US Government Crack Down On Unreported Offshore Accounts

US Government Crack Down On Unreported Offshore Accounts

US Government Crack Down On Unreported Offshore Accounts

In recent years, the US government has made enforcement of foreign accounts compliance a key priority. While taxpayers may be most familiar with the FBAR Form (aka FinCEN Form 114), there are several other international information reporting forms the taxpayers should be aware of if they have foreign accounts, assets, investments, gifts, and/or foreign entities that they have invested in. There are many scenarios that can lead to IRS penalty enforcement – some more common than others. Noting, that even if you fall into one of these five scenarios, you can usually use one of the offshore amnesty programs to see if we get into compliance. Let’s look at a few common examples.

Common Foreign Account/Asset Reporting Scenarios

The following is a list of some of the more common situations that taxpayers may find themselves in for failing to report one or more international information reporting forms:

Foreign Accounts: Total Annual Aggregate Total

When a US person has foreign bank or financial accounts, they may be subject to the most common type of reporting, which is the FBAR (in addition to other forms, such as Form 8938 and Form 8621). It is important to note, that the annual aggregate total of ‘more than $10,000’ it’s not based on a per account threshold but a total value of all the accounts combined. Therefore, even if none of the taxpayers’ foreign accounts exceed $10,000, but the total value of all the counts combine exceeds $10,000 — the taxpayers are required to file the FBAR Form.

Not Just Bank Accounts

When it comes to many of the international tax forms such as the FBAR or Form 8938 it is not limited to just bank accounts. It includes all types of foreign financial accounts such as investment accounts, pooled fund accounts, foreign pension plans, and even certain foreign life insurance policies.

Foreign Gifts & Trust Distributions

When a person receives a gift from a foreign person or trust distribution from a foreign trust, they may be required to file a Form 3520. The failure to do so may result in significant fines and penalties — upwards of 25% value of the gift and even more so if it is a foreign trust.

Foreign Trusts

When a US person has ownership of a foreign trust, they are required to report this trust on international reporting forms 3520 and 3520-A. In recent years, the Internal Revenue Service has significantly increased penalty assessment and enforcement for this type of non-compliance. Since these are assessable penalties, they are handled differently and taxpayers have limited options to dispute the penalty – timing the responses to the IRS is very important.

Foreign Entities

When a taxpayer has ownership or an interest in a foreign corporation, partnership, or even a disregarded entity — they have much more complicated reporting requirements under US tax law. Depending on the type of entity that is being reported will determine the need to file international forms such as Form 5471, Form 8865, and Form 8858. In addition, if the entity is considered a Controlled Foreign Corporation, there may be additional reporting requirements and tax headaches in conjunction with GILTI and Subpart F Income.

IRS Compliance Programs 

Here are some of the more common enforcement programs to be aware of:

FATCA Filing Accuracy

      • “The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions.

        Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by their U.S. account holders and substantial U.S. owners under the FATCA. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.”

      • “On March 22, 2019, the Offshore Private Banking Campaign was announced.  This campaign addresses tax noncompliance related to taxpayers’ failure to report income generated and information reporting associated with offshore banking accounts.  Treatment streams under this campaign will also address individual FATCA compliance.  FATCA records, including those received under intergovernmental agreements (IGAs), will be reconciled with U.S. domestic reporting.  As part of this process, we will review information exchanged under Model 1 and 2 IGAs. This includes but is not limited to:

          • identifying omissions (e.g. failure to disclose accounts);

          • identifying account holders from records received with missing information (e.g. taxpayer identification number); and 

          • identifying account holders from records received from pooled reporting under Model 2 IGAs.

      • U.S. persons are subject to tax on worldwide income from all sources including income generated outside of the United States. It is not illegal or improper for U.S. taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these offshore activities.

      • The IRS is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.”

Post Offshore Voluntary Disclosure Program (OVDP) Compliance

      • “U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.”

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

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.