What is the penalty for not filing Form 8938?

Section 6038D(d)(1) imposes $10,000 for each taxable year a required Form 8938 is not filed complete and correct by the due date, including extensions. If the failure continues more than 90 days after the IRS mails a notice, an additional $10,000 accrues for each 30-day period or fraction of a period, capped at $50,000 for each such failure. The maximum for one year is therefore $60,000.

How does the Form 8938 continuation penalty period work?

The 90-day period runs from the day the IRS mails the notice of failure, not the day you receive or open it. Once that period expires, $10,000 attaches for each subsequent 30-day period, and section 6038D(d)(2) charges a fraction of a period as a full period, so there is no proration. Five completed periods reach the $50,000 statutory maximum for that failure.

Can Form 8938 penalties be abated for reasonable cause?

Yes. Section 6038D(g) provides that no penalty applies to a failure shown to be due to reasonable cause and not willful neglect. Regulation 1.6038D-8(e) requires the filer to affirmatively show the supporting facts, decided case by case on all pertinent facts and circumstances. IRM 8.11.5 confirms reasonable cause relief is available, but notes the First Time Abate administrative waiver is generally not applicable to these international penalties.

Does a streamlined filing submission remove Form 8938 penalties?

IRS.gov states that taxpayers eligible for the Streamlined Foreign Offshore Procedures who comply fully will not be subject to information return penalties, accuracy-related penalties, failure-to-file and failure-to-pay penalties, or FBAR penalties. However, previously assessed penalties for those years will not be abated, and eligibility is lost once the IRS has initiated a civil examination of any taxable year, whatever its subject matter.

Form 8938 Penalties Under Section 6038D

Q: Does the 40 percent accuracy-related penalty apply as well?

It can. Section 6662(a) sets the ordinary accuracy-related penalty at 20 percent, and section 6662(j) substitutes 40 percent for any portion of an understatement attributable to a transaction involving an undisclosed foreign financial asset. Section 6662(j)(2) reaches assets that should have been disclosed under section 6038D. The non-filing of Form 8938 is therefore itself the trigger doubling the rate on any related underpayment.

Q: How long does the IRS have to assess tax if Form 8938 was never filed?

Section 6501(c)(8)(A) provides that the assessment period does not expire before three years after the date the IRS is furnished the required information, and it applies to any tax with respect to the return to which the information relates, not just the omitted asset. Section 6501(c)(8)(B) narrows that to the related items only where the failure was due to reasonable cause and not willful neglect.

Form 8938 penalties begin at $10,000 for each taxable year in which a required Form 8938 is not filed complete and correct by the due date, and they do not stop there. Once the IRS mails a notice of the failure and 90 days pass without the form being filed, a continuation penalty of $10,000 accrues for each 30-day period, or fraction of a period, during which the failure continues, capped at an additional $50,000 for each such failure. The authority is Internal Revenue Code section 6038D, implemented by Treasury regulation 26 CFR 1.6038D-8. For a US citizen resident in the UK holding UK bank accounts, ISAs, brokerage accounts, OEICs or shares in a private limited company, the practical ceiling on a single unfiled year is therefore $60,000, before the separate accuracy-related penalty and before any FBAR exposure is considered.

Two features of section 6038D make it more dangerous than most information reporting provisions. The penalty is not tied to tax due, so a UK-resident filer who owes nothing to the IRS because of foreign tax credits or the foreign earned income exclusion can still face the full charge. And the failure itself extends the assessment period under section 6501(c)(8), which means a year that looked closed can be reopened, in many cases for the entire return rather than the single unreported UK asset. This is a compliance and return preparation problem, and it is solved on paper, in the right order.

What are the Form 8938 penalties under section 6038D?

Section 6038D(d)(1) imposes a penalty of $10,000 where a specified person fails to furnish the required information about specified foreign financial assets for any taxable year. The IRS instructions to Form 8938 on IRS.gov put it plainly: 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. Note the phrase complete and correct. A form that is filed on time but omits a UK holding, or that reports an account without the required identifying detail, is exposed to the same charge as a form that was never filed at all.

