Foreign Account Enforcement Initiatives
Foreign Account Enforcement Initiatives IRS will Pursue in 2022: In recent years, the Internal Revenue Service has significantly increased enforcement of foreign account and asset compliance. For many taxpayers across the globe who are considered US Persons, this entails filing an annual FBAR (Foreign Bank and Financial Account Form) FinCEN Form 114 — along with a FATCA Form 8938 (Foreign Account Tax Compliance Act) as part of their annual tax return. Based on some of the recent publications, case rulings and notices provided by the Internal Revenue Service — here are some enforcement initiatives the IRS will presumably seek out heading into the second half of 2021 and 2022.
Puerto Rico Act 60
PR Incentives Code Act 60 — which is previously Acts 20 and 22 is Puerto Rico’s version of a Golden Visa. The reason why it is alluring for US Persons, is because it does not require the Taxpayer to relinquish their citizenship or Lawful Permanent Resident status — and does not require becoming a citizen of another country. In general, the US government in general frowns upon this particular tax avoidance strategy — there is even a international tax campaign focused on Taxpayers who take the position that Puerto Rico residence under Act 60 limit re-sources their income to Puerto Rico — and thus avoids US Tax.
The way that foreign accounts get involved, is that although having residence in Puerto Rico may avoid US tax on certain income generated in Puerto Rico — it is still considered part of the United States for reporting purposes. Therefore, while bank and other investment accounts located in Puerto Rico are not subject to FBAR or FATCA — the Person residing in Puerto Rico is still considered a US Person — and is still required to report their foreign accounts to the US government on the FBAR and other international information reporting forms.
Post-Death FBAR Penalties & Foreign Account Enforcement
There have been several case rulings recently the take the position that FBAR Penalties are Remedial and not Penal in nature. Therefore, the FBAR Penalty would survive death and the estate/heirs may become subject to penalties that were assessed against the decedent. One important case to keep up with is US v Gill — in which the Court provided a very thorough and detailed analysis of the different arguments — and while the motion to dismiss was denied, defendants will have other opportunities to try to fight the penalties that were assessed against defendant.
Willfulness and FBAR
The US government has been very successful in courts across the nation in convincing them that the government only has to prove a reckless disregard in order to recover willful penalties against the Taxpayer defendant — meaning the US government does not have to prove any intent. Likewise, most courts have rejected Taxpayers’ position that willful FBAR penalties are limited to the regulation willfulness maximum (outdated) and not the updated statute. Most courts rely on the later in time rule — and since the revised statute is later in time, hence the $100,000 maximum is no longer valid.
Form 8938 Soft Letters Leads to Foreign Account Enforcement
Form 8938 is used to report foreign assets to the Internal Revenue Service. The form is similar to the FBAR, but is filed directly with the IRS — and requires more detailed information about the accounts and assets — in addition to a breakdown of income generated from the FATC Assets. Recently, the Internal Revenue Service has issued several soft letters to taxpayers across the globe following up on reporting they have received from the Foreign Financial Institutions to determine why the Taxpayer did not report the information — and to give them an opportunity to get into offshore compliance before penalties are assessed.
While cryptocurrencies are not yet absolutely required to be reported on the FBAR and Form 8938, FinCEN Notice 2020–2 proposes that cryptocurrency located overseas should be reported, similar to how foreign accounts with currency are reported. When coupled with the recent aggressive enforcement of cryptocurrency compliance by the IRS — chances are that International cryptocurrency reporting will soon become required.
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