55; 2011-29 I.R.B. 53) announcing that it planned to introduce Form 8938 "Statement of Specified Foreign Financial Assets" for taxpayers to use to comply with the reporting requirements introduced by the HIRE Act, and also suspending the reporting requirement until the form had been released for use. Instead, the Form 8938 for the suspended taxable year(s) (all taxable years starting after March 18, 2010, the date of passage of the HIRE Act) would need to be attached with the next tax return after the form's availability. This suspension of the reporting requirement was clarified as having no effect on the requirement to file FBAR, then known as TD-F 90-22.1 "Report of Foreign Bank and Financial Accounts" (the form would subsequently migrate to FinCEN Form 114).

Letter from American Citizens Abroad (ACA) calling for the repeal of FATCA (and therefore the cancellation of Form 8938) (August 2011)
On August 31, 2011, American Citizens Abroad (ACA) submitted a letter to the Secretary of the Treasury seeking the repeal of FATCA (the portion of the HIRE Act that introduced the legal basis for FATCA) and therefore the cancellation of the not-yet-released Form 8938. Specifically on FATCA, the letter said: :

"The new FATCA requirement for U.S. taxpayers to report foreign financial assets on Form 8938 (to be filed with the 1040) creates a specific discrimination against the community of American citizens overseas as most long-term overseas residents have the majority of their assets abroad. Furthermore Form 8938 unnecessarily duplicates the FBAR filing. The penalties for errors in filing or non-filing are so confiscatory, under both the FATCA and FBAR legislation, that combined they could wipe out 100% of an individual’s assets, even when that person owes no U.S. taxes because they pay taxes overseas. This is undue harsh punishment and anti-constitutional under the 8th Amendment of the Constitution."

Release of a draft Form 8938 (September 2011, with updates in draft form till November 5, 2011)
The IRS released a draft version of Form 8938 on September 2011, with the last update to this draft December 13, 2011.

Proposed regulations from the IRS (December 2011)
On December 19, 2011, the IRS submitted proposed regulations in the Federal Register for implementing the updates in Section 6038D. The proposed regulations introduced Form 8938 as the form that tax filers needed to submit in order to comply with the reporting requirements of the Act. Further, it relaxed the reporting threshold from $50,000 in a few ways:


 * Instead of a blanket threshold of $50,000, the threshold was considered to be met if either of these conditions were satisfied: $50,000 at the end of the taxable year or $75,000 at any time during the taxable year.
 * Married couples filing jointly got a doubled threshold to reflect that two individuals are filing together: $100,000 at the end of the taxable year or $150,000 at any time during the taxable year.
 * Taxpayers living outside the United States have thresholds that are 4 times the thresholds for others:
 * Individuals: $200,000 at the end of the taxable year or $300,000 at any time during the taxable year
 * Maried couples filing jointly: $400,000 at the end of the taxable year or $600,000 at any time during the taxable year

The IRS also had a provision that those who did not otherwise need to file a US tax return did not need to file the tax return just to include Form 8938. The provision still required those with a filing obligation (even if they had zero tax) to include Form 8938.

Corrections to the proposed regulation were published in February 2012.

Active use as a tax form starting with the 2011 tax year
Form 8938 became generally available as a tax form in January 2012, for use for those filing taxes in the 2011 calendar year; this meant that those filing taxes using the calendar year would have to include Form 8938 from the first year it was in use (so Notice 2011-55 didn't really change anything for them); however, Notice 2011-55 would still be relevant for those whose taxable year didn't align with the calendar year.

Form 1040 Schedule B for 2011 mentioned Form 8938 for the first time, though not on the main data entry page but rather as a TIP in the instructions for Part III. Part III included questions asking about the FBAR. The left margin for Part III did say "(See instructions on back.)" pointing users to the instructions directly from the form, but did not directly mention Form 8938.

Final regulation from the IRS (December 2014)
The corresponding final regulation to the proposed regulation originally published December 2011 would be published in the Federal Register on December 12, 2014, and included responses to feedback received; by this time, Form 8938 had already been available for use for the tax years of 2011 to 2013.

