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When do I need to file a tax form for foreign financial assets?

On Behalf of | Mar 7, 2024 | International Tax Law |

The Internal Revenue Service (IRS) and related entities have taken steps to curb the use of foreign accounts for tax evasion. One major step towards this goal was the passage of the Foreign Account Tax Compliance Act (FATCA). This law serves three main goals. It requires taxpayers to report certain foreign assets, it requires foreign financial institutions to disclose the identities and values of certain US held accounts, and it allows for harsh penalties when these parties fail to abide by the bounds of the law.

One of the main forms that the government uses to ensure compliance of the FATCA is Form 8939, Statement of Specified Foreign Financial Assets.

Who must file this form?

This form can apply to both individuals and corporations. Qualifying individuals include citizens, resident aliens, nonresident aliens when filing a joint tax return, and nonresident aliens who are residents of American Samoa or Puerto Rico. Qualifying corporations include closely held domestic corporations or partnerships when at least 50% of the gross income from passive income and/or 50% of assets held to produce passive income and domestic trusts that have one or more specified persons as the beneficiary.

Reportable assets include financial accounts at foreign financial institutions and certain investments.

When do I need this form?

Those who meet the above criteria will now look at their assets to determine if they need to file the form. A filing is likely necessary when the qualifying individual or business has a foreign asset valued over $50,000 on the last day of the tax year or over $75,000 at anytime during the tax year in question if the taxpayer’s filing status is single. Those filing as married must file when the asset is $100,000 at the end of the tax year and $150,000 at any point during the tax year.

Taxpayers who live abroad may still need to file. This is generally required when the foreign asset is over $200,000 on the last day of the tax year or over $300,000 at any point during the tax year. These ranges are doubled if the taxpayer is filing a joint return.

There are exceptions to these rules. If, for example, a taxpayer does not need to file an income tax return they do not need to file this form. This is generally true even if the values of the foreign asset are above the previously noted reportable amounts.

What happens if a qualified taxpayer fails to file?

A failure to file this form can result in steep financial penalties. The penalty generally starts at $10,000 but can quickly increase to $50,000 if the taxpayer does not come into compliance after notified of the error. Defenses are available for a failure to file this form and can include reasonable cause.

A Senate report recently criticized the IRS on its use of this law, noting the federal agency has failed to adequately use the FATCA to hold those who attempt to avoid tax obligations accountable for reporting these assets. As such, the agency may use its recent influx of funding to focus in on this area. Those with foreign assets could find themselves the target of a federal tax audit. As such, it is generally wise to review tax filings and ensure compliance with applicable tax laws. If errors are present, it is a good idea to take steps to remediate the situation before it escalates into allegations of criminal wrongdoing.