Offshore Accounts: When a U.S. Person has bank and investments accounts overseas, the IRS takes notice. The U.S. government requires certain taxpayers residing in the United States and abroad to report offshore accounts to the IRS. There are many different international information reporting forms the IRS may require, including:
- FBAR aka FinCEN Form 114
- FATCA Form 8938
- Form 8621
- Form 5471
- Form 3520-A
- Form 3520
Having an offshore account is not illegal, but failing to report it to the IRS may can be illegal. FBAR violations can be willful or non-willful, and may even result in criminal enforcement — although criminal FBAR fines are not common.
We will summarize offshore accounts and the IRS Pursuit of international reporting offenses.
Offshore Accounts & IRS Compliance Reporting Rules
The offshore account reporting rules and requirements are complicated.
Offshore Accounts is an enforcement priority for the IRS. The Internal Revenue Service has taken an aggressive position towards foreign accounts compliance.
Is it Legal to Own an Overseas Investment
A common question about Offshore Accounts IRS reporting is…are offshore accounts illegal?
No. But, reporting offshore accounts to the IRS is a complex undertaking. Technically, there is nothing inherently illegal about maintaining Offshore Bank Accounts or Offshore Investment Accounts for managing International Banking and Investments.
The problem with Offshore Accounts comes in when a person is a U.S. Person with an Offshore Reporting requirement (FBAR, FATCA, PFIC, etc.), is out of compliance — and the IRS wants to issue Offshore Penalties.
With the introduction of FATCA Reporting, renewed interest in FBAR Compliance, and overall aversion to Offshore Tax Fraud, Evasion and Money Laundering, the IRS is levying heaving Fines and Penalties against U.S. Persons (more than just U.S. Citizens) for non-compliance.
As you continue your research, it is important to understand the basic terminologies:
From a U.S. Tax and Reporting perspective, Offshore Accounts means any accounts outside of the United States. It does not need to be in an Offshore Tax Haven such as the Caymans, Bahamas, or Bermuda to be Offshore. In other words, accounts in Japan, Korea, and India are also considered “Offshore” (aka Foreign Accounts or Accounts Abroad).
FBAR (FinCEN 114)
This is the Report of Foreign Bank and Financial Account Form. It is required for U.S. Person with more than $10,000 in annual aggregate total in foreign accounts on any given day of the year. This is filed separately from your Tax Return.
This is the process of filing your FBAR directly on the BSA website.
BSA and BSA E- Filing
Refers to the Bank Secrecy Act. While it sounds very “Cloak and Dagger,” it’s not – it is the same site whether you have accounts in Switzerland, Cayman Islands, Bahamas, Japan or India.
FATCA Form 8938
The is the Foreign Account Tax Compliance Act Form for Individuals. It is to report “Specified Foreign Financial Assets.” It is filed along with your Tax Return, if you meet the threshold requirements.
A PFIC is a tax nightmare. A PFIC is a Passive Foreign Investment Company, and depending on whether you made the proper elections and/or have an excess distribution – your offshore investment tax may turn into a penalty (with net-effective tax rates reaching +75%)
What if I Never Reported to the IRS
If you have offshore accounts that have not been reported to the IRS and are concerned that you may get into trouble – your concerns are valid. While there are many individuals who will maintain offshore accounts and never be contacted by the IRS, for the individuals who are not so lucky –they may find themselves facing significant FBAR fines and penalties. Moreover, if the IRS believes the person acted intentionally, willfully, with reckless disregard – or willfully omitted certain facts on their tax returns or during audit – they may be subject to much more extensive fines and penalties.
Why Are Foreign Banks Reporting Offshore Accounts?
It is not just the United States seeking to reduce international tax for. The world as a whole is seeking to cut down offshore tax evasion and fraud. Why? Because unless the country is a tax haven (and proactively seeking individuals to open offshore trusts, foundations, or other investments in the country) the country is losing out on tax money.
In the United States for example, there is a worldwide income tax and reporting responsibility. That means, if you are considered a US person, then you’re also required to include your worldwide income under US tax return. It doesn’t matter if the money is earned in a foreign country, and it doesn’t matter if the money earned in the foreign country is considered tax-free.
As a general proposition, all income must be reported on a US tax return, despite any tax exemptions or exclusions in may receive in the foreign jurisdiction.
Non-Compliance of Reporting Offshore Accounts?
In addition to including income a person earns in a foreign jurisdiction on the US tax return, the person is also required to report certain accounts and investments that they have.
The two main reporting requirements are in accordance with FBAR Filing and FATCA Reporting.
The essence of these reporting requirements is that once a person needs certain threshold requirements that are required to report their accounts and specified foreign financial assets on various forms such as the FBAR and FATCA form 8938.
While these two forms are the more prevalent forms, there does a few in the numerous potential forms a person may have to file, depending on whether they have foreign investments, PFIC, CFCs, Foreign Life Insurance, etc.
Offshore Tax Evasion and Fraud for Offshore Accounts
This seems to be a general misunderstanding that a person has to have several million dollars hidden offshore to even be subject to criminal tax, offshore fraud or offshore tax evasion – but that is incorrect. The IRS does not limit their investigations to just “Big Fish.”
It is a simple is the fact that if a person has unreported income that they knew they were supposed to report but intentionally did not report the income on their tax return – they can be guilty of a crime, such as Tax Fraud, Tax Evasion and/or Money Laundering
Not everybody is going to be investigated and not everybody’s going to be audited or examined. But, if the person finds themselves under audit in a situation in which they already know they commit a crime (eggshell audit) will reverse situation in which they are under audit but are not aware that the IRS already knows that they committed some form of crime (reverse eggshell audit) and is not truthful or does handle the audit properly – it may spell trouble.
Be Proactive, Get Into Compliance with Offshore Disclosure
The IRS offshore voluntary disclosure programs are programs designed to bring people safely into compliance. Depending on the facts and circumstances of a person’s case will help determine which offshore disclosure program may qualify for.
By entering the program, a person may avoid even more excessive fines and penalties in accordance with US tax law.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.