Foreign Asset Disclosure & Tax Reporting: A Guide for U.S. Entities

For U.S. businesses and investors, foreign asset disclosure is a crucial component of tax compliance, yet it remains one of the most commonly overlooked areas. With the IRS increasingly focusing on FATCA and Form 8938, failing to disclose foreign assets can lead to significant penalties and legal complications. 

Understanding these regulations is essential to safeguarding your financial and business interests.

This blog will walk you through everything you need to know about IRS foreign asset disclosure, including the intricacies of FATCA and the specific reporting requirements for assets held. Let’s get started. 

Key Takeaways

• Foreign Asset Disclosure is Essential: Accurate reporting of foreign assets is vital for U.S. taxpayers. Non-compliance can result in severe financial penalties and legal consequences.
• FBAR and Form 8938 Filing Requirements: U.S. taxpayers must file Form 8938 and FBAR if foreign assets exceed certain thresholds. Both forms have different filing processes and penalties for non-compliance.
• Penalties for Non-Disclosure: Penalties for failing to report foreign assets include fines up to $100,000 for willful violations, and criminal charges for intentional non-compliance.
• FATCA’s Impact: The Foreign Account Tax Compliance Act (FATCA) strengthens reporting requirements for U.S. taxpayers with foreign assets, enhancing the IRS’s ability to detect and prevent tax evasion.
• Stay Compliant and Avoid Risks: Following IRS guidelines and filing foreign asset reports accurately can help prevent costly penalties, IRS scrutiny, and potential criminal charges.

What is a Foreign Financial Asset?

A foreign financial asset refers to any financial asset held or maintained outside of the United States. These assets are key for accurate tax reporting and include various forms, such as:

• Foreign Bank Accounts: Savings, checking, or other accounts held with foreign financial institutions.
• Foreign Securities: Stocks, bonds, or securities issued by non-U.S. entities.
• Interests in Foreign Entities: Ownership in foreign corporations, partnerships, or trusts.
• Foreign Mutual Funds: Investment funds that pool capital to purchase foreign securities.
• Foreign Real Estate: Property located outside the U.S., especially if held through foreign entities.
• Foreign Partnership Interests: Ownership in foreign partnerships.
• Foreign Financial Instruments: Contracts or financial instruments issued by foreign parties.

The IRS requires U.S. taxpayers, including citizens, green card holders, residents, and business entities, to disclose foreign financial assets if they exceed the reporting thresholds. Form 8938 (Statement of Specified Foreign Financial Assets) helps track foreign financial assets and ensure compliance with tax obligations.

Also Read: IRS Wage Garnishment: How to Prevent and Fix It

Now that we understand what constitutes a foreign financial asset, let’s look at why reporting these assets is so important.

Why Is Foreign Asset Disclosure Important?

The IRS has significantly increased its efforts to identify unreported offshore assets due to concerns over tax evasion and money laundering. As part of this, FATCA and global tax treaties now require foreign banks to report U.S. account holders to the IRS.

Failing to disclose foreign assets, such as bank accounts, real estate, or investments, can lead to serious consequences:

• Severe financial penalties: Penalties can reach up to 50% of the account balance.
• IRS audits and tax investigations: Failure to report assets often triggers thorough IRS scrutiny.
• Asset seizures and frozen bank accounts: The IRS may seize assets or freeze accounts if foreign assets are not disclosed.
• Criminal charges for tax evasion: Non-disclosure can lead to criminal investigations and charges.

Staying compliant with foreign asset reporting requirements is essential to avoid these risks and prevent unwanted IRS scrutiny.

With the stakes clear, it’s essential to understand how IRS Form 8938 plays a key role in this process.

Why IRS Form 8938 Matters

IRS Form 8938 is a critical tool in the U.S. government’s effort to curb tax evasion through foreign financial assets. While similar to the FBAR (FinCEN Form 114), Form 8938 has distinct reporting requirements and thresholds. 

This form, part of the Foreign Account Tax Compliance Act (FATCA), ensures U.S. taxpayers disclose their foreign financial holdings to the IRS.

