How the IRS Defines a “Specified Foreign Financial Asset” Under FATCA Requirements

The IRS reports that significant U.S.-related income goes unreported in offshore accounts each year. Because of this, FATCA (Foreign Account Tax Compliance Act) plays a major role in identifying foreign assets held by U.S. taxpayers. A key part of these rules is the definition of a “Specified Foreign Financial Asset.”

Many individuals, especially those working with a foreign owned LLC filing tax professional, find this term confusing. Understanding this definition is essential, and clear guidance supported by foreign tax compliance expertise helps taxpayers report the right items on Form 8938.

Why the Term Exists Under FATCA

FATCA requires certain U.S. taxpayers to file Form 8938 when their foreign assets exceed specific limits. The form covers financial holdings located outside the United States. To know what belongs on the form, the IRS created the category “Specified Foreign Financial Asset.”

The term includes two main groups:

1. Foreign financial accounts

2. Foreign assets not kept in an account

Both groups carry reporting duties if the total value crosses the required thresholds for the taxpayer’s filing status.

Foreign Financial Accounts

This group includes accounts held at financial institutions outside the U.S. The IRS treats these accounts as reportable when the taxpayer owns them, controls them, or has signature authority. Examples include:

1. Checking or savings accounts

2. Investment and brokerage accounts

3. Certain foreign pension or retirement accounts

4. Some cash-value insurance or annuity contracts

These accounts may need to be listed on Form 8938 even if they generate no income during the year. While some of these accounts also appear on the FBAR filing, FATCA rules are broader. This is why taxpayers who coordinate with a foreign owned LLC filing tax professional must understand that FBAR and Form 8938 use separate definitions.

Foreign Assets Not Held in an Account

This category often creates confusion because the items do not sit inside a bank or brokerage account. Still, the IRS treats them as foreign financial assets for FATCA purposes. These include:

1. Stock issued by a foreign company when not held through a U.S. broker

2. Bonds or notes issued by a foreign entity

3. Ownership interests in foreign corporations, partnerships, or foreign LLCs

4. Interests in foreign trusts or estates

5. Foreign pension plans that are not structured like standard accounts

6. Foreign contracts, options, or derivatives

If someone directly owns shares in a foreign corporation, those shares must typically be reported. The same applies to individuals with ownership interests in foreign partnerships or limited liability companies. Even when these items produce no income, they remain reportable under FATCA rules.

What FATCA Does Not Include

Some items are not considered “Specified Foreign Financial Assets.” These include:

1. Direct ownership of foreign real estate

2. Physical currency kept outside a financial account

3. Artwork, vehicles, jewelry, or other personal property located abroad

However, foreign real estate becomes indirectly reportable if it is owned through a foreign corporation or partnership. In that situation, the asset being reported is the ownership interest in the entity, not the property itself.

Why Correct Classification Matters

Failing to report or misclassifying foreign assets can lead to serious IRS penalties. Many taxpayers struggle with the rules, especially when multiple asset types are involved. Even non-income-producing assets may need disclosure under FATCA, which tracks financial value held abroad.

Relying on foreign tax compliance expertise helps ensure accurate valuation, correct ownership reporting, and proper filing, reducing the risk of errors and keeping taxpayers compliant.

Get It Right: Avoid FATCA Penalties

A “Specified Foreign Financial Asset” isn’t just a bank account—it includes foreign securities, ownership stakes, and certain contracts held abroad. FATCA kicks in once these assets pass IRS thresholds, so knowing what counts is key to filing Form 8938 correctly.

If navigating FATCA feels overwhelming, Anu Agrawal CPA can simplify it. With deep experience in foreign tax reporting, they help you identify reportable assets, get the filings right, and stay on the IRS’s good side. Expert guidance turns complex rules into a smooth, worry-free process.

Still Got Questions? Here Are The Answers

1. Which foreign accounts or investments must be reported on Form 8938?

Form 8938 requires reporting foreign financial accounts, foreign securities, ownership interests in foreign corporations or partnerships, and certain contracts held outside the U.S. Even non-income-producing assets may need disclosure if they exceed IRS thresholds.

2. How does foreign tax compliance expertise reduce the risk of IRS penalties?

Experts in foreign tax compliance expertise help identify reportable assets, classify them correctly, and ensure accurate filing. This reduces mistakes, avoids missing disclosures, and keeps taxpayers aligned with IRS FATCA rules.

3. Are all foreign-owned assets taxable under U.S. law?

Not all foreign assets generate U.S. tax. Some may require reporting under FATCA without producing taxable income. The IRS focuses on value and ownership, not only income, when determining reporting requirements.

4. What happens if I fail to report a foreign financial asset?

Failure to report can result in significant penalties, interest, and potential IRS audits. Even unintentional omissions may trigger fines, making accurate FATCA disclosure essential.

5. Can a foreign owned LLC filing tax professional identify all reportable assets?

Yes, a foreign owned LLC filing tax professional can review your holdings, classify assets, and ensure all reportable items are included on Form 8938. Their expertise helps prevent errors and ensures compliance with IRS rules.