FATCA & U.S. Real Estate – Hidden Traps in the Sale or Purchase of Real Estate
U.S. Real Estate can negatively impact FATCA Reporting.
While not everyone who is out of compliance with FATCA (Foreign Account Tax Compliance Act) will receive a FATCA Letter, and/or be contacted by the IRS — for the individuals that are contacted and audited/examined, they may be subject to extensively high fines and penalties for failing to file FATCA Form 8938.
When combined with FBAR Penalties (Report of Foreign Banks and Financial Account), which can reach as high as 100% value of the foreign account balance in a multi-year audit in which the IRS believes you were willful, it is important to consider getting into compliance.
Think You Won’t Get Discovered?
Maybe you won’t. But, as a tax law firm that limits their entire practice to international tax and offshore disclosure, we have heard every excuse in the book. Some are very good, and some, well — are not so good…
The following is three (3) ways individuals unsuspectingly get caught being out of FATCA Compliance, when they thought there was no way possible that the IRS or U.S. Government could find them.
Sale of U.S. Real Estate – FATCA Catalyst
We represent numerous foreign investors who maintain investments in the United States. Why? Because these clients were smart enough to purchase investments during the downturn of the economy, when foreign currency was strong. For example, when the Euro was much stronger backing 2008, many foreign individuals (who are still subject to U.S. Tax as Green Card Holders, Dual-Citizens or Visa Holders) purchased U.S. homes at bottom barrel prices, which have since increased in value significantly.
Since the home is not a primary residence, unless another exemption/exclusion applies, capital gain will have to be paid, which can lead to three (3) main issues.
FIRPTA is the Foreign Investment in Real Property Tax Act. When property is being sold by a foreign person, the United States requires a realtor to take additional steps regarding withholding, to ensure that the individual pays tax. There are ways to reduce FIRPTA through proactive planning – but nevertheless, even though you are a “U.S. Person” since you reside overseas, the United States may presume you are a foreign person. Conversely, when you complete the forms and identify that you have a Social Security number and/or that you are a US person — it could be the catalyst that sparks an audit… and lands you in hot water with the US government as a U.S. Person with foreign accounts, assets, etc. that have not been reported to the U.S.
During the sale of the property, you will presumably have to open an escrow account to hold funds. When you complete the forms, the forms will ask you where you reside and you will have to identify that you reside overseas. While you may believe you can use a U.S. address, the next issue will be trying to transfer money or deposit money from your foreign account into the escrow funds (Whether directly from the sale or in a subsequent transfer).
By opening the escrow account and identifying your foreign address – when it comes time to report to gain – it could cause the IRS to want to investigate further regarding the status.
Transferring the Money out of the U.S.
Once you receive money from the sale of the property you are going to want to transfer that money outside of the United States and back your home country or 3rd party country. This can get very complex, very quickly. That is because under new reporting rules, both the U.S. and Foreign Institutions are required to file additional paperwork when transferring the money across borders.
Moreover, many U.S. banks have become extremely hesitant and transferring money outside of the United States, and they may ask you to sign certain forms regarding your US status. If you were to intentionally lie or misrepresent his status on this form, it is a crime and you could get in the trouble.
IRS Voluntary Disclosure
Voluntary disclosure is the process of proactively reporting your foreign accounts and tax information to the United States. Depending on the facts and circumstances of your case, you may not owe any tax or penalty to the United States.
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.
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. Unlikes 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.)