The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the HIRE Act (Pub. L. 111-147), created two parallel compliance regimes: one for U.S. taxpayers (Form 8938) and one for foreign financial institutions (FFI reporting to the IRS). Together, they are designed to make it significantly harder for U.S. persons to hide assets in foreign accounts.

For U.S. taxpayers, FATCA's primary compliance obligation is Form 8938 (Statement of Specified Foreign Financial Assets), filed with the annual income tax return under IRC §6038D.

Form 8938 is required for specified individuals and specified domestic entities that hold specified foreign financial assets above the applicable threshold.

A specified individual is:

• A U.S. citizen;
• A U.S. resident alien;
• A nonresident alien who elects to be treated as a U.S. resident for tax purposes; or
• A nonresident alien who is a bona fide resident of a U.S. territory.

A specified domestic entity is a domestic corporation, partnership, or trust that is formed or availed of to hold specified foreign financial assets. The IRS has issued regulations defining when a domestic entity is "formed or availed of" for this purpose — generally, when a U.S. person owns more than 50% of the entity and the entity holds specified foreign financial assets.

The Form 8938 filing threshold depends on the taxpayer's filing status and whether the taxpayer lives in the United States or abroad.

If the total value of specified foreign financial assets exceeds either threshold (year-end or any-time-during-year), Form 8938 is required.

Specified foreign financial assets include:

1. Foreign financial accounts — bank accounts, brokerage accounts, and other financial accounts maintained at a foreign financial institution;
2. Foreign financial instruments — stocks, bonds, and other financial instruments issued by a foreign person, if not held in a financial account;
3. Interests in foreign entities — interests in foreign corporations, foreign partnerships, and foreign trusts;
4. Financial contracts with foreign counterparties — swaps, options, and other derivative contracts with a foreign counterparty; and
5. Foreign pension plans and deferred compensation plans — interests in foreign pension plans and deferred compensation arrangements.

What is NOT a specified foreign financial asset:

• Foreign real estate held directly (not through a foreign entity);
• Foreign currency held directly;
• Precious metals held directly;
• Social Security-type benefits from a foreign government; and
• Assets held in a U.S. financial account (even if the account holds foreign securities).

FATCA (Form 8938) and the FBAR (FinCEN Form 114) are separate reporting requirements with different thresholds, different filing locations, and different asset coverage. Many taxpayers must file both.

The FBAR has a lower threshold ($10,000) and covers only financial accounts. Form 8938 has a higher threshold but covers a broader range of assets, including interests in foreign entities and financial contracts.

The penalties for failure to file Form 8938 are significant:

• Initial penalty: $10,000 for failure to disclose;
• Continuation penalty: An additional $10,000 for each 30-day period (or fraction thereof) after the IRS notifies the taxpayer of the failure, up to a maximum of $50,000;
• Accuracy-related penalty: A 40% penalty (rather than the standard 20%) on any underpayment of tax attributable to an undisclosed specified foreign financial asset; and
• Extended statute of limitations: The statute of limitations for the entire tax return is extended to six years if the taxpayer omits more than $5,000 of gross income attributable to a specified foreign financial asset.

The IRS has authority to assess these penalties without going to court. The burden of proof is on the taxpayer to demonstrate reasonable cause for the failure.

In addition to the taxpayer-level reporting on Form 8938, FATCA requires foreign financial institutions (FFIs) to report information about accounts held by U.S. persons directly to the IRS (or to their home country tax authority under an intergovernmental agreement, which then shares the information with the IRS).

FFIs that fail to comply with FATCA are subject to a 30% withholding tax on certain U.S.-source payments. This withholding regime creates a strong incentive for foreign banks and investment firms to identify and report their U.S. account holders.

As a practical matter, this means that the IRS receives information about many foreign accounts held by U.S. persons — even if the U.S. person does not file Form 8938. The IRS can use this information to identify non-filers and assess penalties.

U.S. persons who failed to file Form 8938 in prior years may be eligible for the IRS Streamlined Filing Compliance Procedures — a reduced-penalty program for non-willful failures.

The streamlined procedures allow taxpayers to file amended returns for the prior three years and pay a reduced miscellaneous offshore penalty of 5% of the highest aggregate balance of unreported foreign financial assets (for U.S. residents) or no penalty (for non-U.S. residents who qualify for the Streamlined Foreign Offshore Procedures).

The streamlined procedures are not available for willful failures. Taxpayers who knowingly failed to report foreign assets face the full penalty regime and potential criminal prosecution.

FATCA's Form 8938 is a critical compliance obligation for U.S. persons with significant foreign financial assets. The thresholds, the asset coverage, and the penalty structure are all different from the FBAR — and both may be required for the same taxpayer.

If you have foreign financial assets and are unsure whether Form 8938 is required, contact us for a consultation. Our team has extensive experience with international tax reporting and can help you evaluate your compliance obligations.

Governing authority: IRC §6038D; Treas. Reg. §1.6038D-1 through 1.6038D-8; HIRE Act (Pub. L. 111-147); Form 8938 and Instructions; IRS Streamlined Filing Compliance Procedures.

Related: FBAR Filing Guide · FBAR and FATCA Compliance for Expats · Foreign Inheritance Reporting