- 1 Foreign Income & Asset Disclosure
- 2 Foreign Income & Asset Disclosure is Ambiguous
- 3 Why Is this Important (aka Who Cares)?
- 4 But the Money is Overseas?
- 5 How Bad Are the Penalties?
- 6 What Should You Do?
- 7 Summary of IRS Offshore Voluntary Disclosure
- 8 Why IRS Voluntary Disclosure?
- 9 4 Types of IRS Offshore Voluntary Disclosure Programs
- 10 IRS Voluntary Disclosure of Offshore Accounts
- 11 When Do I Need to Use Voluntary Disclosure?
- 12 Common Un-filed IRS International Tax Forms
- 13 Golding & Golding – Offshore Disclosure
- 14 The Devil is in the Details…
- 15 What if You Never Report the Money?
- 16 Getting into Compliance
- 17 5 IRS Methods for Offshore Compliance
Foreign Income & Asset Disclosure (2018) – IRS Overseas Money Penalties
When it comes to international, offshore and foreign assets, accounts, income and investments – the IRS has made it a habit to just not play fair.
Foreign Income & Asset Disclosure
On the one hand, the IRS makes rules and requirements incredibly complex to understand, especially for individuals who are not tax professionals.
On the other hand, they enforce exorbitant penalties against individuals as if they Individual should be ax expert in foreign income and asset disclosure compliance.
Common Issues typically include:
- Foreign Accounts and Investments (FBAR)
- Foreign Assets (Form 8938)
- Foreign Gifts, Inheritances and Trusts (Form 3520)
- Foreign Corporations (Form 5471)
- Foreign Partnerships (Form 8865)
Foreign Income & Asset Disclosure is Ambiguous
For example, you may have foreign accounts that need to be reported on one International Information Return form, but it may be exempt from reporting on another form.
Likewise, you may have some assets that generate income such as an investment in a foreign REIT, which would be reportable, but if you own the same real estate as an individual…then it is not reportable.
Why Is this Important (aka Who Cares)?
Unfortunately, the IRS does care. The IRS pockets billions of dollars by enforcing foreign related nondisclosure penalties against individuals, businesses, and estates.
But the Money is Overseas?
True, but that does not mean the IRS cannot attempt to take it from you. The IRS has entered into nearly 200 treaties/agreements, including Income Tax Treaties, Estate Tax Treaties and FATCA Agreements (as well as many other cooperative agreemetns).
In addition, the IRS has developed numerous International Tax Enforcement Groups, and has even taken to signing onto other international enforcement teams such as J5, in order to combat crypto currency tax evasion.
How Bad Are the Penalties?
The penalties can be rough. They can range from anywhere from a warning letter in lieu of penalty all the way up to 100 percent penalty.
In addition, the IRS can also go after you for fraud penalties as well as potential criminal violations depending on the facts and circumstances of your situation.
What Should You Do?
Everyone makes mistakes. If at some point you discover that you should have been reporting your foreign income, accounts, assets or investments, the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure programs.
Summary of IRS Offshore Voluntary Disclosure
IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first. At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure.
Why IRS Voluntary Disclosure?
With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”
FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years).
4 Types of IRS Offshore Voluntary Disclosure Programs
There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:
- Voluntary Disclosure
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
IRS Voluntary Disclosure of Offshore Accounts
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 for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.
Common Un-filed IRS International Tax Forms
Common un-filed international tax forms, include:
- 1040 (Tax Returns)
- Schedule B (Ownership or Signature Authority over Foreign Accounts)
- FBAR (FinCEN 114)
- FATCA (Form 8938)
- Form 3520 (Gift from Foreign Person)
- Form 5471 (Foreign Corporations)
- Form 8621 (Foreign Investments, aka PFIC)
- Form 8865 (Foreign Partnership)
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 IRS Offshore 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
- Voluntary Disclosure
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
Contact us today; let us help.
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.