The penalty operates per taxable year, per return. Regulation 1.6038D-8(b) and the Form 8938 instructions confirm that where a married couple files a joint income tax return, the failure-to-file penalties apply as if the two spouses were a single person, and liability for all penalties is joint and several. That is a meaningful point for high-net-worth couples where only one spouse is a US person by citizenship but the joint return brings both into the same penalty exposure. It also means a couple cannot double the number of penalties by filing jointly, but neither spouse can distance themselves from the assessment.

Initial penalty: $10,000 for each taxable year the required Form 8938 is not filed complete and correct.
Continuation penalty: $10,000 for each 30-day period, or fraction of a period, the failure continues after the 90-day period following the IRS notice expires.
Maximum continuation penalty: $50,000 for each such failure, so up to $60,000 in total for one year.
Joint filers: penalties apply as though the spouses were a single person, with joint and several liability.
Reasonable cause: no penalty where the failure is shown to be due to reasonable cause and not to willful neglect.

Reporting thresholds matter to whether the penalty can arise at all. IRS.gov sets the Form 8938 thresholds for a taxpayer living abroad at more than $200,000 in specified foreign financial assets on the last day of the tax year, or more than $300,000 at any point during the year, for an unmarried filer, and more than $400,000 or $600,000 respectively for a married couple filing jointly. Those figures are far higher than the domestic thresholds of $50,000 and $75,000, which is precisely why UK-resident filers with substantial portfolios often assume, incorrectly, that they are outside the regime.

How does the continuation penalty work after the IRS mails a notice?

The continuation penalty is the part of section 6038D that most filers misunderstand, and it is mechanical rather than discretionary. Section 6038D(d)(2) provides that if any failure continues for more than 90 days after the day on which the Secretary mails a notice of the failure to the specified person, the person shall pay an additional $10,000 for each 30-day period, or fraction of a period, during which the failure continues after that 90-day period has expired. The clock therefore has two stages: a 90-day grace window measured from the mailing of the notice, and then rolling 30-day periods.

The words fraction thereof are doing real work. A failure that persists for a single day into a new 30-day period attracts the full $10,000 for that period. There is no proration. This is why the arrival of a section 6038D notice at a UK address is an immediate filing deadline, not correspondence to be routed through the usual cycle. Post to a UK address, changes of address after a move within London or out to the counties, and the general friction of cross-border correspondence all consume the 90 days without the filer knowing the clock has started.

Because the notice is what starts the continuation clock, it also fixes the moment at which the options narrow. Before the notice, a delinquent Form 8938 can generally be brought forward as part of a wider compliance filing. After the notice, the only reliable way to stop the additional penalty accruing is to file a correct and complete Form 8938 for the year in question. Correspondence explaining that the form is being prepared does not stop the periods running, and the IRS internal guidance in IRM 8.11.5 on IRS.gov does not treat a promise to file as compliance.

Is there a cap on Form 8938 penalties?

Yes, but the cap applies to the continuation penalty rather than to the total. Section 6038D(d)(2) limits the additional penalty to $50,000 for each such failure. The IRS page on international information reporting penalties states the maximum continuation penalty as $50,000, and the Form 8938 instructions describe the maximum additional penalty for a continuing failure to file as $50,000. Adding the initial $10,000 produces the widely quoted $60,000 ceiling. At $10,000 per 30-day period, the continuation cap is reached after five full periods, so roughly eight months after the notice is mailed the exposure for that year is fixed.

The critical qualification is that the cap is per failure, and each taxable year is a separate failure. A filer with four unfiled years faces four separate initial penalties and, if notices are issued for each year, four separate continuation caps. The $60,000 figure is not a ceiling on section 6038D exposure across a compliance history; it is a ceiling on one year. For a high-net-worth investor with a decade of unreported UK holdings, the aggregate arithmetic is what drives the decision on how to come into compliance, and it is why sequencing matters more than any single argument on the merits.

What if you cannot document the value of your UK financial assets?

Section 6038D(e) contains a presumption that shifts the burden decisively toward the IRS. If the Secretary determines that an individual holds one or more specified foreign financial assets and the individual does not provide sufficient information to demonstrate the aggregate value of those assets, the aggregate value is presumed to exceed the reporting threshold. Regulation 1.6038D-8(d) carries the same rule. In practical terms, the IRS does not have to prove that your UK portfolio crossed $200,000 or $400,000. It has to establish that you held specified foreign financial assets and that you have not shown their aggregate value.

