Form 8938 Penalties Under 6038D (FATCA)
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Form 8938 Penalties Under 6038D (FATCA)
Form 8938 is one of the newest additions to the Internal Revenue Service’s international information reporting requirements for US Taxpayers who have foreign accounts, assets, or investments overseas. Form 8938 was introduced in 2012 on the 2011 tax return in accordance with FATCA (Foreign Account Tax Compliance Act). While the penalties for not being in compliance with Form 8938 are usually not as bad as it is for the FBAR penalties – despite the reporting overlap between Form 8938 and FBAR, in recent months the US government has increased enforcement of Form 8938 penalties and are moving from soft letters such as IRS Letter 6291, to audits and CP15 assessable penalty notices. Let’s take a brief look at the Form 8938 Penalty framework.
Section 6038D(d)
(d) Penalty for failure to disclose
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In general
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If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.
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Increase in penalty where failure continues after notification
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If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period.
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The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.
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Potential Form 8938 Penalties
In general, Form 8938 penalties will be $10,000 per year. Unlike the FBAR penalties, there has been no indication that the Internal Revenue Service plans on seeking penalties against Taxpayers based on each specific asset reported, as opposed to a “per form” violation — but you never know. In addition, if the IRS puts a Taxpayer on notice that they are out of compliance and the Taxpayer does not resolve the issue within 90 days of the mailing of the notice, there can be an additional $10,000 penalty for each 30-day period — up to $50,000.
Criminal Penalties
While criminal penalties under 6038D are not common, they can be issued in accordance with 1.6038D-8(f)(2). In 2019, the US Government secured its first FATCA criminal victory in Baron.
Reasonable Cause
As with many different types of international penalties that can be assessed against the Taxpayer, if the Taxpayer is able to show that the failure was due to reasonable cause and not willful neglect, then no penalty shall be issued. Since reasonable cause is based on several factors in accordance with applying the “totality of the circumstance” test, it will be harder to convince some IRS agents/examiners of reasonable cause than others, and Taxpayers may prefer to submit to the Streamlined Procedures instead.
CP15 Notice
If Taxpayers are penalized, they will usually receive notice by way of a CP15 notice. Taxpayers only have a limited time to protest at the IRS level (usually 30 days), so it is important for Taxpayers to stay cognizant of the notice date of the letter in order to timely protest and show reasonable cause.
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