Who Needs to File Form 8938?

You must file Form 8938 if you are a specified individual or a specified domestic entity that holds foreign financial assets exceeding the IRS’s reporting thresholds.

• Specified individuals include U.S. citizens, resident aliens, or non-resident aliens electing to be treated as residents.
• Specified domestic entities include certain domestic corporations, partnerships, and trusts primarily formed to hold foreign financial assets.

Reporting Thresholds

The IRS defines specific reporting thresholds based on your filing status and residence. These thresholds determine when Form 8938 is required.

Accurate reporting on IRS Form 8938 ensures compliance with U.S. tax laws and provides transparency regarding foreign financial assets.

In addition to Form 8938, U.S. taxpayers may be required to file additional forms to report foreign assets such as trusts, business interests, and ownership in foreign corporations.

Staying on top of these additional reporting requirements ensures full compliance with U.S. tax laws and helps avoid complications with foreign asset holdings.

Also Read: IRS First-Time Penalty Abatement: Key Insights and Tactics for US Businesses

Next, let’s examine some situations where you might be exempt from this requirement.

Exceptions to Filing Form 8938

While many U.S. taxpayers with foreign financial assets are required to file Form 8938, there are some notable exceptions to consider:

• Exempt Foreign Assets: Certain foreign financial assets may be exempt from reporting, particularly for U.S. citizens living abroad. If specific conditions are met, these assets do not need to be disclosed.
• Below Reporting Threshold: If the total value of your foreign assets falls below the reporting threshold, you are not obligated to file Form 8938. This threshold varies based on your filing status and whether you're living in the U.S. or abroad.
• No Tax Return Filing Requirement: Taxpayers who are not required to file a tax return are exempt from submitting Form 8938, even if they hold foreign financial assets.
• Certain Domestic Entities: Some domestic entities, such as partnerships and corporations, do not need to file Form 8938 even if they hold foreign financial assets.

However, even if you're exempt from filing Form 8938, other forms like the FBAR (FinCEN Form 114) may still be required to report foreign financial assets.

To avoid confusion, let’s compare the key differences between Form 8938 and FBAR filing.

Differences Between Form 8938 and FBAR/FinCEN 114

Many taxpayers confuse Form 8938 with the FBAR. Both deal with foreign financial assets, but the rules, thresholds, and filing processes differ.

Form 8938 captures a broader set of foreign assets and requires more detailed reporting, as it is part of the annual tax return. FBAR focuses only on foreign accounts, carries its own filing process, and applies even when the tax return is not required.

Note: Taxpayers meeting both thresholds must file both forms and ensure the same accounts are consistently reported.

Also Read: Understanding Schedule K-1 Tax Form 1065

Once you know which forms to file, here's how you can go about reporting your foreign assets correctly.

How to Report Foreign Assets

Reporting foreign assets is a critical step in ensuring compliance with U.S. tax and financial disclosure regulations. Here’s a streamlined guide for U.S. taxpayers on how to report foreign financial assets:

1. Determine Your Filing Requirements

Not all U.S. taxpayers must report foreign assets. If the combined value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (FBAR). This is filed electronically with FinCEN, not the IRS.

2. File Form 8938

If your foreign assets meet specific thresholds, you must file Form 8938, the Statement of Specified Foreign Financial Assets, with your tax return (usually Form 1040). This provides more details on your foreign financial assets. 

Any income earned from your foreign assets, such as interest, dividends, or rental income, must also be reported on your U.S. tax return.

3. Additional Forms

Depending on your situation, other forms may be required. For instance, Form 5471 is needed for foreign corporations, while Form 3520 or 3520-A may be required for foreign trusts. It's essential to keep accurate records of all your foreign assets and transactions. This will support your filing in case of an audit.

Taxpayers living abroad typically use Form 1040, but may need additional forms such as Form 2555 (Foreign Earned Income Exclusion) or Form 1116 (Foreign Tax Credit). Always refer to the latest IRS guidelines to ensure compliance.

