Section 6038D Penalty Violations of FATCA
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Section 6038D Penalty Violations of FATCA
Section 6038D Penalty Violations of FATCA Form 8938 Filing: When it comes to international reporting and IRS penalties for noncompliance — one of the newest additions to the offshore reporting violation family is FATCA Reporting — in accordance with Internal with Revenue Code Section 6038D Foreign Financial Asset Disclosures. FATCA reporting was only introduced about 10-years ago — with the goal of ensuring that US Persons with specified foreign financial assets abroad report their ownership to the US government on their tax return. When a US person does not properly report their foreign financial assets to the US government (on Form 8938 for 6038D purposes), they may become subject to fines and penalties — although these penalties may be avoided or abated by showing the noncompliance was due reasonable cause and not willful neglect. Let’s go through the basics of section 6038D Penalty violations:
26 USC 6038D – Information with Respect to Foreign Financial Assets
(a) In General
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Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).
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What does this Mean?
Subsection (a) of Internal Revenue Code section 6038D refers to who may be subject to the reporting requirements. And, as Taxpayers get deeper into FATCA reporting, they will find that there are different threshold requirements depending on the filing status and residence of the Taxpayer — the $50,000 threshold is the minimum requirement to even get on the board to possibly have to file a form 8938.
(b) Specified Foreign Financial Assets
For purposes of this section, the term “specified foreign financial asset” means—
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(1) any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
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(2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—
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(A) any stock or security issued by a person other than a United States person,
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(B) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
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(C) any interest in a foreign entity (as defined in section 1473).
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What does this Mean?
Subsection (b) breaks down what is considered a specified foreign financial asset. It is all encompassing and essentially includes any type of foreign asset that the Taxpayer has and interest in. For example, it can involve an account at a bank; an investment account at a foreign financial institution that is not a bank; stock accounts; pension accounts — and even physical stock. It is the final category “stock or security” that can make it very complicated to determine with this standalone asset is reportable (e.g., cryptocurrency and other assets).
(c) Required information
The information described in this subsection with respect to any asset is:
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(1) In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.
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(2) In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
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(3) In the case of any other instrument, contract, or interest—
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(A) such information as is necessary to identify such instrument, contract, or interest, and
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(B) the names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest.
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(4) The maximum value of the asset during the taxable year.
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What does this Mean?
Subsection (c) refers to his specific requirements for reporting — and namely what type of information is required to be disclosed to the US government. It generally requires the name of the asset; the type of asset; the location and value of the asset — and whether or not that asset generated any income, and if so how much and what type of income was generated.
(d) Penalty for Failure to Disclose
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(1) In general
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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.
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(2) Increase in penalty where failure continues after notification
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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.
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What does this Mean?
As with anything related to international reporting, there are penalties for noncompliance — and the Internal Revenue Service does strictly enforce the reporting requirements. If a person does not properly report their foreign assets on form 8938, they may be subject to the penalties identified above — noting below, that if the taxpayer can show reasonable cause, they may be able to abate or avoid the penalties.
(g) Reasonable Cause Exception
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No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.
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What does this Mean?
It means that despite the fact that the IRS does seem to enjoy enforcing offshore noncompliance penalties, that is the Taxpayer can prove the noncompliance was due to reasonable cause and not willful neglect — then the IRS has the ability to abate or eliminate the penalties. There are some limitations in making a reasonable cause submission — and the taxpayer may also have various offshore compliance opportunities by way of the voluntary disclosure programs (VDP; Streamlined Filing, and Delinquency Procedures)
Section 6038D, subsections E,F & H are beyond the scope of this introductory article.
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