FATCA and Form 8938: Reporting Foreign Financial Assets to the IRS

What FATCA actually did

The Foreign Account Tax Compliance Act, passed in 2010, works from both ends. On one end, it requires foreign financial institutions — including effectively every UK bank, broker and investment platform — to identify their US customers and report their accounts to the IRS, or face withholding on their US income. On the other end, it requires those US customers to report their own foreign financial assets on Form 8938, attached to their annual tax return.

The result is a matching exercise. Your bank tells the IRS about your accounts; Form 8938 is you telling the IRS the same thing. Gaps between the two feeds are exactly what the system is designed to surface.

Who must file: the thresholds

You file Form 8938 if the total value of your specified foreign financial assets exceeds the threshold for your filing status and where you live. The IRS sets materially higher thresholds for taxpayers whose home is genuinely abroad:

"Living abroad" for this purpose broadly tracks the tests used for the foreign earned income exclusion — a tax home abroad plus bona fide residence or sufficient days outside the US. Expats who qualify get the higher tiers; a US-resident taxpayer with UK accounts does not.

Specified foreign financial assets go beyond bank accounts: investment and brokerage accounts, foreign stocks and bonds held directly, interests in foreign pension plans and deferred compensation, and interests in some foreign entities and contracts. Direct ownership of foreign real estate is not itself reportable, though an entity holding it may be.

Form 8938 versus the FBAR

The two reports are cousins, not duplicates, and filing one never satisfies the other:

• Different agencies. Form 8938 goes to the IRS with your Form 1040; the FBAR goes to FinCEN, separately and electronically.
• Different thresholds. The FBAR triggers at an aggregate $10,000; Form 8938 starts at $50,000 and rises to $600,000 depending on status and residence.
• Different scope. The FBAR covers financial accounts, including those you merely have signature authority over. Form 8938 covers a wider class of assets but generally only those you own.

A typical American in the UK with ordinary savings files the FBAR every year and Form 8938 only in years when balances are high enough. An expat with substantial investments or pension values usually files both, listing many of the same accounts twice.

Penalties and the statute of limitations

The base penalty for failing to file Form 8938 is $10,000, with additional penalties of up to $50,000 if the failure continues after IRS notification. Understatements of tax attributable to undisclosed foreign assets attract a heightened 40 percent accuracy-related penalty.

The quieter consequence matters just as much: a missing or incomplete Form 8938 can hold open the statute of limitations on your entire return, leaving every item on it open to examination years longer than normal. Reasonable-cause relief is available, but it has to be argued, not assumed.

What this means in practice

For most Americans abroad, FATCA has two day-to-day consequences. First, your UK bank already reports you: the letters asking you to confirm your US status are FATCA compliance, and refusing to engage can lead to accounts being restricted or closed. Second, Form 8938 becomes a routine annex to your return in any year your assets cross the threshold — tedious, but mechanical once your account list is maintained properly.

The real risk sits with people who do not know they are in the system: accidental Americans flagged by a US birthplace, and long-term expats who stopped filing years ago. The data now flows automatically. The only question is whether your filings match it.