In this video, Abhinav is decoding the reporting requirements in Form 8938 (FATCA Report) for US NRIs holding Indian or any other non-US investments.
Transcript of video below (errors possible due to auto-transcription):
Hello. This is CA Abhinav, and I welcome you. In this video, I’m sharing the, IRS reporting requirements in form 8938. Now form 8938 is a reporting requirement in which if you are a US resident, then you have to report. If your specified foreign financial assets are above a certain threshold, then you need to report it to the IRS.
So if you’re if you qualify as a US resident, you’ll be living in USA, or you are a US citizen or a green card holder across the world, anywhere you are, and you have foreign financial assets, that means any assets financial assets outside of the u US, then you need to report it as part of your along with your tax return, you have to do this very important reporting, which is there. It has, severe penalties also if you don’t report. So let us understand this reporting. Now the purpose of this reporting is to enable specified individuals. I’ll come to who is specified individuals to report specified foreign financial assets.
Now which foreign financial assets? There are there are specified assets that are given. Right? That needs to be put above a certain threshold. That means there is a threshold that is given.
I’ll come to all of this in this video. And to ensure that the individuals are reporting income from those assets in US. So, see, understand this thing. As for US tax law, if you are a US citizen or US resident, right, if you pass the green card test or the substantial presence test, then you have to disclose the worldwide income. Disclose and pay tax on the worldwide income.
US doesn’t want you, if you are in the US tax net, if you fall qualify as a US resident, that you do not report, foreign financial, income from foreign assets. So what people do is that, they transfer the assets to trusts and, you know, places outside the US, to escape the tax, paying tax on those assets. So to plug that gap, IRS wants you to disclose the assets and also pay the tax. Right? Okay.
So who needs to file the form 8938? Right? 1st is US citizen. If you are a US citizen, you are required to file. 2nd is a resident alien of United States for any part of the tax year.
Right? So if you pass any of the test, like you’re a green card holder, then you need to report. Or if you pass the substantial presence test at any part of the year. For example, you came to US in, like, May, and since May to December, you are a resident for US tax purposes, then you need to report it. 3rd is a nonresident alien who makes an election.
For so now here is that, for example, you are a, you know, nonresident, you do not pass the green test green card test. You do not pass the substantial presence test. Still, you make an election to be treated as a resident alien for the purposes. For example, if the if you’re a spouse, a nonresident spouse of a US resident, and you make an election to be treated as a resident alien for the purposes of tax filing, the married filing jointly, then you need to also you also qualify for filing form 8,938 right so these are the specified initials now and right and means the person has specified foreign financial assets exceeding the threshold Right? So if you’re a US citizen, but your specified foreign financial assets do not exceed the specified, the threshold, which we’ll come to the next slide, then you don’t need to report.
Right? Now what is the threshold? Okay. Now this is the threshold. See, there are 2 things here.
Depending the threshold depends on 2 things. 1 is your file filing status, how you file the tax return. So in US, you can file it as single, or you can file it as married filing jointly, or you can file as married filing separately, and there are others also. But, basically, here, it is given that either so one is the filing status, and second is whether the taxpayer lives in USA or he doesn’t live in USA. Right?
So the, thresholds vary. So if you’re filing as unmarried or married filing separately, you live in USA, the value of the specified foreign financial asset should be more than $50,000 on the last day of the tax year, that which is December 31, 2023, or more than $75,000 at any time during the tax year. So if it was more than 75,000 at any time during the year and by the end of the year, you sold off the assets and it goes, like, below 75,000, then also you need to report. Right? So these 2 other threshold.
Now if the taxpayer is living outside of the USA, the person is filing as unmarried or my filing as married, filing separately, living outside the USA, so if you live outside the USA, then the threshold is higher. Right? The threshold is 2 lakhs 2 lakh dollars, as on the last year of the financial year or the tax year, and 3 lakh dollars at any time, during the tax year. Right? Okay.
If you are married filing jointly, then the threshold is a bit different. It is kind of a bit higher. So if the you’re living in USA, then it is 1 lakh or 1 lakh 50,000. Right? And if you’re living outside the USA, it is 4 lakhs, 6 lakhs.
Right? So this is the how the, the threshold does. Now let’s come to the which assets? So which assets are we talking about here? So one thing to understand very clearly is we are talking here about foreign assets.