Also Read: Outsourced Tax Services to India: A Guide for US Companies

Step-by-Step Guide to Filing Form 8938

1. Gather Financial Documents

You’ll need records of your foreign accounts, investments, and other assets, including the maximum value of each asset during the year.

2. Complete the Form
   • Part I: Foreign Deposit and Custodial Accounts: Report any foreign savings or investment accounts. Include the number of accounts and their highest value for the year.
   • Part II: Other Foreign Assets: Report foreign stocks, securities, or other financial assets that aren't in a financial account.
   • Part III: Income from Foreign Assets: List any income (interest, dividends, capital gains) earned from your foreign assets, ensuring it matches what you report on your tax return.
   • Part IV: Excepted Assets: If you’ve already reported certain assets on other forms (e.g., Form 3520 or 5471), note that here to avoid duplication.
3. Valuing Your Assets

For foreign accounts, use the highest value during the year. For other assets, use their fair market value at year-end, converting values to U.S. dollars at the year’s closing exchange rate.

4. Foreign Real Estate

Foreign real estate is not typically reported unless it's held through an entity or generates income, such as rental income. Review IRS guidelines for specific real estate reporting rules.

FATCA and Its Impact on Reporting

FATCA requires U.S. taxpayers to disclose their foreign assets and mandates that foreign financial institutions report U.S. account holders to the IRS. This law helps the IRS detect and prevent tax evasion related to foreign accounts.

If you hold foreign assets, FATCA may impose additional reporting obligations on both you and the foreign financial institutions holding your assets. Accountants assisting clients with foreign assets should be familiar with FATCA’s implications, ensuring that all assets are properly reported and that clients are aware of their obligations.

Missing a foreign asset disclosure deadline or making errors can lead to costly penalties. VJM Global specializes in helping U.S. businesses and investors manage the complexities of FBAR, Form 8938, and other foreign asset reporting requirements. With expertise in cross-border tax compliance and audit support, we ensure your disclosures are accurate and timely, keeping your operations fully compliant with IRS regulations. Get started today. 

But what happens if you fail to report these assets? Let’s take a look at the penalties for non-compliance.

Penalties for Non-Compliance with Foreign Asset Disclosure

Failure to disclose foreign assets can result in severe financial penalties, civil cases, and criminal charges. Here’s a breakdown of the penalties associated with non-compliance:

1. FBAR Penalties (FinCEN Form 114)
   • Non-Willful Violations: A penalty of up to $10,000 per violation.
   • Willful Violations: The penalty is the greater of $100,000 or 50% of the account balance per violation.
   • Criminal Charges: Intentional non-compliance can result in up to five years in prison.
2. FATCA Penalties (Form 8938)
   • Failure to file can result in a $10,000 penalty.
   • An additional penalty of $50,000 may apply if the IRS issues multiple non-compliance notices.
   • Willful violations may lead to criminal penalties for tax evasion.
3. Foreign Trust & Business Reporting Penalties
   • Form 3520 (Foreign Trusts & Gifts): Penalty of 35% on unreported amounts.
   • Form 5471 (Foreign Corporations): $10,000 per missed filing.
   • Form 8865 (Foreign Partnerships): $10,000 for each missing filing.

Keeping accurate records and filing on time is the best way to ensure compliance and avoid the costly consequences of non-disclosure.

To wrap things up, here are some practical tips to ensure you file IRS Form 8938 correctly and remain compliant.

Top Tax Tips And Best Practices for Filing IRS Form 8938

Filing IRS Form 8938 can seem daunting, especially when dealing with foreign financial assets. To help you tackle the process, here are some valuable tips to ensure you stay compliant:

1. Don’t Forget About Joint Accounts

Joint ownership affects how you report assets. If you’re filing jointly with a spouse, report the full value of jointly owned assets once. For joint ownership with individuals who are not your spouse, report the full value of the asset. This rule applies regardless of whether the other joint owner is a business partner, friend, or relative.

