Offshore Income and Filing Requirements
U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources, including foreign bank and financial accounts, and pay taxes on income from those accounts at the owner’s individual rates.
There are many legitimate reasons for holding offshore accounts, including convenience, investing, and to facilitate international transactions. However, U.S. taxpayers are not permitted to use offshore accounts, such as foreign bank and securities accounts as well as trusts, to evade paying taxes.
In most cases, taxpayers with foreign accounts are required to complete Schedule B on their annual 1040 tax return. Part III of Schedule B asks about the existence of foreign accounts and typically requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also be required to fill out and attach to their 1040 tax return Form 8938, Statement of Specified Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Additional filing requirements apply to those with foreign trusts.
Additionally, taxpayers with foreign accounts whose aggregate value exceeds $10,000 any time during the year must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), electronically through FinCEN’s BSA E-Filing System. Beginning in April 2016, the FBAR must be filed by the same deadline as the filing of your annual income tax return (including extensions).
Penalties For Noncompliance
Failure to report the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties. For failure to file a required FBAR, the penalty may be up to $10,000, if the failure to file is non-willful; if willful, the penalty can be $100,000 or 50 percent of account balances, whichever is greater. Criminal penalties may also apply.
For failure to disclose assets on Form 8938, the penalty may be up to $10,000, plus an additional $10,000 for each 30 days of non-filing after the IRS issues notice of a failure to disclose. The maximum total civil penalties are $60,000; however, criminal penalties may also apply.
Options Available For U.S. Taxpayers With Undisclosed Foreign Financial Assets
The implementation of FATCA, and increased enforcement of both the IRS and the Department of Justice, requires an increased awareness of your offshore reporting obligations and non-U.S. income and investments. Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers several options for addressing past failure to comply with U.S. tax law:
- IRS Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR Submission Procedures;
- Delinquent International Information Return Submission procedures.
It is highly advised that you seek experienced legal counsel before undertaking any of these options.
To learn more about the Voluntary Disclosure Program and any other options available to you, contact Rosefelt Tax Law at 866-995-0061 or reach out by completing our ten-second contact us form to know your real options. We serve clients from around the world at our offices in Bethesda, Maryland (Greater Washington D.C. Metro area), or from our satellite offices by appointment in Fairfax, Virginia and Saint Petersburg Florida.