We are not talking here about the assets which are located in US. We’re talking about assets which are located outside of the US. Right? Foreign assets. 2nd, we are talking about financial assets.
We are not talking about non financial assets like real estate or gold or any personal assets. No. We are talking about financial assets. So what are the specified financial foreign financial assets? First is financial account maintained by a foreign financial institution.
Right? Foreign financial institution, for example, the person is like a NRI who is now based in US because of his work. So, his NRO, NRE accounts, any accounts, any financial accounts like an any accounts, NRO, NRE accounts, which are maintained by a foreign financial institution like an Indian bank would qualify as a foreign financial institution. Right? So those financial accounts need to be reported.
Right? Remember, these accounts need to be also reported as part of the FBAR reporting. FBAR filing and the form 8938 filing are 2 independent filings that need to be made. I’ll make a separate video on a comparison between the FBAR and form 898 because people some sometimes get confused. Both reportings have to be done if you breach the threshold.
Right? So financial accounts, you need to report there also. You need to report here also, in this reporting also. Right? Then stocks or securities issued by someone which is not a US person.
Right? Now this in this basically involves any companies, any stocks that you have issued by companies in India, any brokerage accounts that you have in India, all those things will come here. Then any interest in foreign entity. Right? Now if you have, like, a any partnership firm, LLP company, any foreign entity where you hold an interest, a financial interest, right, that will qualifies as a specified foreign financial asset.
Then any interest as a granter or beneficiary in a foreign trust. So if you have a trust incorporated outside the United States and you are a granter or a beneficiary in that trust, that also will qualify. Then any financial instrument or a contract that has an issuer or a counterparty that is not a US person, right, which is which includes now this is a very wide definition, which now it says any financial instrument or contract that has a non US issuer. Now when you talk about financial instruments, then it will if you’re an Indian person, it will include all your NSE, your mutual funds, your debentures, your fixed deposits, everything, because these are all financial assets, and they do not have a a a US issuer. It’s a non US issuer.
Now, for example, if you have, like, any, like, stocks that you have in USA, like, held by a US brokerage, that will not qualify. We are talking here specifically of the assets which are outside of the United States. Right? So these are mainly then interest in foreign pension plan and foreign deferred compensation plans. Now this will include your things like a national pension scheme or, investments or your investment in employee provident fund.
All those things will come here. Right? Okay. Now talking about what assets are exempt. So there are certain assets which are not exempt, which is nonfinancial.
Now non nonfinancial is like if you have a land or a flat or a property, real estate or any commodities, actual real hard commodities, like art, gold, you know, those are not included. Social Security or social insurance or similar programs of a foreign so if your foreign government issues you Social Security, all those things, your Social Security accounts and all will not be included. However, in my view, EPF, PPS, NPS, these are not Social Security per se because in India, they we don’t have a Social Security. Right? These product for products, these instruments cannot be termed because there may be different opinion here, but I would want to be erring on the side of caution and reporting these as well.
Right? My fundamental principle is that better to on side of caution than to, you know, aggressively interpret any particular thing. If there is any, kind of a you have been understanding better to kind of report. Right? This should not be anything that you want to hide.
Right? Okay. Also, check whether, you know, any reporting, any tax payable of these things is there in US. For example, if you have a account in India and the interest is exempt, even an NRI can continue to invest in and it is exempt. However, it is taxable from a US perspective.
So US would want to know that whether you hold a account in India, right, and then whether you are disclosing or offering the interest amount to tax. Now this this reporting is actually same in the line of schedule FSI reporting in India, what we do. In the tax return, ITR form 2, 3, you have the schedule FSI, which talk, which talks about sorry. Schedule FA, which talks about, the foreign assets. So it’s the same here.
Only in the US, it’s a reporting are bit more. You have to disclose in tax return. In in in India, you have only in the tax return. Here, you have to disclose in the tax return as well as, which you have to file with the FinCEN, which is a different department. Then you have to also do the form 893 reporting along with the tax return.
So it’s, like, 3 places you have to offer the same amount, same assets, and, you know, all those things. So it’s like duplicate work that you need to do. Okay. Financial account that is maintained by a US payer. Right?
Now any assets that you have in the US payer is maintaining like US if you have mutual funds or stocks in US, brokerage accounts, IRA, 401 k. Right? Now there are certain exemptions. For example, IRA, your IRA holds any financial assets outside India that is exempt. Right?
