Foreign asset reporting and Form 8938 explained

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What foreign assets should be reported to the IRS?

What is Form 8938 and when is it required?

How to report foreign assets

Form 8938 instructions

FATCA considerations

Helping clients with foreign assets

In today’s global economy, many individuals and businesses have financial interests that extend beyond their home country’s borders. For accountants, understanding how to navigate foreign asset reporting is essential, as the IRS requires taxpayers to report certain foreign assets to ensure compliance and combat tax evasion.

If you work with individuals and businesses with financial interests abroad, Form 8938 may be required. The latest in tax preparation software and scan-and-populate solutions can help you meet these requirements, while saving time, streamlining workflow, and accurately reporting foreign assets.

Let’s take a look at what accountants need to know in terms of foreign asset reporting, Form 8938, Foreign Account Tax Compliance Act (FATCA) considerations, and the ways in which technology can help.

What foreign assets should be reported to the IRS?

Generally, any U.S. person holding an interest in specified foreign financial assets with an aggregate value exceeding $50,000 at the end of the tax year or $75,000 at any time during the tax year is required to report these assets on Form 8938.

Specified foreign financial assets include:

• Foreign bank accounts 
• Securities
• Financial accounts
• Foreign-issued instruments like stocks and bonds

Reporting foreign assets involves providing detailed information about each asset, including its location, account number, and maximum value during the tax year. It’s also important to note that these requirements apply not only to individuals but also to certain domestic entities, such as partnerships and corporations with foreign holdings.

What is Form 8938 and when is it required?

Form 8938, officially known as the “Statement of Specified Foreign Financial Assets,” is the document individuals and certain entities use to report their foreign financial interests to the IRS. It is filed with their annual federal income tax return if they meet certain criteria.

At a high-level, you must file Form 8938 if:

1. You are a specified person (either a specified individual or a specified domestic entity).

AND

2. You have an interest in specified foreign financial assets required to be reported.

AND

3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you. 

Refer to the Form 8938 instructions and Form 8938 criteria for information on how to determine the total value of your specified foreign financial assets and whether you are required to file.

It’s important to note that Form 8938 is not a substitute for the Report of Foreign Bank and Financial Accounts (FBAR), which has separate filing requirements.

How to report foreign assets

Reporting foreign assets to the U.S. government is necessary for compliance with tax and financial disclosure requirements, and it can involve several forms and reporting mechanisms.

Below are some key steps and forms to follow when reporting foreign assets as a U.S. taxpayer:

1. Determine your filing requirement. Not all U.S. taxpayers are required to report foreign assets. You may be obligated to do so if you meet certain criteria, such as having foreign financial accounts exceeding certain thresholds.
2. Report to the Foreign Bank and Financial Accounts (FBAR). If you have foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form is filed electronically with the Financial Crimes Enforcement Network (FinCEN), not with the IRS.
3. File Form 8938. If you meet specified thresholds for foreign financial assets, you must file Form 8938, Statement of Specified Foreign Financial Assets, with your annual federal income tax return (usually Form 1040). This form provides additional information on foreign financial assets and is filed with the IRS.
4. Report foreign income. Any income generated from foreign assets must also be reported on your U.S. tax return. This includes interest, dividends, rental income, and capital gains.
5. Consider additional forms: Depending on your specific circumstances, you may need to file other forms. For example, if you have ownership in a foreign corporation, you may need to file Form 5471. If you have foreign trust interests, Form 3520 or Form 3520-A may be required.
6. Maintain accurate records. It’s crucial to maintain thorough records of your foreign assets, income, and transactions to support your reporting in case of an audit or inquiry. 

Failure to report foreign assets or income accurately can result in penalties and legal consequences, so it’s essential to take these reporting requirements seriously. Accountants should always consult the most recent IRS guidelines and regulations for the most up-to-date information.

U.S. citizens living abroad typically use Form 1040, the same form used by taxpayers in the United States. However, there are additional forms and schedules that may apply, such as Form 2555 for claiming the Foreign Earned Income Exclusion, and Form 1116 for claiming the Foreign Tax Credit.

What are the exceptions of specified foreign financial assets?

