IRS Tax Enforcement Campaigns (2018) – Swiss Accounts, FEIE & FTC
The IRS is continuing to make offshore compliance a key enforcement priority in 2018. Recently, the IRS introduced several new campaigns that the Internal Revenue Service, Department of Treasury, and Department of Justice will be enforcing throughout the year.
A majority of the enforcement priorities involve international tax.
Out of the different campaigns, there are three main campaigns that impact a large portion of our clients here at Golding & Golding:
Swiss Bank Program Campaign
The Swiss Bank Program Campaign was one of the first in a long list of settlement agreements the IRS entered into with several offshore financial institutions in order to reduce offshore evasion.
Essentially, under the terms of the program, Foreign Financial Institutions (FFIs) entered into settlement agreements to avoid U.S. prosecution. In exchange for a waiver of prosecution, the Swiss Banks provided information regarding US account holders who have been secretly hiding accounts in the Swiss bank institutions to the IRS (so much for the financial confidentiality the Banks sold U.S. customers on back in the 70s, 80s, and 90s).
Many of these accounts were ‘number accounts,’ or accounts held by shadow companies or nominees.
Thus, by 2018, the IRS has amassed significant amounts of information. This is coupled by the fact that more than 110 foreign countries, and more than 300,000 Foreign Financial Institutions are voluntarily complying with FATCA Reporting. Therefore, with the wealth of information the IRS has at its disposal, along with the IRS’s ability to cross-reference this information in accordance with individual reporting requirements with Form 8938 and the FBAR (amongst others) the IRS has all the tools necessary to vet out who is properly complying international tax law and offshore reporting… and who isn’t.
**If you are one of the individuals who had accounts at one of these financial institutions you may consider immediately entering into one of the approved IRS offshore disclosure programs before it is too late.
Foreign Earned Income Exclusion (Form 2555)
The Foreign Earned Income Exclusion is a major red flag for the IRS. It is not because people are not generally entitled to the exclusion (excluding upwards of $100,000 of foreign income on a US tax return), but rather because many people attempt to utilize this exclusion when they do not fit the mold of individuals entitled to use it. Or, they double-dip the FEIE with FTC (Foreign Tax Credits).
Typically, the people who are more likely to become subject to audit will be individuals who do not qualify under the Physical Presence Test (330 days in any 12 month period, and an “easier” test), and therefore try to show that they were a Bona-Fide Resident of the foreign country when they do not qualify as Bona-Fide Resident. This is usually because they reside for several months in the United States, and/or they are government contractors, living in US housing, etc.
Foreign Tax Credit (Form 1116)
The main issue with the foreign tax credit is simply that US persons are applying foreign taxes that may not qualify for the credit. For example, typically you cannot use foreign employment tax to offset US employment tax.
Moreover, if you have taxes withheld or paid taxes overseas, but then received a refund (for example, in India we have clients who are earning less than $10,000 a year foreign interest income, and either do not have to pay the foreign tax or receive a refund following TDS). If you receive a refund, presumably the IRS will not let you claim the money as a “credit.”
Already Out of Compliance?
If you are out of compliance for issues involving offshore voluntary disclosure – aka you did not properly report your foreign accounts or income on your US tax return, you may consider entering one of the approved offshore voluntary disclosure programs.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.