For US persons in the UK, the IRS is rarely working from nothing. Under the UK to US intergovernmental agreement implementing FATCA, described on GOV.UK, UK financial institutions must identify accounts held by US persons and report them annually to HMRC, and HMRC exchanges that information with the IRS. GOV.UK guidance on automatic exchange of information sets out the same architecture for financial institutions. So the determination that a filer holds UK accounts is often already evidenced. What is usually missing is valuation history, and that gap is what the presumption fills against the filer.

Worked example: a UK-resident filer receiving a section 6038D notice

This is an illustrative example, not a description of any real filer. Assume a US citizen who has lived in London for eleven years, working in an investment bank, holds a UK current account, a stocks and shares ISA, a UK brokerage account and a minority shareholding in a UK private limited company through which consultancy income is taken. Aggregate value comfortably exceeds the abroad thresholds. Form 1040 has been filed each year through a UK-based preparer, but Form 8938 has never been attached because the preparer treated the UK accounts as covered by the FBAR filing alone.

The IRS mails a notice of failure to file Form 8938 for one year to the London address. Working purely from the verified statutory mechanics, the sequence runs as follows.

The initial $10,000 penalty for that year is already in issue when the notice is mailed.
The 90-day period runs from the day the notice is mailed, not the day it is opened in London.
If the form is filed within those 90 days, no continuation period ever opens.
If the form is still outstanding on day 91, the first 30-day period begins and $10,000 attaches to it in full.
Five completed 30-day periods bring the additional penalty to the $50,000 statutory maximum for that failure.
Each further unfiled year is a separate failure with its own initial penalty and its own continuation cap.

The instructive point is not the arithmetic but where the leverage sits. Almost all of the avoidable exposure in this example lies inside the 90-day window, and almost all of the argument about whether any penalty should stand at all lies in the reasonable cause showing. A filer who spends the 90 days building a narrative and files on day 140 has both the continuation periods and the reasonable cause question to fight. A filer who files on day 40 and submits the narrative separately has only the second.

How the 40 percent accuracy-related penalty under section 6662(j) stacks on top

Section 6038D is an information reporting provision, so it operates without regard to tax due. Where tax was in fact underpaid, a second and often larger penalty comes into play. Section 6662(a) sets the ordinary accuracy-related penalty at 20 percent of the portion of the underpayment to which the section applies. Section 6662(j) substitutes 40 percent for any portion of an understatement attributable to a transaction involving an undisclosed foreign financial asset. The Form 8938 instructions state it directly: if you underpay your tax as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40 percent of that underpayment.

The definition of undisclosed foreign financial asset in section 6662(j)(2) reaches assets required to be disclosed under sections 6038, 6038B, 6038D, 6046A or 6048 where the required information was not provided. So the non-filing of Form 8938 is itself the trigger that doubles the accuracy-related rate. For a UK-based investor with dividend income on UK-listed holdings, gains on OEIC disposals, or an accumulating fund position where the US and UK treatment diverge, the tax underpayment can be substantial and the 40 percent rate applies to it, entirely separately from the section 6038D charge on the form.

Why section 6501(c)(8) can hold an otherwise closed UK year open for the whole return

This is the structural consequence most guides skip, and for high-net-worth filers it is usually the largest single exposure. Section 6501(c)(8)(A) provides that where information required under a listed provision is not furnished, the time for assessment of any tax with respect to any tax return, event or period to which such information relates shall not expire before the date which is three years after the date on which the Secretary is furnished the required information. Section 6038D is one of the listed provisions. The Form 8938 instructions describe the same effect: the statute stays open until three years after the date on which you file Form 8938.

Read the words carefully. The extension is not confined to the unreported UK asset. It reaches any tax with respect to the return to which the information relates. A 2017 return that would ordinarily have closed long ago can remain open in its entirety because one UK brokerage account was omitted from Form 8938. Everything else on that return travels with it, including UK employment income and bonus treatment, carried interest characterisation, company distributions, foreign tax credit computations and the residence and sourcing positions taken at the time. The single omission converts a closed year into a fully open one.

