- 1 Are Foreign Parents Using Your Overseas Account for Investments?
- 2 Foreign Account Ownership vs Signature Authority
- 3 Worldwide Income Taxation
- 4 Legal vs Equitable Ownership
- 5 Who Reported the Income on their Overseas Tax Return?
- 6 Foreign Tax Credit Mismatch
- 7 Getting into US Tax and Reporting Compliance
- 8 Late Filing Penalties May be Reduced or Avoided
- 9 Current Year vs Prior Year Non-Compliance
- 10 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 11 Need Help Finding an Experienced Offshore Tax Attorney?
- 12 Golding & Golding: About Our International Tax Law Firm
Are Foreign Parents Using Your Overseas Account for Investments?
As foreign parents age, and especially in situations in which their adult children may reside in a different country such as the United States, it is not uncommon for the parents to include their children as joint owners or signatories on their bank accounts. Oftentimes, the parent may not even tell the child they have been added to the account until several years after including them or until an emergency type of situation arises. This can cause problems for U.S. Person children whose parents have foreign accounts and include their children on the foreign account(s). That is because US persons who have ownership, signature authority — or even joint ownership of an account in which the funds are not theirs — are required to report their status to the US government on one or more international information reporting forms such as the FBAR and Form 8938. Moreover, when these types of accounts are more than just bank accounts, but rather investment accounts that generate significant income it can be even more complicated for the US person.
Foreign Account Ownership vs Signature Authority
When a person has ownership of an account or co-ownership of a foreign account, they are presumed to own whatever portion of the money in the account represents their ownership status. For example, if a person is a 50% owner of the account, then generally the IRS will determine that 50% of the funds are theirs as well as 50% of the income generated. Conversely, when a person only has signature authority over an account then generally, they are not deemed to own the funds or the income generated in the account.
Worldwide Income Taxation
It is important to keep in mind that unlike most other countries across the globe, the United States taxes US persons on their worldwide income. Thus, if a foreign national resides in the United States or even abroad but has US person tax status as either a citizen or resident, all of their income is taxable by the U.S. Therefore, if they are deemed the owner of a foreign account or joint owner, then foreign income from an account they are listed as an owner may be imputed to them. If instead, they are merely a signatory on an account owned by their foreign parents, then generally they are not imputed the income generated from the account because they are not the owner of the account.
Legal vs Equitable Ownership
From a baseline perspective, when a Taxpayer co-owns a foreign account, they are deemed to owe the respective portion of the funds and the income generated from the account relative to their ownership perspective. But, a distinction may be made between legal ownership and equitable ownership. While the US person child may legally be listed as a 50% co-owner of the account, if none of the money is theirs and they did not contribute any funds to the account, then there is the potential position to be made that they do not have any equitable ownership of the funds and the income should not be imputed to them.
Who Reported the Income on their Overseas Tax Return?
If the foreign parent files tax returns overseas to claim all the income, then that would help show that the U.S. person child does not have ownership rights of the money. If instead, the parents filed their own tax return for only a portion of the income as well as filed a foreign tax return for their child’s portion of the income, 50% would be presumably be imputed to the child. And, if taxes were paid on the income overseas by the child or on their behalf then they can usually claim these payments as foreign tax credits on their U.S. tax return — so that they are not paying double tax.
Foreign Tax Credit Mismatch
The concern with foreign tax credits becomes that, for example, if the child is deemed a 50% owner for example but the parents filed tax returns in the foreign country claiming all the income as their own – and they paid all of the foreign taxes due – the child may not have any foreign tax credits available. Thus, if the IRS was to impute the income to the child but the child did not pay any taxes overseas for the income or it was not paid on the behalf (because the parents claim the income and paid the taxes), it could result to the unjust outcome of the US person child having to include the income but not having foreign tax credits to apply.
Getting into US Tax and Reporting Compliance
While the failure to timely report the accounts and income could result in significant fines and penalties, oftentimes taxpayers in this type of situation can minimize or eliminate penalties by entering one of the offshore amnesty programs.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.