Offshore Asset Tax Filing Requirements
What are Offshore Asset Tax Filing Requirements: For the past several years, the Internal Revenue Service has strictly enforced international tax and reporting filing requirements. Not all offshore assets are reported the same; the nature and extent of the reporting is dependent on the specific type of asset and the total value of each asset category. It is important that Taxpayers are able determine what type of foreign tax and reporting requirements are necessary for them to stay (or get into) compliance with the international information reporting rules. There are many different IRS foreign tax forms that a US Person may have to file when they have foreign assets. When it comes to offshore assets in particular, there are two main issues that a US taxpayer has to contend with: the tax aspect and the reporting requirements. Let’s take a brief look at the offshore asset tax filing requirements in 2021.
Offshore Asset Tax Filing Requirements
From a baseline perspective, the US government taxes US Person individuals on their worldwide income. That means that a US person is taxed on income that is generated within the United States — as well as income that is earned from overseas. The US tax requirements are much different than the tax rules of foreign countries — which tend to follow a residence and not citizenship-based requirement (noting: citizenship actually refers to us persons and not just US citizens). Thus, when an offshore asset generates income such as foreign interest, dividends, capital gain, rental income — or any other type of foreign income — it is generally going to be taxable by the US Government and included on the US tax return.
It is important to note that there are some highly complex tax rules involving foreign income that is generated from foreign entities (see below). Moreover, the offshore asset tax filing rules are further complicated by the PFIC rules, which impacts certain types of income generated from various Passive Foreign Investment Companies.
Reporting Requirements for Offshore Assets
In addition to the offshore asset tax filing rules are the IRS reporting requirements. The reporting requirements can also be extremely complicated. This because oftentimes the international reporting forms that a Taxpayer is required to file can be very complex in comparison to the Taxpayer’s knowledge of the overseas asset. For example, the Form 8938 — which is used to report Specified Foreign Financial Assets — is typically not overly difficult to prepare — while the Form 5471 (which is used to report foreign corporations) can being incredibly complex. And, this complexity is heightened when it is a Controlled Foreign Corporation (CFC) — and issues such as Subpart F income, Section 962 Elections and GILTI come into play.
How to Get into Offshore Compliance (Safely)
The Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Can I Just Start Reporting Offshore Assets This Year Instead?
If you had a prior year tax or reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as a Quiet Disclosure. The IRS has warned taxpayers that if they get caught in a Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.
Our International Tax Lawyers Represent Clients Worldwide
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and Offshore Asset Tax Filing and Reporting.
Contact our firm today for assistance.