FATCA and Form 8938: reporting foreign assets on your tax return

FATCA is the law; Form 8938 is your part of it

The Foreign Account Tax Compliance Act was passed in 2010 as part of the HIRE Act, and it works from two directions at once. Foreign financial institutions must identify their US account holders and report them, directly or through their own governments, or face withholding on payments from the US. That is why a bank abroad asks customers with a US address to certify their US tax status. From the other direction, US taxpayers must report their specified foreign financial assets, above a threshold, on Form 8938, Statement of Specified Foreign Financial Assets, which is attached to the annual income tax return.

This page is about the second direction, but the first changes the odds: the IRS receives data about your foreign accounts from the institutions that hold them, so an account missing from your return is visible.

Who has to file Form 8938

The form is required from "specified individuals": US citizens, resident aliens for any part of the tax year, nonresident aliens who elect to be treated as residents to file a joint return with a US spouse, and nonresidents who are bona fide residents of Puerto Rico or American Samoa. For newcomers that translates simply. Every green card holder is in scope. H-1B and L-1 workers are in scope from the year they become residents under the substantial presence test, which is usually their first full calendar year. A nonresident alien filing Form 1040-NR is generally not required to file Form 8938.

"Any part of the tax year" means a dual-status first year counts, unless a treaty tie-breaker claimed on a timely Form 8833 lets you leave the nonresident portion off. One more gate: the form is only required from people who must file an income tax return at all. If your residency is not clear, the resident vs nonresident guide and the substantial presence calculator settle it.

The thresholds

There are two tests for each filing status, and meeting either one triggers the form. Both are measured against the total value of all your specified foreign financial assets combined. For taxpayers living in the United States:

• Unmarried, or married filing separately: more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
• Married filing jointly: more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.

Taxpayers who live abroad get much higher thresholds ($200,000 and $300,000 single, $400,000 and $600,000 joint), but those are for people whose tax home is outside the US, not a visa holder working here with family abroad.

Values are fair market value in US dollars, converted at the Treasury Bureau of the Fiscal Service rate for the last day of the tax year, or another publicly available rate disclosed on the form if none is published. Assets already reported on Forms 3520, 5471, 8621 or 8865 are not repeated on Form 8938, but their value still counts toward the threshold.

What is a specified foreign financial asset

The category is wider than "bank account". It includes:

• Any financial account maintained by a foreign financial institution: bank deposits, fixed deposits, brokerage accounts, foreign mutual funds.
• Foreign stocks or securities held directly, such as shares in a family company or foreign corporate bonds.
• Interests in foreign entities: partnerships, private companies, trusts.
• Your interest in a foreign pension or deferred compensation plan. You report the interest itself, not the assets inside the plan.
• Foreign-issued life insurance or annuity contracts with a cash value.
• Financial instruments or contracts whose issuer or counterparty is not a US person.

The following are not specified foreign financial assets:

• Foreign real estate you hold directly. A flat or plot in your own name does not go on the form; if you hold it through a foreign entity, the entity interest does.
• Foreign currency, precious metals, art, jewellery and other personal property held directly.
• Accounts at a US branch of a foreign bank, and US mutual funds, IRAs or 401(k)s even when they invest abroad.
• Social-security-type benefits provided by a foreign government.
• A safe deposit box, which is not a financial account.

FATCA vs FBAR, side by side

The two reports are constantly confused because they overlap. Here is how they differ on each point that matters:

• Who files. Form 8938: specified individuals, meaning residents for tax purposes; nonresidents generally do not. FBAR: US persons, which includes resident aliens and also US entities and trusts.
• Where it goes. Form 8938: attached to your Form 1040 and filed with the IRS. FBAR: filed with FinCEN through the BSA E-Filing System, never with the return.
• Threshold. Form 8938: $50,000 or $75,000 for a single filer in the US, $100,000 or $150,000 for a joint return. FBAR: $10,000 in aggregate at any time in the year.
• Due date. Form 8938: the due date of your return, including extensions. FBAR: April 15, with an automatic extension to October 15.
• What is covered. Form 8938: accounts plus non-account assets such as directly held stock, entity interests and pension interests. FBAR: accounts only, but including signature-authority accounts and accounts at foreign branches of US banks, which Form 8938 does not reach.
• How assets are valued. Form 8938: fair market value at the year-end Treasury rate. FBAR: the maximum value during the year, also converted at the year-end Treasury rate.
• Penalties. Form 8938: a fixed penalty for not filing, a continuing penalty if you still do not file after the IRS asks, and an accuracy-related penalty on tax understated because of undisclosed assets. FBAR: non-willful penalties per violation, willful penalties measured against the account balance, and criminal exposure in serious cases.

Because the FBAR threshold is so much lower, anyone who owes Form 8938 because of foreign accounts owes an FBAR too. The typical sequence for a work-visa arrival is no reporting in a nonresident first year, FBAR only for a few years, then both once balances abroad pass $50,000 or $75,000. The exception is someone whose foreign wealth is directly held shares or an entity interest rather than accounts, who can owe Form 8938 without ever owing an FBAR. The full rules are in the FBAR guide.

The income side: interest back home is taxable here

Both forms are disclosure, and disclosure is not tax. As a resident for US tax purposes your worldwide income is taxable on Form 1040. That includes interest on savings and fixed deposits abroad, dividends, capital gains and rent from a property back home, whether or not the foreign bank issues anything like a 1099, whether or not tax was withheld at source, and even when the income is tax-free where it arose.

If you paid foreign tax on the same income, you can usually claim a foreign tax credit on Form 1116 rather than paying twice. Form 8938 itself asks you to summarise the income from the assets you report and where it appears on the return, so the two must agree. Get advice early on foreign mutual funds, which may be taxed under the harsh passive foreign investment company rules.

Schedule B, Part III also asks whether you had a foreign account and whether you must file FinCEN Form 114, so your accounts are asked about three times a year. Consistent answers across all three are the goal.

Penalties and how they are fixed

Failing to file Form 8938 carries a fixed penalty, and a further penalty accrues for each period you still do not file after the IRS notifies you, up to a cap. Tax understated because of an undisclosed foreign asset attracts an increased accuracy-related penalty. And until the form is filed, the statute of limitations on that year's return can stay open.

Penalties can be waived for reasonable cause, and the route back depends on what was missed. If only the form was left off, file it with an amended return. If foreign income was also unreported, the Streamlined Filing Compliance Procedures cover non-willful cases and involve amending several years of returns together with late FBARs. Take that decision with a professional who handles offshore compliance; the non-willfulness certification is signed under penalty of perjury.

An annual checklist for money in two countries

1. In January, list every account and asset outside the US: deposits, brokerage, insurance with cash value, pension or provident funds, directly held shares, and joint accounts with family.
2. Pull the year's statements and note two figures per account: the peak balance during the year and the balance on December 31.
3. Look up the Treasury year-end exchange rate for each currency and convert both figures to dollars.
4. FBAR test: did the combined peak exceed $10,000? If yes, file FinCEN Form 114 by April 15, or by October 15 under the automatic extension.
5. Form 8938 test: compare the total against both thresholds for your filing status. If either is exceeded, prepare the form for your return.
6. Gather the income: interest, dividends, gains and rent from those assets go on your Form 1040, with Form 1116 for any foreign tax paid.
7. Answer Schedule B, Part III consistently with the above.
8. Keep statements and calculations for at least five years, the FBAR retention period, and longer if a year is still open.
9. If any earlier year was missed, deal with it in the same sitting rather than carrying it forward.

Other guides on this site

Form 8938 rarely arrives alone. These pages cover what usually comes with it:

• FBAR guide — the lower-threshold report to FinCEN that almost everyone with Form 8938 also owes.
• Resident vs nonresident alien — the status that decides whether FATCA reporting applies to you.
• Investing on a visa — where holdings back home fit into a US investment plan.