In an increasingly globalized business world, taxpayers are more likely to accumulate foreign financial assets than ever. While diversifying assets is advantageous, many individuals are unaware of the potential U.S. tax reporting requirements for these holdings.

In this episode, host Tim LeMasters and guest Jason Rauhe discuss the complexities and increased scrutiny in international tax compliance affecting CPA firms and real estate professionals.

In the accounting world, the close of a company’s tax year inevitably sends people into a scramble. The calculation of the IC-DISC commission expense seems to add to the chaos; however, being familiar with the IC-DISC’s 60-day rule and 90-day rule could alleviate some of the tax season stress.

On May 3, 2024, the D.C. Circuit Court reversed the Tax Court’s decision on the Farhy case. The Circuit Court ruled that the IRS has legal authority to assess and collect penalties related to Form 5471 under Section 6038.

 

McGuire Sponsel identified an opportunity for a Kentucky-based company that machines automotive and heavy truck parts. The LLC had approximately $5.5 million in annual revenue, including about $2.6 million in international sales.

The Corporate Transparency Act’s (CTA) mandate to disclose beneficial ownership information (BOI) has recently ignited a debate.

 

This week on Let’s Talk Tax, Dave McGuire and guest John Bodur dive into transfer pricing documentation.

Navigating individual tax returns involving foreign entities or assets presents significant challenges.

Treasury Decision 9960 materially altered the reporting of international tax items for domestic Partnerships and S-Corporations (flow-through entities). For tax years beginning after January 25, 2022, such entities report items of Subpart F as pass-through items and not at the entity level.

McGuire Sponsel identified an opportunity for a California-based plant that specializes in designing, manufacturing and installing farm equipment for different edible nut industries domestically and internationally. The S-Corporation had approximately $21.3 million in annual revenue, including about $6.5 million in international sales.

Understanding Form 8938: Filing Requirements, Penalties,
and Key Insights for U.S. Taxpayers

In an increasingly globalized business world, taxpayers are more likely to accumulate foreign financial assets than ever. While diversifying assets is advantageous, many individuals are unaware of the potential U.S. tax reporting requirements for these holdings. This lack of awareness can lead to significant compliance issues and potential penalties. One crucial reporting requirement for individuals with foreign financial assets is Form 8938, the Statement of Specified Foreign Financial Assets.

What is Form 8938?

Form 8938, implemented by the Foreign Account Tax Compliance Act (FATCA), reports foreign financial assets that exceed certain thresholds. The form aims to enhance transparency and compliance with U.S. tax laws, complementing other reporting. Reportable assets on Form 8938 include foreign bank accounts, brokerage accounts, mutual funds, certain foreign retirement plans, and other financial accounts held outside the U.S.

The thresholds for filing Form 8938 will vary depending on the taxpayer’s filing status and their country of residence.

The aggregate value thresholds are as follows:

Taxpayers Living in the U.S.

Unmarried taxpayers and married taxpayers filing separately: Aggregate value exceeds $50,000 on the last day of the tax year or $75,000 at any point during the year

Married taxpayers filing jointly: Aggregate value exceeds $100,000 on the last day of the tax year or 150,000 at any point during the year

Taxpayers Living Abroad

Taxpayers not filing a joint return: Aggregate value exceeds $200,000 on the last day of the tax year or $300,000 at any point during the year

Married taxpayers filing jointly: Aggregate value exceeds $400,000 on the last day of the tax year or $600,000 at any point during the year

Specified Domestic Entities: Aggregate value exceeds $50,000 on the last day of the tax year or $75,000 at any point during the year

Penalties Relating to Form 8938

Failure to File: If the IRS notifies a taxpayer of the failure to file Form 8938 and the taxpayer continues to neglect their reporting obligations, an additional penalty of $10,000 per 30-day period (up to a maximum of $50,000) may be imposed.

Foreign Asset Underpayment: Under certain circumstances, taxpayers who underpay their taxes as a result of undisclosed foreign financial assets may face a penalty equal to 40% of the underpayment attributable to the undisclosed assets.

Additional Considerations

If you have reported specified foreign assets on certain international tax forms, there is no requirement to repeat this reporting on Form 8938. Please note that this does not excuse the taxpayer from filing Form 8938; instead, they should complete part IV of the form, which will detail which international forms were filed with specified foreign assets and the number of these forms filed.

International forms that would qualify for reporting on Part IV include the following:

  • Form 5471
  • Form 8621
  • Form 3520 and 3520-A
  • Form 8865
  • Form 8891

It’s also important to note that, while similar, the FinCEN FBAR reporting and Form 8938 are in no way substitutes. While there is some overlap between Form 8938 and FBAR reporting requirements, they serve different purposes and have distinct filing thresholds and instructions.

Engaging in business activities abroad may initiate unforeseen IRS reporting obligations and lead to significant penalties for taxpayers who are unaware of them. With decades of experience in the realm of international taxation, McGuire Sponsel’s Global Business Services Team is adept at assisting taxpayers in navigating increasingly intricate reporting requirements.

Contact our Global Business Services team for help with compliance or any other international tax issue.

Josh Riker, is a Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including preparing client calculations, international forms, IC-DISC tax returns, and transfer pricing documentation.

Recent Resources

  • podcasts
    Alliance Network
    May 23, 2024

    Why CPA Firms Avoid International Compliance

    by Tim LeMasters & Jason Rauhe, CPA

    In this episode, host Tim LeMasters and guest Jason Rauhe discuss the complexities and increased scrutiny in international tax compliance affecting...

  • blog
    Global Business Services
    May 17, 2024

    Two Rules to Consider when Timing your IC-DISC Commission

    by Greg Lambrecht, CPA

    In the accounting world, the close of a company’s tax year inevitably sends people into a scramble. The calculation of the IC-DISC commission...

  • blog
    Global Business Services
    May 10, 2024

    Reversal of Farhy Ruling

    by Catherine Yuan, CPA

    On May 3, 2024, the D.C. Circuit Court reversed the Tax Court’s decision on the Farhy case. The Circuit Court...

  • case studies
    Global Business Services
    May 10, 2024

    Automotive Component Part Manufacturer

    by Jason Rauhe, CPA

    McGuire Sponsel identified an opportunity for a Kentucky-based company that machines automotive and heavy truck parts. The LLC had approximately...