The Penalties for IRS Form 8938, Avoiding Form 8938 Fines

Form 8938 Penalty

The Penalties for IRS Form 8938

Form 8938 is one of the newest additions to the Internal Revenue Service’s international information reporting requirements for US Taxpayers who have foreign accounts, assets, or investments overseas. Form 8938 was introduced in 2012 on the 2011 tax return in accordance with FATCA (Foreign Account Tax Compliance Act).  While the penalties for not being in compliance with Form 8938 are usually not as bad as it is for the FBAR penalties – despite the reporting overlap between Form 8938 and FBAR, in recent months the US government has increased enforcement of Form 8938 penalties and are moving from soft letters such as IRS Letter 6291, to audits and CP15 assessable penalty notices. Let’s take a brief look at the Form 8938 Penalty framework.

Section 6038D(d)

(d) Penalty for failure to disclose

• • • In general

      • If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.

• • • Increase in penalty where failure continues after notification

      • If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period.

        • The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.

Potential Form 8938 Penalties

In general, Form 8938 penalties will be $10,000 per year. Unlike the FBAR penalties, there has been no indication that the Internal Revenue Service plans on seeking penalties against Taxpayers based on each specific asset reported, as opposed to a “per form” violation — but you never know. In addition, if the IRS puts a Taxpayer on notice that they are out of compliance and the Taxpayer does not resolve the issue within 90 days of the mailing of the notice, there can be an additional $10,000 penalty for each 30-day period — up to $50,000.

Failure-to-File Accurate or Timely Form 8938 Penalties (Civil)

As provided by the IRS:

You may be subject to penalties if you fail to timely file a correct Form 8938 or if you have an understatement of tax relating to an undisclosed specified foreign financial asset.

Failure-To-File Penalty

• • • • If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.

Continuing Failure To File

• • • • If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.

Married Taxpayers

• • • • Filing a Joint Income Tax Return If you are married and you and your spouse file a joint income tax return, the failure-to-file penalties apply as if you and your spouse were a single person. Your and your spouse’s liability for all penalties is joint and several.

Presumption of Maximum Value

• • • • If the IRS determines that you have an interest in one or more specified foreign financial assets and asks you for information about the value of any asset, but you do not provide enough information for the IRS to determine the value of the asset, you are presumed to own specified foreign financial assets with a value of more than the reporting threshold that applies to you. See Determining the Total Value of Your Specified Foreign Financial Assets, earlier. In such case, you are subject to the failure-to-file penalties if you do not file Form 8938.

Reasonable Cause Exception

• • • • No penalty will be imposed if you fail to file Form 8938 or to disclose one or more specified foreign financial assets on Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support a reasonable cause claim. The determination of whether a failure to disclose a specified foreign financial asset on Form 8938 was due to reasonable cause and not due to willful neglect will be determined on a case-by-case basis, taking into account all pertinent facts and circumstances.

Effect of foreign jurisdiction laws

• • • • The fact that a foreign jurisdiction would impose a civil or criminal penalty on you if you disclose the required information is not reasonable cause. Accuracy-Related Penalty If you underpay your tax as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40% of that underpayment.

    • Examples of underpayments due to transactions involving an undisclosed specified foreign financial asset include the following.

      • You do not report ownership of shares in a foreign corporation on Form 8938 and you received taxable distributions from the company that you did not report on your income tax return.

      • You do not report ownership of shares in a foreign company on Form 8938 and you sold the shares in the company for a gain and did not report the gain on your income tax return.

      • You do not report a foreign pension on Form 8938 and you received a taxable distribution from the pension plan that you did not report on your income tax return. Fraud If you underpay your tax due to fraud, you must pay a penalty of 75% of the underpayment due to fraud.

Form 8938 Penalties (Criminal)

• • Criminal Penalties

    • In addition to the penalties already discussed, if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may be subject to criminal penalties.

Criminal Penalties

While criminal penalties under 6038D are not common, they can be issued in accordance with 1.6038D-8(f)(2). In 2019, the US Government secured its first FATCA criminal victory in Baron.

Reasonable Cause

As with many different types of international penalties that can be assessed against the Taxpayer, if the Taxpayer is able to show that the failure was due to reasonable cause and not willful neglect, then no penalty shall be issued. Since reasonable cause is based on several factors in accordance with applying the “totality of the circumstance” test, it will be harder to convince some IRS agents/examiners of reasonable cause than others, and Taxpayers may prefer to submit to the Streamlined Procedures instead.

CP15 Notice

If Taxpayers are penalized, they will usually receive notice by way of a CP15 notice. Taxpayers only have a limited time to protest at the IRS level (usually 30 days), so it is important for Taxpayers to stay cognizant of the notice date of the letter in order to timely protest and show reasonable cause.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.