- 1 Offshore Accounts (In General)
- 2 What is an Offshore Account?
- 3 What if I do Not Report Offshore Accounts?
- 4 Case Study Example — Offshore Account Ownership
- 5 Offshore Account Tax Planning
- 6 Big CPA firms & “Individual” Tax Returns
- 7 Tax vs. Accounting
- 8 Cross-Section of Michelle’s Offshore Tax Situation
- 9 Australian Bank Accounts
- 10 Australian Superannuation
- 11 Australian Rental Properties
- 12 Australian Securities Account
- 13 What if Michelle is Out of Offshore Compliance?
- 14 Golding & Golding (Board-Certified Tax Law Specialist)
- 15 Recent Golding & Golding Case Highlights
- 16 Interested in Learning More about Golding & Golding?
Offshore Accounts – Summary for New US Citizens & Residents
Offshore accounts: When the IRS or FinCEN refers to Offshore accounts, it is a catchall reference to foreign bank accounts, assets and investments located outside of the United States.
*It also includes the income generated from the accounts.
Offshore Accounts (In General)
The IRS hates offshore accounts. The current rules require extensive reporting of Offshore Accounts, and the IRS has made the reporting of offshore accounts a key enforcement priority.
The Internal Revenue Service requires the owners and signatories of offshore accounts to disclose their offshore account status each year, on a broad range of different international reporting forms.
And, for the U.S. account holders who meet the threshold filing requirement, this will result in extensive annual reporting and disclosure reporting requirements.
What is an Offshore Account?
An offshore account is an account located outside of the U.S. It may involve many different types of accounts, including:
- Bank Account
- Investment Account
- Securities Account
- Pension & Retirement
- Life Insurance
Offshore Bank Account
Offshore bank accounts are the most common type of offshore accounts. Some common examples would be a Lloyds or Barclay’s account in Isle of Mann.
Offshore Investment Accounts
Offshore investment accounts are much more diverse. A common type of offshore investment account is a mutual or equity fund account. Alternatively, it may be foreign pension or unit linked life insurance account.
Offshore Brokerage Accounts
An offshore brokerage account is generally an account used to house investments. For example, you may an Offshore Brokerage Account for: ETF, Mutual Funds, Stock, and more.
What if I do Not Report Offshore Accounts?
It is important to report offshore accounts. And, if a person is not in IRS compliance, it is crucial that they get compliant.
The IRS has made offshore account enforcement a key priority.
As a result, when a person is considered out of compliance, the IRS may (and does) issue extensive fines and penalties when the proper international reporting forms are not filed.
Case Study Example — Offshore Account Ownership
Michelle is a senior level manager who resides in Australia. She is an Australian citizen, who was relocated to the U.S from Australia by her company on an L-1 visa.
Michelle has a diverse “offshore” investment portfolio.
While Michelle would probably not refer to her accounts in Australia as “offshore,” the IRS does. To the IRS, the term offshore refers to anything “outside of the U.S.”
*The IRS uses Offshore, International and Foreign interchangeably.
Michelle has the following offshore accounts and assets:
- Seven (7) Bank Accounts (total = $800,000)
- Two (2) Superannuation funds (total = $1,200,000)
- Two (2) Rental properties (total = $1,100,000)
- Commonwealth Securities and Mutual Fund account (total = $900,000)
Offshore Account Tax Planning
Since Michelle was transferred to the U.S. on a visa (L-1), she will need tax assistance.
While she is excited about coming to the U.S. — she’s a bit nervous about her tax situation.
“Luckily,” her employer is providing her 2-years of accounting services with one of the big 4 accounting firms.
What is Tax Equalization?
Equalization is the process of “equalizing” Michelle’s taxes and credits to make sure she does not pay any more taxes in the U.S. than she would have otherwise paid.
Big CPA firms & “Individual” Tax Returns
Unlike EAs (Enrolled Agent), Big 4 Accounting firms do not specialize in tax – they primarily specialize in accounting, auditing, Sarbanes Oxley, etc.
There are a few big CPA firms — there used to be five, now there are four.
But, hen using these firms for individual tax returns, you have to be very careful.
As other board-certified tax attorney specialists will tell you, having one of these big firms working on your individual tax matter is a catch-22.
In fact, it is common for us to find numerous mistakes in the tax returns prepared by the Big-4.
Tax vs. Accounting
Many of the individuals working for these firms are not “tax” professionals. Most of the employees assigned to work on individual tax returns do not specialize in offshore tax.
They work on any tax matter the boss puts in front of them. And, the majority of the professionals at these larger CPA firms did not sign up to do “individual taxes.”
Big CPA Firms and Bulk Tax Preparation
These firms make their money in “bulk” off a script of specific things to look for in a tax return.
Oftentimes they will:
- Miss key offshore reporting issues
- Fail to tell you about the FBAR
- Not file the FBAR if they know about it
- Underreport the accounts (putting you at risk)
- Overreport the accounts (making your future reporting unnecessarily complex)
Whether or not you are provided equalization services, when you have offshore accounts, it is advised to speak with a specialist as well, to best review your tax situation.
Cross-Section of Michelle’s Offshore Tax Situation
Here is how Michelle’s tax situation looks at the outset. Based on her specific facts and circumstances, there will be additional issues to look out – but here are the basics:
Australian Bank Accounts
Based on the value of the offshore bank accounts, Michelle will have to report them on the two main forms:
- FBAR (FinCEN Form 114)
- FATCA Form 8938
Supers can be complicated. There are various reporting issues to consider, but the main reporting includes:
- FBAR (FinCEN Form 114)
- FATCA Form 8938
Is a Super a Trust?
Generally, a super is considered an employer trust, so a Form 3520-A is not required. Depending on the cross-section of the underlying assets, an 8621 may be considered.
Australian Rental Properties
Rental Properties are reported on Schedule E. The income is reported, along with the deductions and expenses.
Foreign Rental Depreciation
Depreciation in the U.S. is calculated differently than Australia. In the U.S. (starting in 2018), foreign property depreciation is generally handled on a 30-year or 40-year schedule.
Australian Securities Account
Securities are more complex. There are various issues to consider when reporting securities.
- FBAR (if the securities are in an account)
- Form 8938 (FATCA)
- Form 8621 Mutual Funds and Holding Corps
- Form 5471 or 8865 (Depending on the ownership type and level)
What if Michelle is Out of Offshore Compliance?
Like many people who contact our firm, Michelle is out of compliance. The CPA firm never filed her FBAR, and did not ask about anything other than foreign “bank accounts.”
In addition, they over-report the Super, and underreported the stock and securities.
They also failed to make an MTM or QEF election.
Golding & Golding (Board-Certified Tax Law Specialist)
Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
- Learn more about the IRS Enrolled Agent credential
- Learn More about Golding & Golding’s Case Accomplishments
- Learn More about Golding & Golding Testimonials from prior clients
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant. Contact our firm today for assistance with getting compliant.
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.