Not all foreign assets need to be reported on Form 8938.  These exceptions include: 

• Assets reported on other forms. If a foreign asset is already reported on other IRS forms, such as Form 3520 (for foreign trusts) or Form 5471 (for foreign corporations), it may not need to be reported again on Form 8938.
• Individual thresholds. Certain individuals, such as married couples filing jointly, may have higher thresholds for reporting foreign assets. For example, if both spouses are U.S. persons and live in the United States, the threshold doubles to $100,000 at the end of the year or $150,000 at any time during the year.
• Excluded foreign non-financial assets. Form 8938 focuses on specified foreign financial assets. Non-financial assets, such as real estate, art, or personal property, generally do not need to be reported on this form.
• Minimal reporting requirements for certain accounts. Accounts with minimal value and minimal activity, like a foreign savings account with a small balance, may not need to be reported. 

Accountants should carefully review the IRS exceptions and thresholds to determine whether their clients need to report specific foreign assets on Form 8938. 

Form 8938 instructions

When helping clients with Form 8938, accountants must ensure that all required information is accurately filled out. This includes details about each specified foreign financial asset, its maximum value during the year, and any income generated from these assets.

To properly assist clients with their foreign asset reporting, accountants should be well acquainted with the Form 8938 instructions. These instructions provide detailed guidance on how to complete the form accurately.

Form 8938 and foreign real estate

Accountants should be aware that foreign real estate holdings can also be subject to reporting on Form 8938, and the rules regarding real estate reporting can be complex. However, the rules regarding real estate reporting can be complex.  

Generally, foreign real estate does not need to be reported if it is held directly and used as a personal residence. But, when real estate is held through certain entities or used for rental income, it may trigger reporting requirements.  

Accountants should closely examine the IRS guidance on foreign real estate to ensure accurate reporting. 

FATCA considerations 

The Foreign Account Tax Compliance Act (FATCA) is a U.S. law that has a profound impact on individuals and entities with foreign financial accounts and assets. Accountants need to understand the implications of FATCA when dealing with clients who have foreign assets.  

FATCA is a critical component of the effort of the IRS to combat tax evasion involving foreign accounts and assets. FATCA imposes additional reporting obligations on U.S. taxpayers and foreign financial institutions. Accountants must understand how FATCA impacts their clients’ foreign asset reporting and compliance. 

Under FATCA, foreign financial institutions are required to report information about accounts held by U.S. persons directly to the IRS or their local tax authorities. This information sharing aims to prevent U.S. taxpayers from hiding assets abroad. 

Accountants should ensure that their clients are aware of these requirements and that they comply with FATCA reporting obligations. 

Helping clients with foreign assets

Navigating the complexities of foreign asset reporting, including Form 8938 and FATCA, is a crucial aspect of an accountant’s role in today’s globalized world. By understanding what foreign assets should be reported, how to report them, exceptions, and the requirements of Form 8938, accountants can provide valuable guidance to their clients. 

Additionally, staying up to date with evolving tax laws and regulations, especially those related to foreign asset reporting, is essential for ensuring compliance and minimizing potential penalties. As international financial activities continue to grow, accountants who can confidently assist their clients in managing foreign assets and complying with IRS requirements will be in high demand, providing a valuable service in an increasingly interconnected financial landscape. 

Tax software for foreign asset reporting

Tax planning and preparation software are valuable tools for accountants serving clients with foreign assets. It simplifies the often complex process of reporting foreign assets, reduces the risk of errors, ensures compliance with tax laws, and ultimately helps accountants provide more efficient and accurate services to their clients.  

Perhaps most importantly, tax software receives real-time updates and alerts regarding changes in tax laws and regulations, including those related to foreign asset reporting. This ensures that accountants and clients are aware of any changes that impact their tax obligations. It’s essential for accountants to select reputable tax software that meets their specific needs and stay updated on the latest tax regulations, especially when dealing with international tax matters. 

If you’re an accountant looking to help your clients navigate the complexities of foreign asset reporting, Thomson Reuters UltraTax CS® can help you organize your client’s Statement of Specified Foreign Financial Assets by reducing manual data entry, ensuring compliance, and minimizing tax liability.  

Additionally, SurePrep’s AI-powered combination of 1040SCAN, SPbinder, and TaxCaddy can integrate with UltraTax CS, GoSystem Tax RS, CCH Axcess Tax, and Lacerte to automate each phase of the tax prep process, including filing Form 8938 and FinCEN Form 114. Together with Checkpoint Edge, you can be sure you are properly interpreting IRS tax legislation in an ever-changing landscape.