Divorce Tax Rules (2018) | IRS Foreign Asset Reporting Rules
- 1 Divorce & Foreign Assets
- 2 Married Filing Jointly – Dual Liability
- 3 Undisclosed Foreign Assets
- 4 MFJ and Hidden Accounts – Possible Landmines
- 5 What Can Michelle Do – Offshore Amnesty
- 6 No Spousal Cooperation Needed
- 7 IRS Offshore Amnesty Options
- 8 When Do I Need to Use Voluntary Disclosure?
- 9 Golding & Golding – Offshore Disclosure
- 10 The Devil is in the Details…
- 11 What if You Never Report the Money?
- 12 Getting into Compliance
- 13 5 IRS Methods for Offshore Compliance
Divorce Tax Rules (2018) | IRS Foreign Asset Reporting Rules
Divorce & Foreign Assets
When couples are divorcing, oftentimes secrets will float to the surface. Oftentimes, these secrets include hidden foreign accounts, assets, investments or other sources of money that one spouse may be hiding from the other spouse in another country.
Especially as a divorce becomes more acrimonious and more contentious, the discovery of hidden assets feels like a treasure trove to the discovering spouse.
When these assets include foreign assets, the issues are compounded greatly due to the fact that there varies “moving parts” to the divorce that the spouses have to contend with, with an emphasis on money and asset splits.
The most important values typically include:
- Marital Settlement Agreement (MSA)
- Spousal Support
- Child Support
- Tax liability
Of course, there is no better feeling to the spouse who discovered the treasure to know that they have some serious leverage over the other spouse. With that said, there is another issue discusses how to contend with, which is how to report the foreign accounts to the IRS.
Married Filing Jointly – Dual Liability
Unfortunately, one thing that spouses do not consider when filing married filing joint is that one day they may be divorced. Although the date of separation may impact certain aspects of the settlement, it has little to no bearing on the IRS’ ability to audit the returns for prior years.
For example, David and Michelle were married in 2010. They filed joint tax returns through 2015. Before December 2016 they decide to call it quits. If the IRS wants to go back and audit David and Michelle, the IRS can do so for the years that David and Michelle were married – and the mere fact that they are now divorced does not impact the fact that the IRS can audit both of them for the years they filed Married Filing Jointly.
Undisclosed Foreign Assets
While disclosing foreign accounts has been a requirement since the 1970s, with the introduction of FATCA (Foreign Account Tax Compliance Act) which began enforcement in 2014, the IRS and Department of Treasury are requiring extensive reporting – more so than they did in years past.
If one spouse was to discover that the other spouse has undisclosed foreign assets, there is some concern that parties filed married filing jointly in the prior years.
MFJ and Hidden Accounts – Possible Landmines
The reason this is so important, is because of Form 8938. Form 8938 is a form that is required to be reported by individuals who meet certain threshold requirements involving the value of their specified foreign financial assets.
Unlike other forms, this particular form is actually part of the tax return. So for example, if a person has a foreign business and would be required to file a 5471, that form is not required to file by the individual who does not have ownership of the business, and it is no a form contained within the tax return.
Thus, if one spouse owned a foreign business and did not tell the other spouse, the other spouse may not be liable the first spouse did not file form 5471 (other factors permitting).
In sharp contrast, Form 8938 is actually part of the tax return. Therefore, if David had foreign assets that he did not tell Michelle, and they filed married filing jointly – the fact that form 8938 was not included in the tax return they filed jointly may lead both spouses to tax liability and penalties for David’s undisclosed foreign assets/accounts
Fast forward down the line of David and Michelle are sick of each other. Neither one wants to be in the same room as one another dealing with the results of an IRS audit, especially when Michelle literally had no idea about David’s assets.
What Can Michelle Do – Offshore Amnesty
Michelle (and David) have the opportunity to enter one of the amnesty programs. Since Michelle had absolutely no knowledge of the foreign assets (David was very good at keeping them hidden), Michelle may qualify for the amnesty program that provides a reduced penalty, or even no penalty if she can prove reasonable cause (or can show she was a foreign resident).
**The analysis for David is much more complex.
No Spousal Cooperation Needed
The IRS wants their money, and they could care less whether the spouses refuting or not talking any further. As a result, the IRS is okay with one spouse submitting the amnesty program application, without the other spouse’s cooperation.
IRS Offshore Amnesty Options
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”
It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
5 IRS Methods for Offshore Compliance
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)