Understanding How to Navigate Form 8938 Audit Triggers

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Understanding How to Navigating Form 8938 Audit Triggers

Understanding How to Navigate Form 8938 Audit Triggers

Understanding How to Navigate Form 8938 Audit Triggers

Expanding upon our recent article involving FBAR compliance and Form 3520 triggers, another very common international information reporting form that U.S. taxpayers may have to file is IRS Form 8938. Since the tax year 2011, certain taxpayers who meet the threshold requirements for reporting foreign accounts and assets must include Form 8938 as part of their tax return filing. In general, Form 8938 is manageable for most taxpayers — unless they are out of compliance for prior year reporting. While Golding & Golding have written several articles on Form 8938, including common filing examples and penalty risks, this article will focus specifically on how best to avoid violation triggers.

First, What is FATCA?

FATCA is the Foreign Account Tax Compliance Act. There are many components to FATCA, but for individual taxpayers who are considered U.S. persons for tax purposes, it requires the reporting of foreign accounts and assets to the IRS on Form 8938. The reason it is important to file timely Form 8938s is because the U.S. has entered into over 110 FATCA agreements with foreign countries, leading to hundreds of thousands of Foreign Financial Institutions (FFIs) reporting account holders to the U.S. government — which increases the risk of non-compliance penalties for taxpayers who do not file the form timely or accurately.

Form 8938 is Not the Same as FBAR

Similar to Form 8938, the FBAR is also used to report foreign accounts to the IRS. The FBAR has been around for over 50 years, and even though it is not technically an IRS form, the IRS is tasked with compliance enforcement. It is important to note that Form 8938 is different than the FBAR — and some taxpayers may be required to file both forms in the same year. Noting that there are some nuances between these two different forms — and while some foreign assets may be reported on only one form, other assets will be reported on both the FBAR and Form 8938 each year.

Timely Filing: Form 8938 is Not on Automatic Extension

Unlike the FBAR, Form 8938 is not on automatic extension. If a taxpayer wants to extend the time to file Form 8938, they must extend the time to file their U.S. tax return as well. However, extending the time to file Form 8938 does not require any additional extension form beyond extending the time to file a tax return — such as how extending the filing due date for Form 3520-A requires the Taxpayer to file a Form 7004.

Form 8938 Requires Assets and Accounts

Form 8938 is not limited to only bank accounts. In addition to reporting foreign bank accounts, Form 8938 is also used to report assets such as direct stock holdings, investment accounts, life insurance policies, and pension plans. Taxpayers should be aware that, unlike the FBAR, Form 8938 only requires taxpayers to report accounts or assets that they have a financial interest in.

Do Not Intentionally Omit Accounts on Form 8938

Unfortunately, it is impossible to know exactly which Foreign Financial Institutions will actively report U.S. taxpayers to the IRS — and how consistently they will report. Even if a taxpayer only had an account open for a small amount of time, especially if that account had a large balance at any time during the year, taxpayers should be sure to include all the required foreign accounts on the Form to avoid any potential penalty violation for intentionally omitting accounts (inadvertently missing a small account or two does not usually trigger penalty violations).

Form 8938 Accuracy

Even if taxpayers do not have the exact account balances, they should do their best to report accurately and timely. It is not advised for taxpayers to avoid filing the form just because they do not have all the information necessary. It is typically better for taxpayers to file the form the best they can after having done a diligent and reasonable search for the information as opposed to just not filing the form – since not filing the form increases the chance of triggering a penalty violation.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer misses the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.

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