Now take an example of that you have a LLC that you have incorporated in US. You’re a US resident. You have a LLC that you incorporated in US, and the LLC holds a certain more than 50% or 75% out of India in foreign financial assets. Then, also, you need to report that the interest in your in that, the interest that the LLC holds outside India, that also you need to report. So if you are a majority shareholder in the LLC in the US LLC, which is holding assets for for financial assets outside India, that also will qualify in the specified financial assets.
So very, very important that you, read the provisions, read the IRS. So IRS has a given an instruction. There’s a specific instructions on form 4938. You can check-in Google, and you’ll get the IRS publication. Study the publication minutely because there are a lot of ifs and ifs and buts.
This is just an overview I’m providing. If you cannot do it by yourself, take help of a tax professional. Take his support and get this done in a proper way, right, not hiding anything because there are certain penalties, severe penalties if you hide anything, right, even inadvertently. Right? Okay.
Now coming to where you need to file. Right? Where you need to file this? So this report this reporting has to be done has to be filed to the IRS along with your tax return. Right?
The 1040 that you file, you need to file it along with it to the IRS. You cannot file this separately. Do not file this report separately on a stand alone basis to the IRS. IRS will not accept it. You have to file it along with your tax return.
Whenever you file your tax return, you have to attach this report if you qualify for this reporting. What is the timeline? Now, since this reporting has to be made with your tax return, the tax return timeline that is there, it’s generally April 15. So for, like, 2023 tax year, the reporting date is April 15, 2024. So this is the same timeline that we have for the form 8938.
Right? Now you can get an extension for this reporting if you file an extension, for your tax return. I have made a separate video on how to get an extension on your tax return. You can check that. So before April 15, 2024, if you are a US resident, you can file and obtain an extension or a 6 month extension you will get, whereby your reporting require your reporting timeline for your tax return changes to October 15, 2024.
And if your you get that extension automatically for this report also, you get an extension. Note that for US residents living abroad, there are there’s an automatic 2 month extension without needing to file. All that is there. So if you get an extension on your tax return, this report extension also you get. And now very, very important to understand this, that there is no automatic 6 month extension like in FBAR, right, foreign bank account reporting.
You get check my separate video on the FBAR. Right? In FBAR, basically, if you do cannot file by April 15th, you get a automatic 6 month extension. You don’t need to file an extension, and you get an extension till October 15th. So effectively, the FBAR filing date is October 15, 2024.
However, here you have to file an extension to your tax return so that you get an extension for this reporting. So that is different. Now let us come to the penalties. Right? What is the penalty for default in form filing form 8938?
Now if you do not file now these all validates are in USD US dollars. If you don’t file by the due date, there is a penalty of up to $10,000. $10,000 penalty is there. Then there is a continuous pattern of late filing where you do not file. So if you get a IRS notice of filing and you do not even then file after 90 days of receiving IRS notice, then there is 10,000 penalty additional 10,000 penalty for every 30 days of, non filing, which is maximum $50,000.
Right? So that penalty is there. Then if you underpay the tax due to non disclosure, now there are 2 things. 1 is a non willful mistake whereby you were not aware that you need to file, then it’s a penalty of 40% of such income. Right?
40% of such income straight away, the IRS will take away. Right? This is a big thing. 2nd is that if there is an underpayment of tax due to non disclosure of specified financial asset, if you it’s fraudulent, right? Then it is 75%.
Please understand that if you fail to file, the income or the asset, the first presumption that the IRS will take is that it’s a fraudulent. They will slap a 75% penalty. Then you need to explain and go and explain the reasonable cause and the, you know, non willful. It was non willful. I was not aware there were certain circumstances where I was.
So all that you need to convince and, you know, then it’s upon your luck whether you are able to convince or not. Right. If you are able to convince, then it is 40%, otherwise, 75%. So very important that to first understand the taxability of foreign financial assets in your US tax return. See, understand, if you are a US resident if you are living in US, working in US, then you are a US resident.
You have to pay tax on each and every worldwide income. Yes. You can claim a foreign tax rate. I’ll make separate videos on foreign tax. So if you have paid taxes in India, you can claim tax.
The the you can claim a kind of a credit or you can claim you can check if you can claim an exemption in the DTA, India US DTA. But important thing is first thing is disclosure That, okay, this much is the income that I have earned. Right? If you don’t disclose itself, then the matter ends there. IAS can simply if they find out, they will because there is a information reporting requirements between countries, information kind of transfer requirements.
