Do International Wire Transfers Trigger an IRS Audit & Penalties?
With introduction and enforcement of FATCA (Foreign Account Tax Compliance Act), along with the ongoing requirement for FBAR reporting (FinCEN 114 and other FinCEN Forms), transferring money from overseas and into the United States has become a lot more riskier.
Not that there is anything illegal about someone transferring legally sourced money from outside the United States, into your U.S. bank account – but there are some pitfalls and hurdles to overcome, which you should keep in mind — especially when it involves reporting the money.
International Wire Transfers (IRS)
In many countries, there are currency restrictions that limit the amount of money that a person can transfer out of the country. This is common with Asian countries.
Example: Presuming the currency restriction limit is around $50,000 (USD), if your Grandma wants to transfer you $500,000 to purchase a new home, how is she going to do it? Luckily, she has many friends, and ten of them agree to each transfer $49,995 into your U.S. bank account.
While there is no issue with reporting the accounts, since they are not your foreign accounts, there is the issue of reporting the receipt of the gift from a foreign person (your sweet Grandma).
Now, before you try to get too crafty, and argue that no IRS Form 3520 is required because technically you received $49,995 from each person (which is less than $100,000), keep in mind that it was your Grandma (a foreign national) who actually gifted you the money – and just used her friends as conduits to transfer the money.
Therefore in this type of situation, you would have a Form 3520 reporting requirement or possibly be subject to penalties.
Transfers Into Your Own Foreign Account
In this situation, your Grandma just doesn’t have enough friends that she trusts in order to facilitate the transfer. Therefore, she put $500K into a foreign account under your own name. The money only stays in the account briefly, before you transfer the full amount of money to your own U.S. account or an Escrow account in the U.S. to purchase the home.
This can be dangerous. Why? Because the moment that $500K hit your foreign account, you had a reporting requirement, including:
- Form 8938
- Form 3520 (Reporting the gift)
- Possibly other IRS International Reporting and Tax forms
How Will the IRS Find You?
The IRS has entered into FATCA Agreements with more than 110 countries, and there are more than 300,000 Foreign Financial Institutions currently reporting U.S. Account Holders (U.S. Citizens, Legal Permanent Residents, and Foreign Nationals subject to U.S. Status) to the IRS.
Are You Already Out Of IRS Compliance
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Golding & Golding, A PLC
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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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.