International Tax Implications of Divorce & Offshore Money
5 International Tax Implications of Divorce: When it comes to divorce, one of the most overlooked issues — but most complicated aspects of separating — are the IRS tax implications. That is because most of the time, the Taxpayers have been filing joint returns together — and the Taxpayers have intimate knowledge of each others income and tax consequences — for better or for worse. Depending on how amicable the divorce is — and if one spouse decides to go scorched earth on the other or not — there are potential tax and reporting implications that can have a negative impact on the spouses. This is especially true in the world of international tax and offshore disclosure where one Taxpayer may have knowledge of another taxpayers misdeeds — which may lead to significant fines and penalties down the line. Let’s take a look at five (5) common international tax implications of divorce.
Knowledge of the Other Account
Sometimes, one spouse may have no knowledge of the other spouse’s foreign accounts until the divorce commences — and the spouses must submit their financial statements under penalty of perjury. Oftentimes, this is the first time that the spouse who may not own any foreign accounts learns that the other spouse may have foreign accounts that they opened either before the marriage, during the marriage — or by their parents — or other family members overseas.
Were the Offshore Accounts Reported
Sometimes, spouses will work together to conveniently ignore International Information Reporting requirements for offshore accounts and assets on forms such as FBAR and FATCA. Once the divorce commences, one spouse may decide to turn the other spouse into the Internal Revenue Service — without fully ingesting the tax consequences and potential penalties to both spouses before acting on emotion.
Post-Divorce Offshore Disclosure
If one spouse decides they want to get into offshore tax compliance for prior year nondisclosures — they may avail themselves to one of the offshore disclosure programs such as VDP, the Streamlined Procedures, or delinquency procedures. And, if the other spouse is not in the know that their former spouse has made the disclosure it could have serious tax implications — and leads us to the next issue.
Reverse Eggshell Audit
In this situation, possibly one spouse may have disclosed information about the other spouse as part of the offshore disclosure program. Alternatively, a foreign financial institution may have reported one or both spouses in accordance with FATCA — and now the IRS has damaging information about offshore accounts that the taxpayer may not have reported previously. The Taxpayer is then called in for an IRS audit or examination, but the Taxpayer is unaware that the IRS has the information or that the former spouse may have started reporting account and/or already disclosed information to the IRS — and it puts the spouse in a reverse eggshell audit situation. This may catch the unsuspecting spouse by surprise and lead them to further deny ownership of the offshore account (because they are unaware of the IRS has the information) — which then leads to an International Special Agent Investigation.
Lopsided Penalties and Further Disclosure
When spouses own an account jointly, the presumed ownership is 50-50. So, in the situation in which one spouse is being significantly penalized as a result of ownership of a foreign account jointly owned with the former spouse — when it was primarily the other spouse’s money — it may result in one spouse further detailing more incriminating information about the spouse with the foreign money. This can result in negative consequences, penalties and tax implications for both spouses.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.