Divorcing Spouses & the Discovery of Hidden Foreign Accounts.
So…You Discovered Your Spouse’s Foreign Accounts
While there are many different ways to get revenge against a former spouse, as experienced International Tax Attorneys we have come to the conclusion that the ultimate revenge seems to be reporting the former spouse to the Internal Revenue Service – especially when foreign (aka Offshore or Overseas) money, income, assets, or investments are involved.
Unfortunately, what the reporting spouse may not realize is that he or she may bring themselves down in the process, this is especially true when it involves Foreign Income, Accounts or Assets.
Divorce, Tax & The IRS
It is important to proceed with caution and seek legal advice from an experienced tax attorney before making any proactive representation to the IRS regarding any tax situation which may also impact your own tax situation.
Divorce & International Tax
The breakdown of a marriage has a far reaching impact on the spouses’ financial affairs – not the least being the tax ramifications of a divorce. The stakes are even higher when the spouses have foreign property and offshore assets (especially if the spouses have not properly reported and disclosed the foreign accounts and income).
Unreported Foreign Money
The reason for the increases concern regarding unreported foreign money is that the IRS has the right to issue extremely high-penalties for non-compliance with International Tax related matters, and the IRS is authorized to penalize both spouses (in any year a joint return was filed) for the penalties.
Therefore, being proactive and getting into IRS Offshore Voluntary Compliance early is typically the best strategy to reduce, minimize (or even eliminate) fines and penalties.
Divorce & Undisclosed Offshore Account FAQ
Here are some common questions we receive often regarding divorce and undisclosed offshore/foreign accounts:
I wanted to disclose the Foreign Money but my Former spouse wouldn’t let me?
Unfortunately, from the IRS’s perspective this will usually result in a “too little too late,” especially if the IRS can show that you knew you were required to disclose information. When a couple is married, there is something a marital privilege, which prevents spouses testifying against each other. But now that the marriage is over one of the former spouse’s may want to come clean and then claim innocent spouse in order to secure amnesty against civil and criminal prosecution.
Why is Undisclosed Foreign Income & Assets such a Big Problem?
That is because there is a new law that took effect in 2014. The name of the law is FATCA – it stands for the Foreign Account Tax Compliance Act. Under this new act, there are very serious consequences for failing to report foreign income and disclose overseas assets. The IRS is aware that many individuals have not reported their offshore accounts, which is why they’re taking such a heavy hand in prosecuting these individuals.
The other reason why it is so important to resolve this matter sooner as opposed to later is because there is currently two “amnesty” programs in effect that will avoid criminal prosecution if the person voluntarily discloses the information to the IRS. In addition, depending on the nature and circumstances of the failure to disclose the IRS has penalty reduction initiatives in place as well.
Will I go to jail?
That will depend on the facts and circumstances of each case. With former spouses, there is always going to be one spouse that is more culpable. In other words, one spouse who facilitated the intentional failure to disclose the offshore accounts and foreign money. This fact, coupled with the fact that whichever spouse voluntarily goes in to the IRS first will ordinarily have a better shot at amnesty, will determine what the punishment would be.
What if I do not do anything?
For divorced couples this can be an issue. That is because oftentimes following divorce one spouse will be unhappy with the marital settlement agreement, custody arrangement and/or support agreement. This is usually the catalyst in “Ratting Out” the other former spouse.
If you are found to be willful and intentionally misrepresented your case to the IRS, you may be subject to extremely high fines and penalties beyond what you may have already paid.
The following is a summary of penalties as published by the IRS on their own website:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
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