What Are Specified Foreign Financial Assets?

U.S. taxpayers are required to report foreign assets to the Internal Revenue Service (IRS) as a significant part of tax compliance. As global financial connections become more common, understanding these obligations is important for many individuals and certain domestic entities. This reporting framework ensures transparency and helps prevent offshore tax evasion. Navigating the rules for what constitutes a reportable asset and who is required to file can be complex. This article serves as a guide to the definition of specified foreign financial assets and the associated reporting duties.

Defining Specified Foreign Financial Assets

The term “specified foreign financial asset” encompasses a wide range of holdings and is not limited to traditional foreign bank accounts. The definition is intentionally broad to include various types of financial instruments and interests a U.S. person might hold outside of the United States. This category includes financial accounts maintained by a foreign financial institution, such as savings, deposit, checking, and brokerage accounts. A foreign financial institution is any non-U.S. entity that accepts deposits, holds financial assets for others, or is primarily in the business of investing or trading.

The definition also extends to other foreign financial assets held for investment that are not in an account with a financial institution. These include:

• Stock or securities issued by a non-U.S. person
• A capital or profits interest in a foreign partnership
• A note, bond, or other debt instrument issued by a foreign person
• An interest in a foreign trust or estate
• Financial contracts with a foreign counterparty, like currency swaps

Certain assets are specifically excluded from the definition. Directly held foreign real estate, for instance, does not need to be reported. However, if that real estate is held through a foreign entity like a corporation or partnership, the interest in that entity becomes a reportable asset. Other non-reportable assets include precious metals held directly, art, and other collectibles. An interest in a foreign pension or a deferred compensation plan is another example of a reportable asset. The breadth of these definitions requires taxpayers to carefully inventory their foreign holdings to determine if they fall under the reporting requirements.

Reporting Thresholds and Requirements

The obligation to report specified foreign financial assets is triggered when the total value of these assets exceeds certain monetary thresholds. These thresholds vary based on the taxpayer’s filing status and whether they reside within the United States or abroad. This duty applies to “specified persons,” which includes U.S. citizens, resident aliens, certain nonresident aliens, and some domestic entities. A taxpayer only needs to file if they are already required to file an annual income tax return.

U.S. Residents

For unmarried taxpayers living in the U.S., or those married but filing separately, the requirement is met if the total value of their specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any point during the year. For married taxpayers residing in the U.S. and filing a joint return, these thresholds are doubled: they must report if their assets exceed $100,000 on the last day of the year or $150,000 at any time during the year.

Residents Abroad

The thresholds are higher for taxpayers who live abroad. An unmarried individual or someone married filing separately who lives abroad must file if their assets are valued at more than $200,000 on the last day of the tax year, or more than $300,000 at any point during the year. For married couples living abroad and filing a joint return, the thresholds increase to more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

It is the aggregate value of all specified foreign financial assets that determines whether the filing threshold is met.

Information and Valuation for Form 8938

Preparing to report foreign assets requires gathering specific information and performing valuations according to IRS rules. The reporting is done on Form 8938, Statement of Specified Foreign Financial Assets. For each reportable asset, a taxpayer must provide detailed identifying information. For a financial account, this includes the name and address of the foreign financial institution and the account number. For stocks or securities, the issuer’s name and address are required, along with information to identify the class of stock.

A component of the preparation is determining the maximum value of each asset during the tax year, which is its fair market value. If an asset’s value is denominated in a foreign currency, it must first be determined in that currency and then converted to U.S. dollars. The exchange rate to be used is the U.S. Treasury Bureau of the Fiscal Service’s year-end rate. If that rate is not available, another publicly available exchange rate can be used, but its source must be disclosed.

If an asset has a value of zero or less, it is treated as having a value of zero for reporting purposes. For certain assets where the fair market value is not readily accessible, such as an interest in a foreign trust or pension plan, specific rules apply. In these cases, the value may be based on distributions received or the value of the interest on the last day of the tax year.

The Form 8938 filing requirement is distinct from the separate obligation to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is filed with the Financial Crimes Enforcement Network (FinCEN), not the IRS, and has different reporting rules and lower thresholds, applying to foreign financial accounts exceeding $10,000 in aggregate value. A taxpayer may be required to file both forms, as filing one does not relieve the obligation to file the other.

Completing and Filing Form 8938

Once all necessary information has been gathered and valuations are complete, the final step is to complete and file Form 8938. This form is not submitted as a standalone document; instead, it must be attached to the taxpayer’s annual return. This includes returns such as Form 1040 for individuals or returns for entities like partnerships (Form 1065) or corporations (Form 1120).

The due date for Form 8938 is the same as the due date for the annual return to which it is attached, including any approved extensions. Form 8938 is an informational report that discloses the existence and value of the assets but does not, by itself, calculate any tax. However, any income generated from these foreign assets, such as interest or dividends, must be separately reported on the appropriate sections of the income tax return.

Penalties for Non-Compliance

Failure to file a required Form 8938 can lead to significant financial penalties. If a taxpayer fails to file a complete and correct Form 8938 by the due date, they may be subject to an initial penalty of $10,000. This penalty can be applied even if the non-compliance does not result in any unpaid tax.

The penalties can escalate if the non-compliance continues after the IRS has notified the taxpayer of their failure to file. If the taxpayer does not file the form within 90 days of receiving an IRS notice, an additional penalty of $10,000 is imposed for each 30-day period that the failure continues. This continuation penalty is capped at a maximum of $50,000.

An underpayment of tax that is attributable to an undisclosed foreign financial asset can result in a penalty of 40 percent of that underpayment. In addition to these civil penalties, willful violations may also lead to criminal penalties. The statute of limitations for the IRS to assess tax may also be extended if a taxpayer fails to file Form 8938 or does not report a specified foreign financial asset as required.