Are You Considering Transferring Assets Offshore? 5 Key Facts

Are You Considering Transferring Assets Offshore? 5 Key Facts

Thinking of Transferring Assets Offshore? 5 Key Points

In today’s global market, it is not uncommon for US taxpayers to want to transfer assets offshore or to acquire foreign accounts and investments to expand their portfolio. There is nothing inherently illegal about transferring assets offshore or purchasing foreign assets. Where the problem arises is that taxpayers receive incorrect information about how the US taxes foreign-sourced income — and how foreign financial institutions regularly report US persons account holders to the US government. In accordance with FATCA (Foreign Account Tax Compliance Act), hundreds of thousands of foreign financial institutions (FFIs) proactively report US account holders each year. Thus, before a taxpayer decides that they want to move assets offshore or acquire foreign assets, here are five key points to remember:

Your Foreign Income is Still Taxable in the U.S.

The United States is one of the few countries that taxes individuals on their worldwide income based on their US person status. In other words, if a taxpayer is a U.S. citizen, lawful permanent resident, or foreign national who meets the substantial presence test, the US government will still tax them on their worldwide income. That means that the taxpayer is required to include any foreign income that is generated offshore on their U.S. tax return. This is true, even if the money is not transferred back to the United States and even if the income is tax-free in the offshore haven it is located in.

Your U.S. Tax Return Will Become More Complicated

While most individuals are used to filing tax returns to report US income, there are incredibly complex tax laws when it involves foreign income, accounts assets. The IRS requires taxpayers to file a plethora of different international information reporting forms each year to disclose their foreign investments. Some of the common types of forms include Form 8938, Form 3520, Form 5471, and the infamous FBAR.

Foreign Institutions May Report You to the IRS

Foreign financial institutions regularly report U.S. owners of foreign accounts each year to the US government. Oftentimes, they will not tell the taxpayer that they are reporting them — because they do not want to scare the taxpayer off. Nevertheless, among all the different international tax treaties, FATCA agreements, and other agreements the United States has entered into with foreign countries, it is safe to say that almost any place a taxpayer would want to place their money or acquire assets is a country in which the foreign financial institutions will report US account holders to the U.S. government.

Offshore Tax Promoters Can Lead to U.S. Tax Problems

One way taxpayers get into trouble is that they believe that just because they are operating offshore that the same rules that are applicable in the US do not apply. It is important to note that if the type of income is illegal in the United States, then just because it is being generated offshore does not somehow make that income safe and legal. Therefore, taxpayers should be very wary of foreign tax promoters who guarantee huge income streams and low taxes based on certain nuances within the law, where, if that same tax promotion were available in the United States, it would be illegal. The IRS has been cracking down on these types of tax schemes, such as the Malta pension plan — which has been the subject of both civil and criminal US investigations.

Penalties May Be Severe

Taxpayers who are considering transferring assets offshore or acquiring foreign assets must stay aware that if they do not properly report the information to the US government, it can result in extreme fines and penalties. Unlike other types of fines and penalties, oftentimes taxpayers can be assessed hundreds of thousands of dollars in fines, simply for failing to file a form– even if there is no unreported income associated with the foreign asset, trust, or gift. Therefore, before transferring assets offshore, taxpayers should be aware of the increased complexity of their return and that the US tax rules will still apply so that they can plan accordingly and avoid any unwanted surprises, audits, or penalties from the

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.