U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources, including foreign accounts, and pay taxes on income from those accounts at their individual rates.
There are many legitimate reasons for holding offshore accounts, including convenience, investing and to facilitate international transactions. By law, U.S. taxpayers are not permitted to use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid paying tax.
In most cases, affected taxpayers need to fill out and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Those taxpayers with foreign accounts whose aggregate value exceeds $10,000 at any time during the year must also file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Certain taxpayers may also have to file Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds. Additional filing requirements apply to those with foreign trusts, foreign business entities, and certain foreign investments.
As you know, we request certain foreign financial information from you each year via our Tax Questionnaire. We specifically request this information because non-disclosure can result in severe penalties. For example, the current FBAR maximum penalties are $12,921 for a non-willful violation and the greater of $129,210 or 50% of account value for a willful violation.
Also, there’s been a recent global collaboration to crack down on non-disclosure, which makes the proper disclosure of foreign financial activity to the IRS more important than ever. The Joint Chiefs of Global Tax Enforcement (J5) recently combined forces to put a stop to the suspected facilitation of offshore tax evasion. The J5 consists of the United Kingdom, United States, Canada, Australia and the Netherlands.
The J5 will work together to gather and share information and intelligence and will focus on a number of areas, including offshore financial accounts. For U.S. taxpayers who utilize offshore accounts, this means an enhanced risk of scrutiny and, with it, an enhanced risk for civil or criminal prosecution. Specifically, those who have offshore accounts with “problem” banks are at increased risk for IRS audits and criminal tax fraud investigations. The IRS’s Chief of Criminal Investigation has said the J5’s formation means that those who have not properly disclosed their foreign income and/or activity “should be on notice that their days of non-compliance are over.”
We encourage you to report your foreign accounts and foreign financial assets as required by law. If you have any questions or concerns, please contact your Beaird Harris tax advisor to discuss your situation and, if applicable, some of your available options for compliance.
Ron Skalberg