Responses to feedback on individuals required to report
The final rule included responses to feedback on individuals required to report:


 * Dual resident taxpayers: The IRS agreed with the feedback requesting that these people be exempted from filing Form 8938; specifically, the IRS concluded that taxpayers filing as nonresidents, using 1040NR (or equivalent) along with Form 8833 would not have to file Form 8938.
 * Individuals residing on non-immigrant visas: The IRS rejected the feedback requesting that these poeple be exempted from filing Form 8938; people on non-immigrant visas who were residents for tax purposes (i.e., they satisfied the Substantial Presence Test) would still be required to submit Form 8938 if they satisfied the reporting thresholds. The IRS determined that the Substantial Presence Test served the goal of excluding people on short stays, and that a separate exclusion for people on longer-term non-immigrant visas was not warranted.
 * Persons that do not owe US taxes for the taxable year: The IRS rejected the feedback requesting that people who did not owe any US taxes for the taxable year be exempted from including Form 8938. However, as in the proposed regulation, the IRS continued to maintain the provision that those who did not otherwise need to file a US tax return did not need to file the tax return just to include Form 8938.

Responses to feedback on applicable reporting thresholds
The final rule included responses to feedback on applicable reporting thresholds:


 * Assets received in connection with the performance of personal services: The IRS rejected the feedback that assets received in connection with the performance of personal services should be excluded, due to the difficulty of valuing these assets. However, the IRS did point out that nonvested interests were anyway not included.
 * Employees seconded to the United States: The IRS rejected feedback seeking higher reporting thresholds for employees seconded to the United States, for the same reason that it rejected feedback seeking exemption for individuals residing on non-immigrant visas.
 * Non-citizen US residents who do not qualify for Section 911 benefits: The IRS rejected feedback "requesting that higher reporting thresholds apply in the case of a non-citizen resident of the United States who would qualify for benefits under section 911(d)(1)(A) if he or she were a U.S. citizen." This was mainly due to the administrability challenge.

Responses to feedback on interest in a specified foreign financial asset
The IRS final rule included clarifications in response to requests for clarification on these topics:


 * Nonvested property under Section 83: The IRS clarified that a person is considered to have an interest only after either vesting or an 83(b) election.
 * Assets held by a disregarded entity: The IRS clarified that foreign financial assets held by a disregarded entity were still considered reportable on Form 8938.
 * Jointly owned assets: The IRS clarified that each joint owner for assets owned jointly needed to include the full value of the asset for reporting; however, for married couples who own an account jointly and are filing their return jointly, they just need to include the account once in their Form 8938.

Comments on the overlap with the FBAR (FinCEN Form 114)
The IRS final rule adopted the position that Form 8938 still needed to be filled with all reportable accounts even if they were being reported on the FBAR (FinCEN Form 114). The rationale was that the two forms were in service of different goals, and that therefore even if some information was duplicated, it was not exactly identical between the forms. It also quoted from a technical explanation for the HIRE Act (that provided the legal authority for Form 8938): "[n]othing in this provision [section 511 of the HIRE Act enacting new section 6038D] is intended as a substitute for compliance with the FBAR reporting requirements, which are unchanged by this provision."

Other responses and clarifications
The IRS final rule included clarifications and responses to comments regarding various kinds of "other specified foreign financial assets", clarified the information required to be reported, and provided valuation guidelines, including addressing fair market value, currency conversion, and hard-to-value assets. it also responded to suggestions to relieve filers of Form 8938 reporting requirements if they were filing specific other forms that covered the reportable accounts; in most cases, the IRS rejected these proposals.

Updated final regulation from the IRS clarifying a few points (February 2016)
On February 23, 2016, the IRS issued a final regulation providing clarifications in response to some comments on its final rule of December 2014. These clarifications were primarily focused on stuff around the definition and applicable rules for domestic entities.

Explicit mention in the main page of Form 1040 Schedule B starting tax year 2022
Tax year 2022 was the first time that Form 1040 Schedule B explicitly mentioned Form 8938 in the main form (rather than only in the instructions); however, this reference was still only in the left margin and not in the form of any question or checkbox that the filer needed to directly interact with.

Mention in Form 1040 Schedule B
The IRS started mentioning Form 8938 in the instructions for Form 1040 Schedule B starting with tax year 2011 and added it in the margin of the form itself starting with tax year 2022.

Tax prep software
Form 8938 is not supported by the IRS Free File option, an option for software-guided tax preparation and submission available to taxpayers making below a threshold amount each year. However, it is supported as part of Free File Fillable Forms (an alternative that is available to all taxpayers, but one that offers very little guidance beyond doing basic math); the support has been present since at least as far back as the 2020 tax year.

TurboTax supports Form 8938; it includes a question asking about foreign financial assets and, depending on the answer, applies the filing thresholds to determine if Form 8938 needs to be filed. However, some workarounds may be needed for limitations; for instance, foreign banks are not required to issues Forms 1099 (such as 1099-INT or 1099-DIV) to report interest and dividend income, but the tax prep software may require the interest income to be entered as "1099-INT" income in order for it to be properly included in Form 8938 and Form 1040 Schedule B. H&R Block also supports filing Form 8938.

