Form 8938 Penalties and the Open Statute: What Happens When the Form Is Missing

Form 8938 is an information form. It does not change your tax. So people treat it like paperwork. That is a mistake, because the Internal Revenue Code attaches three separate consequences to a missing or incomplete Form 8938, and the least obvious one is the most dangerous.

Consequence one: the $10,000 penalty

Under 26 U.S.C. 6038D(d)(1), an individual who fails to furnish the required information at the time and in the manner required pays a penalty of $10,000.

If the failure continues for more than 90 days after the IRS mails a notice of the failure, section 6038D(d)(2) adds $10,000 for each 30-day period, or fraction of one, that the failure continues after the 90 days. The additional penalty is capped at $50,000. The IRS comparison chart describes the combined maximum as $60,000.

The Form 8938 instructions add a point for married couples: if you file a joint return, the failure-to-file penalties apply as if you and your spouse were one person, and your liability is joint and several.

Unlike the FBAR penalty amounts, these dollar figures are set in the statute and are not inflation adjusted.

The presumption you do not want

Section 6038D(e) contains a presumption. If the IRS determines that you have an interest in one or more specified foreign financial assets and you do not provide enough information to show their aggregate value, the value is treated as exceeding the reporting threshold for purposes of the penalties. In other words, if you will not tell the IRS what the assets were worth, the law assumes you were over the line.

Consequence two: the 40 percent accuracy-related penalty

The ordinary accuracy-related penalty under 26 U.S.C. 6662 is 20 percent of the underpayment. Section 6662(j) creates a special category, the undisclosed foreign financial asset understatement. It covers the portion of an understatement attributable to a transaction involving an undisclosed foreign financial asset, meaning an asset for which information was required under sections 6038, 6038B, 6038D, 6046A or 6048 and was not provided. For that portion, the rate is 40 percent instead of 20.

The Form 8938 instructions give examples: you did not report foreign shares on Form 8938 and did not report the dividends; you did not report foreign shares and sold them at a gain you did not report; you did not report a foreign pension and did not report a taxable distribution from it.

Notice that the 40 percent penalty only applies when there is an underpayment. If all the income was reported and only the form was missing, the 40 percent penalty has nothing to attach to.

Consequence three: the statute of limitations stays open

This is the one that keeps people up at night, or should. Normally the IRS has three years after you file to assess additional tax. Section 6501(c)(8) changes that for international information returns. If information required under sections 1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A or 6048 is not furnished, the time to assess any tax with respect to the return, event or period does not expire before three years after the date the information is furnished.

Read that again. The statute does not say the IRS can assess tax related to the foreign asset. It says the time for assessment of any tax with respect to the return stays open. A missing Form 8938 can keep your entire return open, indefinitely, until three years after you finally file the information.

There is one important limitation. Under section 6501(c)(8)(B), if the failure to furnish the information was due to reasonable cause and not willful neglect, the extended period applies only to the item or items related to the failure. Reasonable cause shrinks the open door to the foreign items.

The Form 8938 instructions summarize the effect: if you fail to file Form 8938 or fail to report an asset, the statute of limitations may remain open for all or part of your return until three years after you file the form.

The six-year rule for omitted foreign income

There is also a separate extended period. Under 26 U.S.C. 6501(e)(1)(A)(ii), if you omit from gross income more than $5,000 attributable to assets for which information is required under section 6038D, the IRS can assess tax within six years after the return was filed. The statute applies this without regard to the dollar threshold, so it can reach assets that were below the Form 8938 filing threshold.

How the pieces stack: an example

Consider a hypothetical. A U.S. resident owns a foreign brokerage account worth $300,000. For three years she does not file Form 8938, and she does not report $6,000 of dividends each year. Here is what the Code puts on the table for each year:

• A $10,000 failure-to-file penalty under section 6038D(d)(1), plus continuing penalties if she ignores an IRS notice for more than 90 days.
• Tax and interest on the $6,000 of unreported dividends, plus a 40 percent accuracy-related penalty on the resulting underpayment under section 6662(j).
• A six-year assessment period under section 6501(e)(1)(A)(ii), because she omitted more than $5,000 attributable to a section 6038D asset.
• An assessment period that does not close until three years after the Form 8938 information is finally furnished, under section 6501(c)(8).

And the account almost certainly required an FBAR too, which brings Title 31 penalties into the conversation separately. None of these are automatic maximums, and reasonable cause can take some of them off the table. But you can see why a missing information return is not just paperwork.

Reasonable cause

Section 6038D(g) bars the penalty if the failure was due to reasonable cause and not willful neglect. The Form 8938 instructions say you must affirmatively show the facts supporting reasonable cause, and the determination is made case by case.

One argument is off the table by statute. Section 6038D(g) states that the fact that a foreign jurisdiction would impose a civil or criminal penalty for disclosing the required information is not reasonable cause. Foreign bank secrecy laws will not save you.

A short checklist

• Pull every return you filed in the last six years and check whether Form 8938 was attached when your assets were over the applicable threshold.
• Check whether the income from each foreign asset made it onto the return, including dividends, interest, gains and pension distributions.
• Identify any other international information returns that may be missing, such as Forms 3520, 5471 or 8621, because they trigger the same open-statute rule.
• Write down why the forms were missed, while the facts are fresh. Reasonable cause has to be shown with facts.

Fixing a missing Form 8938

Before choosing a path, confirm the basics: which years required a Form 8938 under the threshold that applied to you, whether you qualified as living abroad in each of those years, and whether any of the assets were already reported on Forms 3520, 5471, 8621 or 8865. The answers often shrink the problem, and sometimes they show there was no Form 8938 requirement at all for a given year.

How you fix it depends on what else is wrong. If the only problem is missing information returns and all the income was reported, the IRS offers delinquent international information return procedures, which involve filing the missing forms with an amended return and, if you have one, a reasonable cause statement. If income was also left off, the streamlined procedures may fit if your conduct was non-willful.

The worst approach is the quiet one: slipping Form 8938 into future returns and hoping the past stays buried. With section 6501(c)(8) in the picture, the past does not get buried. It stays open. See why quiet disclosures backfire.

If a missing Form 8938 is holding one or more of your returns open, let's talk about closing them.