IRS Assessment of Taxes for US Taxpayers Abroad – IRS Enforcement
In most jurisdictions, when a person resides outside of their home country, the tax laws will change. Specifically, the person is taxed as a “non-resident,” which generally limits the taxation of the individual while he or she resides in a different country.
Unfortunately, the IRS does not work that way. In the U.S., the tax rules follow a worldwide income taxation model. This means the IRS requires U.S. person to report and pay tax on their worldwide income — even if they reside abroad.
So, what happens when an expat is out of compliance, and the IRS finds them.
IRS Assessment of Taxes for US Taxpayers Abroad
One common misconception is that the IRS cannot go past its own borders to pursue a tax claim against a non-resident.
This is not true.
The IRS has entered into more than 50 bilateral tax agreements with foreign countries, and more than 110 Intergovernmental Agreements (IGA aka FATCA Agreements) with foreign countries.
It is quite common for the IRS to go after a U.S. person who resides outside of the U.S., to assess taxes for U.S. Taxpayers abroad.
Can the IRS Levy a Foreign Bank Account or other Account?
Yes, the IRS can levy a foreign bank account.
Just because you reside and/or have Bank Accounts, Assets, or Income overseas does not mean your Foreign Bank Accounts, Assets, or Income are safe from the Internal Revenue Service (IRS).
Depending on the terms of the agreement between the U.S. and Foreign Country (IGA) at issue (although most IGAs are similar), the U.S. Government may be able to request a Levy (“Seizure”), Freeze or Suspension to be placed on the Foreign Account. This is especially true if the accounts are being maintained at the foreign branch of the US financial institution, such as Citibank.
If the IRS discovers you have foreign assets and/or income that were not reported on your tax return and/or FBAR through your tax filings or Voluntary Disclosure, the IRS may be able to place a levy on your accounts. The mere fact that the property, assets and/or income is located overseas does not prevent the IRS from placing a levy on your U.S. property and/or possibly your foreign money, accounts, and income.
How to Stay in U.S. Tax Compliance?
In order to stay in compliance, it is important to continue filing U.S. Tax returns, and reporting any foreign accounts, assets, investments, and income on the requisite International Informational Reporting Forms.
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
This form is used to report “Specified Foreign Financial Assets.”
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
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
Out of IRS Offshore Compliance?
The rules have changed, but you still have options.
Depending on the facts and circumstances of your situation, your options may include the streamlined program, reasonable cause, or the delinquency procedures – which may result in significantly reduced fines and penalties (and may even receive a penalty waiver).
Golding & Golding – Board Certified in Tax Law
Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1000 streamlined and voluntary disclosure submissions.
Our Team Lead is a Board Certified Tax Law Specialist (Less than 1% of Attorneys nationwide) and Enrolled Agent, with a Master’s of Tax Law (LL.M.)
Mr. Golding leads his team in each and every case we accept for submission.
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