Section 6501(c)(8)(B) is the relief valve, and it is the second reason reasonable cause matters. If the failure to furnish the information is due to reasonable cause and not willful neglect, subparagraph (A) applies only to the item or items related to the failure. A successful reasonable cause showing therefore does two jobs at once: it defeats the section 6038D penalty and it collapses the statute extension from the whole return down to the omitted asset. Separately, the Form 8938 instructions note the six-year assessment period where gross income attributable to foreign financial assets in excess of $5,000 is omitted from the return.

What counts as reasonable cause for Form 8938 penalties?

Section 6038D(g) provides that no penalty shall be imposed on any failure which is shown to be due to reasonable cause and not due to willful neglect. Regulation 1.6038D-8(e) makes clear that the filer must affirmatively show the facts supporting the claim and that the determination is made on a case-by-case basis taking into account all pertinent facts and circumstances. There is no safe harbour and no checklist in the regulation. What exists is a standard, and it is met or missed on the quality of the written record the filer puts in front of the examiner.

Because the test is facts and circumstances, the statement has to be built from documents rather than assertions. The elements that carry weight in a UK fact pattern are ordinarily these.

A dated chronology of when each UK asset was acquired, and what the filer was told about it at the time.
The engagement history with each return preparer, including the scope of what was asked and what was disclosed to them.
Contemporaneous evidence, not reconstruction, that the filer disclosed the UK holdings to whoever prepared the return.
The reason the filer believed no Form 8938 was due, tied to a specific and identifiable misunderstanding rather than general unawareness.
What the filer did once the position became known, and how quickly, because remediation speed is part of the circumstances.
Consistency with every other filing the IRS can see, including FBARs, prior year returns and any HMRC-reported data.

Two procedural points from IRM 8.11.5 on IRS.gov shape expectations. The First Time Abate administrative waiver is generally not applicable to the international penalties covered by that section of the manual, so the routine relief many US filers rely on is not available here. Reasonable cause relief, however, is expressly available for the section 6038D penalty, and Appeals currently provides a prepayment, post-assessment appeal process for assessed international penalties. That combination means the written showing is the mechanism, and there is a route to review if the examiner rejects it.

Why foreign law prohibiting disclosure is never reasonable cause

Both the regulation and the Form 8938 instructions close off one argument in express terms. The fact that a foreign jurisdiction would impose a civil or criminal penalty on you if you disclose the required information is not reasonable cause. IRM 8.11.5 states the same rule from the examiner side: an individual will not have reasonable cause merely because a foreign jurisdiction would impose a penalty on any person for disclosing the required information. This is a statutory exclusion, not a weighting factor, and it cannot be recovered by framing it as a commercial or contractual constraint instead of a legal one.

In UK fact patterns this rarely arises as a genuine legal prohibition, because the UK regime runs in the opposite direction. Under the FATCA arrangements described on GOV.UK, UK financial institutions are required to report US account holders to HMRC for onward exchange with the IRS. The practical relevance of the exclusion is different: arguments built on confidentiality obligations, shareholder agreements in a private company, or professional secrecy in a fund structure will be tested against this rule and will generally fail. The reasonable cause narrative needs to rest on the knowledge and conduct of the filer instead.

How the continuation penalty interacts with a streamlined filing submission

For UK-resident US citizens, the Streamlined Foreign Offshore Procedures are usually the route considered first, and the penalty relief is broad. IRS.gov states that eligible taxpayers who comply fully will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. Information return penalties includes the section 6038D charge, and accuracy-related penalties includes the 40 percent rate under section 6662(j). The submission requires the most recent three years of returns for which the due date has passed and six years of FBARs, plus satisfaction of the non-residency requirement, which for a US citizen turns on absence of a US abode and 330 full days physically outside the United States in one or more of the relevant years.

The interaction with the continuation penalty is where filers get caught, and it turns on two sentences on IRS.gov. First, if the IRS has initiated a civil examination of the returns of a taxpayer for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer is not eligible to use the streamlined procedures. Second, any previously assessed penalties with respect to those years will not be abated. A section 6038D notice is a signal that the years are already in the system, and each 30-day period that passes may be adding a penalty that a later streamlined filing cannot reach.