2. Track the Maximum Value of Your Assets

You must report the maximum value of your foreign assets during the year, not just their value at year-end. Use account statements to identify the highest value of your foreign assets during the tax year.

3. Convert Foreign Currency Accurately

When converting foreign assets into U.S. dollars, use the exchange rate on December 31st of the tax year. If you sold or closed an asset before the year-end, still use the exchange rate on December 31st.

4. Don’t Mix Up FBAR and Form 8938

Both FBAR (FinCEN Form 114) and Form 8938 require reporting of foreign assets, but their filing requirements differ:

• FBAR is filed with FinCEN if foreign accounts exceed $10,000 at any point during the year.
• Form 8938 is filed with your tax return and has higher reporting thresholds.

You may need to file both forms, depending on your assets.

5. Use Reasonable Estimates If Necessary

If you’re unsure of an asset’s exact value, you can use a reasonable estimate based on available information. For example, use financial statements or publicly available market data to estimate values. Be sure to document how you arrived at your estimate in case the IRS asks for clarification.

6. File Form 8938 Even If You Don’t Owe Taxes

You are required to file Form 8938 even if you don’t owe any U.S. taxes. The IRS uses this form to track foreign financial assets, so it must be filed regardless of your tax liability.

7. Seek Professional Help When Needed

Filing Form 8938 can be complicated, especially when dealing with foreign assets. If you’re unsure about any part of the filing process, consult a professional. VJM Global offers U.S.‑trained CPA & CA teams, Form 8938/FBAR cross‑border compliance, and full accounting‑outsourcing support for U.S. companies with Indian operations, so you can stay compliant with ease. 

Following these tips simplifies the Form 8938 filing process, ensures you meet IRS requirements, and helps you avoid penalties. 

Conclusion

Accurately reporting foreign assets is a regulatory requirement and a crucial step in avoiding significant penalties. The complexity of international tax laws and foreign asset disclosure can be tricky, but ensuring compliance is essential for the long-term financial health of U.S. businesses and investors.

VJM Global’s specialized services ensure your compliance with U.S. tax regulations, including FBAR and Form 8938. Here’s how we can help:

• Comprehensive Reporting Assistance: We ensure accurate and timely filing of FBAR, Form 8938, and other foreign asset disclosures, protecting you from costly penalties.
• Expert Guidance on International Taxation: With our deep expertise in international tax compliance, we help businesses manage tax risks across multiple jurisdictions and ensure proper foreign asset reporting.
• Tailored Tax Advisory: We provide solutions to address your complex tax situations, ensuring compliance while minimizing tax liabilities and managing cross-border challenges.
• Audit Support & Tax Preparation: Our team provides audit support and tax preparation services to ensure your foreign asset disclosures align with your tax returns and IRS requirements.
• Proactive Risk Management: We stay ahead of regulatory changes, helping you avoid penalties and ensuring that your foreign asset reporting process is efficient and up to date.

Get in touch with our expert team today to ensure your foreign asset disclosure is handled seamlessly and in full compliance with U.S. tax laws.

FAQs

1. What is FBAR, and who needs to file it?

FBAR (Foreign Bank and Financial Accounts Report) is required for U.S. taxpayers who have foreign financial accounts exceeding $10,000 in aggregate value at any point during the year. If you meet this threshold, you must file FinCEN Form 114.

2. What are the penalties for failing to report foreign assets?

Penalties for non-compliance can be severe, including civil fines up to $10,000 per violation for non-willful failures and up to $100,000 or 50% of the account balance for willful violations. Criminal charges may also apply in cases of intentional non-compliance.

3. What is Form 8938, and who needs to file it?

Form 8938 is required for U.S. taxpayers with specified foreign assets exceeding certain thresholds. It must be filed with your annual tax return (Form 1040) if your foreign assets meet these thresholds.

4. How does VJM Global assist with foreign asset reporting?

VJM Global offers comprehensive support with FBAR, Form 8938, and other foreign asset disclosures. We provide tax preparation, audit support, and international tax advisory services to ensure full compliance with U.S. regulations.

‍