So if they come to find out that against this SSN, against this item, there is this income that was offered to tax. So you’ve sold like some assets, some stocks in India, and you are not paying tax in US, then straight away and then they will check whether you have filed FBAR. You do. You’ve not filed FBAR. You’ve not filed form 8938, not offered this income to tax, then straight 75%.
Right. And then there are criminal penalties also. So very important to be very careful with this reporting. Okay. Then some other points on form 89381 is that it is linked to your tax return.
If you are not required to file a tax return in US, you do not you are saved. You don’t have to file FBAR you don’t have to file FBAR. If the sorry. It’s not FBAR. It’s I’m mentioning form 8938.
You don’t need to file it’s not FBAR. Sorry for the mistake. You don’t need to file form 8938 if the value of the specified foreign assets is above the reporting threshold. Even if it is above the threshold, but you do not have any reporting requirement in US, you don’t need to. You are exempt from this reporting.
Now always best practice is that file all these three reports if you qualify for all these 3. 1 is definitely tax return. If you’re a US citizen, you’ll have to comply with the filing of the tax return. Then 2nd is the FBAR above $10,000 if the, you know, maximum balance is there at any time. 3rd is form 8938.
If you qualify for all 3, always do a three way check. So the incomes should go in 1040. The same assets the assets should be there in 8938, and the financial accounts should be reported in the FBAR. Try to file all these 3 reporting forms together. If need be, take an extension on your FBAR.
So there is an automatic extension of 6 months for FBAR. Take an extension on your on your tax return. Right? Take an extension of 6 months on your tax return. What basically you can do okay.
One more thing. If you take an extension or tax return, this doesn’t mean that if there is a tax payable, you get an extension for that also. No. You have to pay the tax. You can maybe calculate the tax, pay the tax by April 15th.
If you pay electronically through the IRS website, the pay.gov website, you can check mark check that this pay this is being paid, as an extension, so you will get an automatic extension, or you can file an extension electronically. That’s a simple process. So you get time till October 15th. Get all your documents, everything. File all these three reports, like, together.
I mean, together means at one time so that, you know, it’s not that you file it that one in April, then you forget, you know, what was the account that I reported there. No. Try to do it in the space of 2, 3 days. 10 440 has 893, it has to be filed with 1040, and FBAR has to be filed, separately under the, BSA filing system. Right?
Okay. Now if, basically, you have missed earlier filings, so now you realize, no. No. I should have filed for 8938. I have assets which are exceeding this amount and, threshold, and I should have filed.
So then what you need to do, you will need to amend because this reporting, you can only do along with your tax return. So what you’ll have to do is that you’ll have to go and amend the prior year tax return, right, Because it is to be filed only with the tax return. So now if you check the provisions on amending the tax return, you can only amend 3 years prior to 3 years. That means if you file the tax return from the due date, 3 years time you get, or if you have paid the tax, then from that that day, 2 years that you get. So that’s like only how much you can go back.
Right? So you can maybe file a 2021 return, which is or 2020 return till 2020, you can revise. But prior to that, you will not be able to revise. Right? So okay.
Now form 8938 is of independent of FBAR. It is 2 separate requirements are there. Right? Okay. For the purpose of figuring the total amount of specified foreign financial assets, the value of a specified foreign financial asset denominated in a foreign currency must first be determined in the foreign currency and then convert it convert it to the US dollars.
So there is a specified process for doing that, which is given in the IRS publication, so you can check that. If you don’t file form 8938, even though you file tax return, IRS statute So IRS has a, like, a statute of limitation. For example, it’s like said that if you file a tax return, IRS cannot question it after 3 years. Right? Unless there is a significant underpayment, which is like more than 25 percent and where which they have to prove that there is a more than 25% understatement and then the time limit for the limitation is 6 years.
But if you do not file 8938, even though you have filed your tax return, then the there is no IRS statute of limitation that is, like, it will remain open. So, that is also very, very important reason that if you qualify for 8938 reporting, file the report along with your tax return to so that the statute of limitation starts. Right? K. So this is it.
I have explained some points on 8938 reporting. If you have any questions, do share. And, if do share in the comment section. If you have any feedback, do share in the comment section. I’ve also give the link to the IRS publication in the description, and I’ve also made a post on this on my website.
I will also give a link to that. So I hope this was useful. Thank you so much. Bye.