The sequencing consequence is specific. Where a notice has been issued, filing the delinquent Form 8938 to stop the continuation periods running is a different decision from choosing a compliance route for the whole history, and it usually has to happen faster. A streamlined submission covering three years also does not, by itself, resolve a year outside that window that is being held open by section 6501(c)(8). The compliance plan has to address the noticed year, the streamlined years and any older years the statute extension keeps alive, and it has to do so in an order that stops the meter before it optimises the narrative.

Sequencing a reasonable cause statement when the same UK asset also drives FBAR exposure

A UK bank or brokerage account almost always sits in two regimes at once. IRS.gov is explicit that Form 8938 does not relieve filers of FBAR filing requirements, and that different rules, definitions and reporting requirements apply to each. That means a single UK account can generate a section 6038D failure and a separate FinCEN Form 114 failure from the same underlying facts. The two regimes are administered under different authority, with different standards, and a filer producing one written explanation for both is writing into two records simultaneously.

The drafting risk runs in one direction. A reasonable cause statement for section 6038D purposes needs to explain why the filer did not appreciate a reporting obligation. Phrasing that concedes awareness of the existence of the account and of a general US reporting regime, while explaining the specific Form 8938 gap, can read very differently against the FBAR standard. The practical discipline is to establish the facts once, in documents, then draft each submission against the standard it will actually be measured by, and to prepare both before filing either so that nothing in the first constrains the second.

Which UK assets most often generate section 6038D exposure?

Section 6038D reaches specified foreign financial assets, which is broader than foreign accounts. For high-net-worth US persons in the UK, exposure is rarely created by the obvious current account. It is created by holdings that feel domestic to a long-term UK resident and therefore never reach the return preparer at all. These are the recurring sources.

UK bank and building society accounts, including accounts opened decades ago and largely dormant.
Cash ISAs and stocks and shares ISAs, which carry no UK reporting consequence and are therefore easy to overlook.
UK brokerage and investment platform accounts holding listed shares, gilts and funds.
Shares in a UK private limited company, including founder shareholdings and personal service company shares.
Partnership and LLP interests, and carried interest entitlements held by fund and banking professionals.
UK life assurance policies with a cash surrender value.
Unlisted shares, options and growth shares held directly rather than through a US account.

The common thread is that none of these produce a UK filing prompt. A UK employee with an ISA and a company shareholding may have no UK self assessment complexity at all, which removes the annual moment at which the US position would otherwise be reviewed. That is why the exposure accumulates quietly across years and then surfaces all at once, either through an IRS notice or when the filer engages a cross-border preparer for the first time.

A preparation checklist to close down section 6038D exposure

Closing section 6038D exposure is a document exercise before it is anything else. The order below reflects where the money is actually saved: stopping accrual first, then fixing the statute position, then arguing the merits.

Date-stamp any IRS notice on receipt and calculate the 90-day expiry from the mailing date immediately.
File a complete and correct Form 8938 for any noticed year inside the 90-day window, before any narrative is finalised.
Build a full asset inventory across every year in question, including assets that closed or were sold, and value each at the required measurement dates.
Identify which years remain open under section 6501(c)(8) and confirm whether the exposure is the whole return or only the omitted item.
Assess streamlined filing eligibility against the non-residency requirement and confirm no civil examination has been initiated for any year.
Prepare the reasonable cause showing from contemporaneous documents, addressing preparer engagement history and remediation speed.
Reconcile the Form 8938 position with FBAR filings and with data UK institutions have reported to HMRC, so the records are consistent.
Draft any FBAR submission separately from the section 6038D reasonable cause statement, and complete both before filing either.

Form 8938 penalties are severe but they are also highly structured, and the structure is where the relief lives. The initial charge is fixed, the continuation charge is capped, the accuracy-related rate turns on disclosure, and both the penalty and the scope of the statute extension bend to a properly evidenced reasonable cause showing. The filers who come out of a section 6038D notice well are the ones who treat the 90 days as a filing deadline and the narrative as a separate, later, and much more carefully prepared piece of work.