Beginning with the 2016 tax year, certain domestic entities (e.g., corporations and partnerships formed in the United States and trusts subject to supervision by a court in the United States or controlled by U.S. persons) will be required to file a Form 8938 (“Statement of Specified Foreign Financial Assets”) with their federal income tax returns. Previously, this form only applied to certain U.S. citizens and residents, residents of American Samoa and Puerto Rico, and electing nonresident aliens filing joint returns with U.S. citizen or resident spouses (all of whom the law refers to collectively as “specified individuals”).
The Form 8938 was created as part of the Foreign Account Tax Compliance Act of 2010 (“FATCA”). Congress enacted FATCA partially in response to revelations that the bank, UBS AG, had been helping U.S. persons avoid reporting billions of dollars of income to the IRS through the use of undeclared Swiss bank accounts. The goal of FATCA was to encourage the disclosure of foreign assets held by U.S. persons. FATCA aimed at accomplishing this objective, first, by imposing withholding requirements on payments to foreign financial institutions that refuse to disclose U.S. account holders to the IRS and, second, by requiring certain U.S. persons to self-report information about “specified foreign financial assets” (defined to include such things as foreign financial accounts and interests in foreign entities). This second, self-reporting mechanism is what the Form 8938 is all about.
Originally, the statute only obligated individuals to file this new information return but gave the IRS authority to extend its scope to domestic entities. Going forward, a domestic corporation or partnership is generally required to file a Form 8938 if: (a) it’s closely held, and (b) more than 50 percent of its income during the taxable year is passive income or more than 50 percent of its assets produce or are held for the production of passive income. “Passive income” here includes dividends, interest, rents, royalties, annuities, and certain gains. A domestic corporation or partnership is closely held if at least 80 percent of the vote or value of the corporation or the capital or profits interest in the partnership is directly, indirectly, or constructively owned by specified individuals (see above). The use of the term “constructively” calls into play provisions in the Internal Revenue Code that attribute ownership to a taxpayer from entities deemed related to the taxpayer and from family members.
A domestic trust must file an 8938 if the trust has a specified person as a current beneficiary.
As with individuals, there’s a reporting threshold for domestic corporations, partnerships, and trusts: Only such entities having an interest in specified foreign financial assets in excess of $50,000 at the end of the taxable year or $75,000 at any time during the taxable year are required to file a Form 8938.
The Form 8938 requests identifying information, contact info, and the value for each specified foreign financial asset in which the taxpayer has an interest. A lot of this information is duplicative of the information already required by other foreign information returns, including the FBAR, Form 3520 (“Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”), Form 3520A (“Annual Information Return of Foreign Trust With a U.S. Owner”), Form 5471 (“Information Return of U.S. Persons With Respect To Certain Foreign Corporations”), Form 8621 (“Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”), and Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”).
The initial penalty for failing to file a Form 8938 is $10,000, with additional penalties if a taxpayer fails to file the form after being notified by the IRS that it’s required.