Filing deadline
Form 8938 needs to be filed as part of the federal tax return, so it is subject to the same filing deadline. A timely filed extension request for the federal tax return automatically grants an extension for filing Form 8938 as well.

Civil penalties for failure to file Form 8938 (none in case of reasonable cause; default of $10,000, up to $50,000 for failure to comply after receiving a notice from the IRS)
The penalty for failure to file a complete and correct Form 8938 as part of the federal tax return is $10,000 for every affected tax return, as specified by statute in IRC Section 6038D. The regulations enforcing the penalty are described in the Code of Federal Regulations at 26 CFR § 1.6038D-8 - Penalties for failure to disclose.

There is a "reasonable cause" exception specified in 26 CFR § 1.6038D-8(e) that allows the IRS to waive the penalty for taxpayers who can show a reasonable cause for failure to file Form 8938, and that it was not willful neglect. An affirmative showing is required to show reasonable cause, with all facts and circumstances taken into account.

The penalty is specified as an exact amount ($10,000) without adjustment for inflation, so that it stays at $10,000 unless amended by statute. This is in contrast with the FBAR, that also had a penalty of $10,000 for FBAR violations including failure to file or errors in filing, but allowed the penalty to be adjusted by inflation.

In case of failure to comply with reporting requirements for Form 8938 within 90 days receiving a notice from the IRS to do so, an additional $10,000 penalty can be charged by the IRS for every 30-day period (or fraction thereof) after the elapsing of the 90 days, up to a total of $50,000.

The case law in Bittner v. United States for the FBAR (FinCEN Form 114) established that there could be a maximum of one violation per reporting period for the FBAR; while there is no case law for Form 8938, a similar principle applies in practice to Form 8938.

Criminal penalties
Criminal penalties may be charged over and above the civil penalties for failure to file Form 8938.

Streamlined filing
The IRS offers a set of procedures called the streamlined filing compliance procedures that allow taxpayers with non-willful failure to file Form 8938 to voluntarily catch up on Form 8938s from past years. The procedures also cover failure to file Form 8938 as well as failure to pay taxes on the income reported on Form 8938. Taxpayers need to pay all past due taxes and penalties and should not have an ongoing civil examination against them, but do not need to pay Form 8938 penalties for the years being disclosed (as well as any prior years) if their streamlined filing is accepted. The filing process is a little different based on whether the taxpayer is inside or outside the United States:


 * Taxpayers inside the United States need to file Form 14654 and pay a miscellaneous offshore penalty of 5% of the maximum account value over the years where the taxpayer failed to file the FBAR or Form 8938 (with a maximum lookback of 6 years for FBAR and 3 years for Form 8938) in addition to any taxes due. This amount replaces the penalty of $10,000 that the taxpayer would otherwise have to pay for each year with a Form 8938 violation. Along with the Form 14654, an amended tax return needs to be included for each of the past three years for which the taxpayer did not originally file Form 8938. The streamlined filing penalty (at 5% of maximum account value) is smaller than the $10,000 penalty for a single year if the maximum account value is less than $200,000, and for filers with Form 8938 violations for the past three years, the streamlined filing penalty is smaller if the maximum account value is more than $600,000; thus, in practice, for taxpayers who are only slightly above the thresholds, streamlined filing, if accepted, is cheaper than paying the full penalty.
 * Taxpayers outside the United States need to file Form 14653. There is no offshore penalty for these users.

Legal challenges and precedents
There is not much legal precedent directly covering Form 8938. However, there is some related case law:


 * Bittner v. United States (decided February 28, 2023 by the United States Supreme Court) where the Supreme Court concluded that the FBAR penalty can be applied once per reporting period (year) rather than once per account. Similar logic applies to Form 8938 penalties.
 * Farhy v. Commissioner (decided by the United States Tax Court on appeal from IRS Appeals) where the U.S. Tax Court ruled that while the IRS can impose penalties for failure to disclose assets on Form 5471, it cannot treat the penalty as unpaid taxes and therefore cannot make use of the collection machinery that it has at its disposal for unpaid taxes. The authority to impose this penalty comes from IRC Section 6038A, while the authority for Form 8938 penalties comes from Section 6038D, and an analysis of the ruling concludes that the same logic would also apply to Form 8938 penalties. There had also been a related ruling for FBAR penalties in Mendu v. United States.