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Apply international-reporting penalties and distinguish FBAR from Form 8938
Foreign-reporting penalties are steep, and each form has its own. This lesson puts the penalty schedules side by side and then explains the difference clients confuse most: the FBAR account report versus the Form 8938 asset statement, which share facts but share nothing else.
Account penalties start with the FBAR: up to $10,000 per violation for a failure, excused where reasonable cause joins proper reporting of the balance. Willfulness changes the scale to the greater of $100,000 or half the balance at violation, with criminal penalties possible on top. The asset statement has its own penalties: a missing or incorrect Form 8938 draws $10,000, and an underpayment connected to an undisclosed specified asset draws 40%, with unreported foreign-company distributions and unreported sale gain as the named cases. Where the Form 8938 failure continues past 90 days after IRS notice, each 30-day period of continued failure may add $10,000 up to $50,000 additional. No Form 8938 penalty is imposed where the failure is due to reasonable cause and not willful neglect, with affirmative showing required. Because the duties are independent, one set of facts can draw both penalties.
Ben non-willfully misses a required FBAR on a $40,000 account with no reasonable cause. He faces up to $10,000. Had his failure been willful, the civil measure would be the greater of $100,000 or half the $40,000 balance, hence $100,000, with criminal exposure separate. Had Ben also skipped a required Form 8938 and omitted $6,000 of dividends from the same shares, the $10,000 form penalty and the 40% underpayment penalty would join the account penalty rather than replacing it.
FBAR Line Item Instructions Page 22
A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed.View on the source
FBAR Line Item Instructions Page 22
A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Willful violations may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.View on the source
Form 8938 Instructions Page 11
If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.View on the source
Form 8938 Instructions Page 11
Presumption of Maximum Value specified foreign financial asset, you may have to pay a penalty equal to 40% of that underpayment.View on the source
Form 8938 Instructions Page 11
Examples of underpayments due to transactions involving an undisclosed specified foreign financial asset include the following. • You do not report ownership of shares in a foreign corporation on Form 8938 and you received taxable distributions from the company that you did not report on your income tax • You do not report ownership of shares in a foreign company on Form 8938 and you sold the shares in the company for a gain and did not report the gain on your income tax return.View on the source
Form 8938 Instructions Page 11
If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.View on the source
Form 8938 Instructions Page 11
No penalty will be imposed if you fail to file Form 8938 or to disclose one or more specified foreign financial assets on Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support a reasonable cause claim.View on the source
A U.S. person willfully fails to report a foreign account with a $300,000 balance on a required FBAR. What civil penalty may apply for the violation?
Entity and trust penalties scale with the value not reported. Form 5471 section 6038(a) failures start at $10,000 for each annual accounting period of each foreign corporation, then continue at $10,000 for each 30-day period past 90 days after IRS notice, capped at $50,000 additional, with criminal provisions behind the civil schedule. Form 8865 pairs the same $10,000 base and $10,000-per-period, $50,000-maximum additional continuation per partnership with a 10% cut to creditable foreign taxes plus 5% for each 3-month continuation period after 90 days past notice. Form 3520 starts at the greater of $10,000 or 35% of the property transferred to the trust or distributed from it, and 5% of the grantor-trust assets where the trust's own filings fail, with additional penalties where noncompliance continues more than 90 days after IRS notice and no penalties where the failure is due to reasonable cause and not willful neglect. The penalty follows the form that was owed, so a taxpayer missing two forms pays on both schedules.
Cara fails to file a required Form 8865 for one partnership and ignores the notice for 30 days past the 90-day window. She owes the $10,000 base plus one $10,000 continuation period amount, $20,000 in all, alongside the credit reduction. Had she instead failed to report a $100,000 foreign-trust distribution on Form 3520, the starting measure would be 35% of the $100,000, or $35,000, since that exceeds $10,000.
Form 5471 Instructions Page 9
A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the information required by section 6038(a) within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.View on the source
Form 5471 Instructions Page 9
Criminal penalties. Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046.View on the source
Form 8865 Instructions Page 6
A $10,000 penalty is imposed for each tax year of each foreign partnership for failure to furnish the required information within the time prescribed. If the information isn’t filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign partnership) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.View on the source
Form 8865 Instructions Page 6
Any person who fails to furnish all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901 and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired.View on the source
Form 3520 Instructions Page 4
the initial penalty is equal to the greater of $10,000 or the following (as applicable). • 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I. • 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III. • 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679), if the foreign trust (a) fails to file a timely Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries; or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c) and the instructions for Part II of this form and Form 3520-A.View on the source
Form 3520 Instructions Page 4
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.View on the source
Form 3520 Instructions Page 4
No penalties will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.View on the source
A U.S. shareholder fails to furnish required Form 5471 information for one foreign corporation for the year. The IRS mails notice of the failure, and the shareholder still does not file for 120 days after the 90-day period expires. What is the section 6038 penalty?
The FBAR and Form 8938 differ in four ways.
| Axis | FBAR (FinCEN Form 114) | Form 8938 |
|---|---|---|
| Recipient | Treasury through FinCEN, filed separately | IRS, attached to the annual return |
| Trigger | $10,000 aggregate at any time | Applicable threshold by filing and residence status |
| Coverage | Financial interest or signature authority over accounts | Interests in specified foreign financial assets |
| Excuse | Reasonable cause plus proper balance reporting | No penalty where failure is due to reasonable cause and not willful neglect, with affirmative showing required |
Filing the asset statement never relieves the account report. Signature authority alone can trigger the FBAR at the $10,000 aggregate line.
Dana holds signature authority over a $90,000 foreign account she does not own and holds $20,000 of foreign stock. The authority alone triggers her FBAR. The $20,000 of stock alone sits below her Form 8938 threshold, so she files the FBAR without the asset form. Filing the asset form later, had her holdings grown, would never have excused the account report she already owed.
Form 8938 Instructions Page 1
Filing Form 8938 does not relieve you of the CAUTION requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if you are otherwise required to file the FBAR.View on the source
Form 8938 Instructions Page 1
Attach Form 8938 to your annual return and file by the due date (including extensions) for that return.View on the source
FBAR Line Item Instructions Page 4
Who Must File an FBAR. A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.View on the source
FBAR Line Item Instructions Page 4
The FBAR must be received by the Department of the Treasury on or before April 15th of the year immediately following the calendar year being reported. FinCEN will grant filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year.View on the source
FBAR Line Item Instructions Page 8
The FBAR must be filed electronically through FinCEN’s BSA E-Filing System.View on the source
Form 8938 Instructions Page 11
No penalty will be imposed if you fail to file Form 8938 or to disclose one or more specified foreign financial assets on Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support a reasonable cause claim.View on the source
An unmarried U.S. citizen living in the United States holds foreign bank accounts whose combined maximum value during the year is $12,000. Her applicable Form 8938 threshold is above $12,000. Which reporting obligation applies?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
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