Page 3 - Reporting Foreign Accounts on the FBAR versus Form 8938: Differences, Similarities, and Traps to Avoid

COLUMNS I Tax Practice & Procedure

Only reporting foreign accounts on Form 8938. Form 8938 lists the filing of Form 3520. If the foreign account is held by
is broader than the FBAR because it requires reporting on not just a foreign corporation in which the taxpayer has an ownership
foreign bank accounts, but all manner of foreign assets. Thus Form interest, then the taxpayer would likely need to file Form 5471
8938 requires the reporting, inter alia, of interests in foreign trusts; as well as a Form 8938 that separately lists the filing of Form
foreign corporations; foreign stocks, notes, or bonds; a contract 5471. If the foreign account is held in the name of a disregarded ◀ THE NYSSCPA’S
with a foreign person to buy or sell assets held for investment; gold entity or fictitious entity, or is simply a numbered account, then
certificates issued by a foreign person; foreign pensions; foreign it will probably need to be reported on Form 8938 as a directly
mutual funds; and foreign hedge funds and foreign private equity held asset of the taxpayer. PROFESSIONAL
funds. Simply reporting on Form 8938 the same foreign accounts Failing to properly consider a child’s foreign assets. For
reported on the FBAR—without considering other potentially FBAR purposes, when a child has foreign accounts, those accounts NETWORK
reportable foreign assets (or inquiring into them if one is a tax pro- must be reported on an FBAR filed for that child if the $10,000
fessional)—may lead to a materially incorrect Form 8938 that may, reporting threshold is satisfied. But for Form 8938, the question

in turn, result in penalties or issues with the statute of limitations is more complicated. Assuming that the reporting thresholds are WHERE EXPERTS GO
for the entire tax return. With respect to penalties for an incorrect met, if the parents file Form 1040 on behalf of the child to report
Form 8938, if the failure to disclose a specified foreign financial unearned income, then they must include Form 8938 with that
tax return to report any specified foreign financial assets owned FOR EXPERTISE
by the child. Alternatively, if the parents file Form 8814 (Parents’
Election to Report Child’s Interest and Dividends) with the par-
ents’ income tax return and thereby elect to include in their gross
Form 8938 is broader than income certain unearned income of their child (i.e., the “kiddie ◀
the FBAR because it requires tax” election), then the parents must report on the parents’ Form
8938 any specified foreign financial asset that the child owns. Get help with tricky questions. Join the conversation on Exchange, the members-only
reporting on not just foreign If, however, the child does not have to file an income tax return
for the tax year (e.g., not enough unearned income), then, per discussion board and share questions and solutions with your peers. Be sure to
bank accounts, but all manner the instructions to Form 8938, there is no obligation to file Form update your preferences to adjust how often you receive email updates.
of foreign assets. 8938, even if the value of the child’s specified foreign financial
assets is more than the reporting threshold for Form 8938.
Failing to consider the interplay between Form 8938 and the
statute of limitations. As reflected in the Instructions to Form
8938, the IRS takes the position that there is no running statute HOW TO Go to exchange.nysscpa.org and log in.
asset results in an underpayment of tax, then there is a 40% accu- of limitations for the entire Form 1040 tax return if the taxpayer LOG IN ◀
racy-related penalty on the underpayment per IRC section 6662(j). fails to file the required Form 8938 with that tax return. Even
Ignoring the ‘presumption’ baked into Form 8938. There more important, the IRS appears to be taking the position, as
is a presumption expressly set forth in IRC section 6038D—the reflected in the instructions to Form 8938, that filing a materially
statute that resulted in the creation of Form 8938—that if the IRS incomplete Form 8938 (i.e., one that “fail[s] to report a specified Login questions? Customer Service
determines that a taxpayer had an ownership interest in a foreign foreign financial asset that you are required to report”) is deemed can help—call 800 - 537- 3635
asset, then the reporting threshold for Form 8938 was met and the to be a failure to file Form 8938 for purposes of keeping open
taxpayer was required to report the asset. As such, the burden is the statute of limitations on the entire tax return. The statute of
on the taxpayer to demonstrate that the reporting threshold was not limitations will not start to run until the taxpayer files the required
met. Because of this presumption built into the statute—as well as “complete” Form 8938. Further, even if a specified foreign asset is
the harsh penalties that may be applied and the statute of limitations reported on Form 8938, if as little as $5,000 in income from that NEW ON Create your profile and start building connections today!
issues that may arise if foreign assets are omitted from Form 8938— asset is omitted from the tax return, then the statute of limitations ◀
the over-inclusion of assets on Form 8938 may be a preferable way for the entire return is extended from three years to six years. EXCHANGE?
for taxpayers and their tax professionals to deal with the form. 1. Click on profile in top right corner and “Import Your Info”
Assuming that foreign accounts held in the name of a foreign File Carefully
entity do not need to be reported on Form 8938. Form 8938 The foregoing are just some of the pitfalls that taxpayers should from LinkedIn
includes a rule regarding indirect interests that is often misinter- be aware of when dealing with foreign bank accounts, the FBAR, 2.
preted. If the foreign account is held in the name of a foreign trust, and Form 8938. Taxpayers should consult tax professionals Under the “Directory” tab, add other members as contacts
a foreign entity, or a fictitious entity, it will still get reported on knowledgeable in this area to help them navigate such issues. ■
Form 8938 in one form or another. For example, if the account 3. Select the “Open Forum” tab and engage in discussions
is in the name of a foreign trust, then the taxpayer would likely Usman Mohammad, JD, is of counsel at Kostelanetz & Fink
need to file Form 3520, and then file a Form 8938 that separately LLP, New York, N.Y.

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