How (Legally) Moving Money Overseas Can Lead to an IRS Audit

How (Legally) Moving Money Overseas Leads to IRS Audits

How (Legally) Moving Money Overseas Leads to IRS Audits

While it is perfectly legal to move your money offshore, unless you remain tax compliant with your offshore investments, it may result in an IRS audit, fines, and penalties. In recent years, the number of U.S. taxpayers who have come under audit for failing to be compliant with their offshore money has increased significantly — and so taxpayers who are considering moving money offshore should be careful before doing so. Unfortunately, there are many tax attorneys and other individuals purporting to be ‘international tax specialists’ and even ‘board-certified’ when they have no real experience working in offshore matters beyond very basic disclosure cases and are not actually board-certified. Before taxpayers move their money to a foreign jurisdiction to acquire assets and investments, they should be aware of the various hurdles and pitfalls, along with the increased requirements they will have on an annual basis to properly remain in compliance — to minimize the chance of audit or examination.

Did You Get Bad Legal Advice?

One common reason why a taxpayer is under audit for moving their money offshore is that they received bad advice from a U.S. tax professional or U.S. tax lawyer. It is simple to go online and claim to be an expert, and even claim to be a Board-Certified Tax Law Specialist Attorney, when the attorney is neither board-certified nor an expert in international tax.

*If a tax attorney claims to be board-certified, we always recommend that the taxpayer inquire with the State Bar of the jurisdiction where they claim to be board-certified, so that the individual client can confirm the attorney’s status. Receiving (and acting upon) bad advice about going offshore is typically one of the leading catalysts for being audited by the IRS.

Are you FBAR Compliant?

Once the taxpayer has foreign accounts and assets, they will typically have to file the annual FBAR. While the form itself is not overly complicated, there are many nuances as to who has to file the form, which accounts are required to be disclosed, and which additional forms the taxpayer has to file. Failing to file the proper forms can lead to an audit or examination (and penalties).

Are you FATCA Compliant?

For individual investors who are considered US persons for tax purposes, they may also be required to also file an IRS Form 8938 (in addition to the FBAR) to report their foreign accounts and assets. Form 8938 was developed with FATCA, and while the form is similar to the FBAR, there are additional requirements and exceptions for having to file this form as well.

Are You Reporting Your Foreign Income?

From a U.S. tax perspective, the United States taxes individuals on their worldwide income. Therefore, if a US person moves assets and investments offshore and those assets and investments generate income come with the US persons required to report that income even if the money is earned overseas and even if the money is never transferred or repatriated back to the United States – and even if the income is tax free in the foreign jurisdiction.

Did Your Foreign Bank Report You to the IRS?

One final component to keep in mind is that even though taxpayers have specific requirements under the US tax code for reporting their foreign accounts and assets, more than 110 foreign countries and hundreds of thousands of foreign financial institutions have entered into agreements with the United States to proactively report US taxpayers who have foreign accounts and foreign income to the U.S. Government. If a taxpayer has been filing returns and not reporting this income, it may lead to an audit, and depending on how the taxpayer responds to the examination, it may lead to more complications, such as an eggshell audit or a reverse eggshell audit.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.