- 1 Offshore Accounts
- 2 IRS Offshore Compliance
- 3 What is an Offshore Account?
- 4 What if I do Not Report Offshore Accounts?
- 5 Case Study Example — Offshore Account Ownership
- 6 Offshore Account Tax Planning
- 7 Big CPA firms & “Individual” Tax Returns
- 8 Cross-Section of Michelle’s Offshore Tax Situation
- 9 Australian Rental Properties
- 10 Australian Securities/Mutual Fund Account
- 11 What if Michelle is Out of Offshore Compliance?
- 12 Golding & Golding: About Our International Tax Law Firm
Offshore Accounts: Just because an account is designated as an “offshore” account, does not mean the account is illegal or violating U.S. tax laws. Rather, it means the account is maintained in a foreign jurisdiction and the IRS will require additional information reporting. In general, 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.
Some common information reporting forms are the FBAR (FinCEN Form 114) and FATCA (Form 8938)
The Internal Revenue Service international tax rules require extensive reporting of Offshore Accounts, and the IRS has made the reporting of offshore accounts a key enforcement priority.
We will summarize the basics of Offshore Accounts and what you need to know.
IRS Offshore Compliance
An International/Offshore Bank account is nothing more than an account located outside of the U.S. It is not limited to Cayman Island Banks and other “offshore tax havens.” With an International or Offshore Bank Account, the institution will oftentimes issue an IBAN (International Bank Account Number).
Owners and signatories of offshore accounts to disclose their offshore account status each year, on a broad range of different international reporting forms.
For the U.S. offshore 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 accounts are the most common type of offshore accounts. Some common examples would be a Lloyds or Barclay’s account in Isle of Man.
Offshore investment accounts are much more diverse. A common type of offshore investment account is a mutual fund or equity fund account. Alternatively, it may be foreign pension or unit linked life insurance account.
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?
Tax 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
While these firms are great for corporate taxes when using one of these firms for individual tax returns, you have to be careful.
Because many of the staff working for these large firms are not “tax” professionals — they are accounting and auditing specialists.
Most of the employees assigned to work on individual tax returns do not specialize in offshore tax, and did not sign-up with the big-4 to work on individual tax returns.
Cross-Section of Michelle’s Offshore Tax Situation
Here is how Michelle’s tax situation for her offshore accounts looks at the outset.
Based on her specific facts and circumstances, there will be additional issues to consider – 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
- Possibly Form 3520 and 8621
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/Mutual Fund Account
Securities are more complex.
There are various issues to consider when reporting securities/funds:
- 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: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.