Foreign Accounts Compliance Enforcement
Foreign Accounts Compliance: Heading into 2020, offshore bank and financial account enforcement by the IRS is on the rise. With offshore bank accounts, the IRS requires U.S. account holders of offshore accounts, assets, investments, & income to report the account information each year.
Since offshore enforcement is a key IRS priority, overseas accounts Compliance is crucial for avoiding unnecessary foreign account and asset fines and penalties.
We will summarize the basics of Foreign Accounts Compliance.
IRS Increased Overseas Account Reporting Enforcement
Overseas Reporting Compliance involves the reporting and disclosure of foreign bank and financial accounts located abroad. In addition, hundreds of thousands of overseas foreign institutions are conducting their own compliance in accordance with FATCA and CRS.
One of the most difficult aspects of getting compliant with the IRS and international tax, is trying to understand whether or not you are even required to file certain international reporting forms.
Common questions, include:
- Do I meet the threshold for filing FATCA?
- Do I meet the threshold for filing an FBAR?
- What if I never filed the form before?
- Can I file the forms late?
- Will the IRS penalize me?
- What are my options for Foreign Account Amnesty?
10-Step Offshore & Foreign Account Disclosure Guide
Isn’t Google great?
The first CPA you contact tells you nothing is going to happen and you should just go back and amend the prior returns and file FBARs. He doesn’t tell you about what a “Quiet Disclosure” is, but your research tells you that a Quiet Disclosure is probably not the best idea.
You decide to move on to attorneys and make a list of the ones that offer “Free Consultations.”
Who doesn’t like free stuff, right?
So when you talk to the first attorney on your list, he has a different take on your situation.
Avoid Tax Attorney Scaremongering
How does Tax Attorney scaremongering work?
It goes something like this:
You see an Ad for a Free Consultation.
The Attorney proclaims himself an “Expert,” “Industry Leader,” “Top Attorney, etc.” The Attorney may advertise that he used to work for the IRS, but you later learn that it was not as an Offshore Disclosure Lawyer for the IRS.
The Attorney then tries to scare you.
He tells you that you’re probably going to be subject to criminal investigation and that unless you provide him with confidential account information, sign the retainer immediately, and deposit a huge retainer at an hourly fee without any idea what the total price of services will be, chances are — the IRS will find you and you are going to go to prison.
The Attorney rattles off a bunch of acronyms, making your head spin.
Luckily, before signing any retainer, you find our firm and come to realize that chances are — you are not going to jail.
Whenever you are submitting documents (even tax returns) to the IRS, you should use an experienced tax professional. With that said, not everyone has the means to do so and/or many people are just fine doing it themselves.
If you want to use the guide below, just remember that it is not considered legal or tax advice.
First, Common Offshore Reporting Acronyms
These are the common acronym basics for non-attorneys, non-CPAs, and non-tax professionals
Foreign Bank Account Reporting. But, since it includes more than than accounts, it is generally referred to as “Report of Foreign Bank and Financial Account Form.”
Financial Crimes Enforcement Network. It sounds much more evil than it actually is. FinCEN Form 114 is actually the technical term for FBAR.
Foreign Account Tax Compliance Act. For individuals, it generally refers to either form 8938, which is part of your U.S. tax return, or when you receive a FATCA Letter from a Foreign Financial Institution (FFI).
Passive Foreign Investment Company. This refers to certain investments that a person has oversees, and includes foreign mutual funds (where many unsuspecting U.S. Taxpayers get snagged). The PFIC calculation is very complicated.
Step 1 – Do You Have a Foreign Account?
Accounts include a laundry list of different items, including investment accounts, foreign life insurance, foreign retirement funds, and foreign provident accounts. You should make a list of ALL your accounts.
Step 2 – Do you Own the Foreign Account or have Signature Authority?
Depending on whether you own the foreign accounts, or just have signature authority over the account(s) will help determine where and how to report the accounts — and whether it also needs to be reported on FBAR, form 8938 (interest in the account vs. signature authority) and other forms.
Step 3 – What is the Value of the Foreign Accounts?
You should use whichever exchange rate you prefer for the actual year in which you’re performing the analysis. So if you’re analyzing for 2014 — you would use 2014 exchange rates, not the current year rates.
Step 4 – Categorize the Foreign Accounts you have
You should separate the accounts by type, value, and whether you have ownership or signature authority over the account.
Step 5 – What Currency are the Foreign Accounts in?
In many countries, foreign financial institutions maintain multiple “currency sub-accounts” within the accounts, and the accounts may be in different currencies (common in Hong Kong and Taiwan)
For example, since the exchange rate for the HKD dollar and CNY are similar, but the exchange rate for the Taiwanese dollar (TWD) is much different, it is important to calculate the exchange amount properly to avoid over reporting or underreporting.
As you begin aggregating your account values, it is important to know which forms you may have to file.
A. Do You File the FBAR?
If you have foreign accounts that you have either ownership or signature authority over, and the annual aggregate total in any given years, exceeds $10,000 in US dollars using that specific year’s exchange rate – you may have an FBAR Reporting Requirement.
B. Do You File FATCA Form 8938?
If you have foreign assets/accounts that exceed any of the Form 8938 thresholds, you may have a form 8938 filing requirement as well.
There are four main thresholds for individuals is as follows:
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
C. PFIC (8621)
If you have foreign investment accounts, addition to the value, you also have to determine whether the investment is considered a PFIC.
This will help to determine what your tax liability will be, and whether you have to report the accounts on a form 8621 or not, and whether or not you have to perform an excess distribution calculation or not
D. Schedule B
Schedule B is not based on any value of the accounts. Question 7 simply asks whether or not you own foreign accounts, or if you have signature authority over foreign accounts.
Chances are that if you made it this far into our article, you probably have at least one foreign account.
Step 6 – Aggregate Your Account Values, By Type
Calculate the total amount of each type of account and whether you own it, or have signature authority over it to determine the total value.
Step 7 – Determine Which Forms You Have to File
Refer to the list of forms above to determine which forms you have to file (note: you may have other forms to file as well)
Step 8 – Did You Have to Report in Prior Years? – Very Important
Determine whether you have met the requirements in prior years as well.
*Generally, the reporting period is 3-6 years.
Step 9 – Check if the Current Year is the First Year You Had to File
If this is the first year you have to file, you are in luck.
Presuming you are timely, as long as you give it your best effort and perform a diligent and reasonable completion of the forms, usually that will be sufficient.
Step 10 – You Missed Prior Year Reporting
If you come to the realization that you did not report for prior years, then you should STOP.
Before submitting for the current year you are required to go back and fix he prior years using one of the approved IRS offshore voluntary disclosure/Tax Amnesty Programs.
While the IRS is done away with OVDP, other programs are still available such as
- Traditional IRM Voluntary Disclosure
- Streamlined Disclosure
- Reasonable Cause
*If you decide to just submit without using amnesty first, just keep in the mind that the IRS has indicated it will take a heavy hand against individuals who take this position, and it may result in significant fines and penalties.
**That is not an attempt to scare you, since there are probably plenty of people who do it anyways, and get away with it no problem (although we really don’t recommend it, since the downside is tough).
Beat the IRS to the Punch!
If you did not properly disclosing foreign income, accounts, assets, and/or investments — and are not under audit or examination — you may consider submitting to IRS Voluntary Disclosure (IRM, Streamlined or Reasonable Cause).
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Foreign Accounts Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.