If you follow the news even casually, you have doubtlessly read about the Paradise Papers, a recent leak of roughly 13.4 million financial documents exposing the offshore accounts and assets of more than half a million entities and individuals. While no indictments have resulted from the Paradise Papers so far – likely due to the leak’s recent timing, combined with the sheer amount of information for investigators to sift through – some attorneys and tax professionals are speculating that criminal charges, and/or hefty civil penalties, could be on the horizon for certain taxpayers. These threatening possibilities should remind taxpayers to promptly disclose unreported foreign income and assets. However, due to the complexity of the procedures for accurately reporting offshore accounts, it is essential to consult with an experienced FBAR attorney before attempting to file.
Our international tax attorneys have, on several occasions, written about the Paradise Papers. (In case you missed our earlier articles, you can view them at our tax law blog (here and here) However, to provide a quick summation, a German newspaper obtained millions of leaked offshore tax documents in November, leading to a global investigation by hundreds of journalists. While most of the information contained in the leaked documents appears to reflect perfectly lawful uses of the U.S. Tax Code, the Internal Revenue Service (IRS) – which has a recent history of aggressive international tax enforcement – may begin to audit or investigate certain taxpayers if any discrepancies or omissions are detected. Thus, the Paradise Papers should serve as a “wakeup call” for taxpayers who, for any reason, have failed to report offshore income and assets, particularly since a similar leak occurred last year when the Panama Papers were released.
The question is, what actions should such a taxpayer actually take? In a word, what are the IRS’ foreign income reporting requirements, and how does a taxpayer fulfill them?
Just as you report domestic income on your annual income tax return, or Form 1040, you are also required to report foreign income, provided certain criteria apply. However, there are different sets of criteria for different reporting requirements, which can cause confusion for taxpayers. To provide an example, let’s examine two related but separate tax requirements, both of which are of paramount importance for taxpayers with global income: FBAR (Report of Foreign Bank and Financial Accounts, or Foreign Bank Account Reporting) and FATCA (the Foreign Account Tax Compliance Act).
FATCA is a federal law, enacted in 2010 as part of the HIRE (Hiring Incentives to Restore Employment) Act. To quote the IRS directly, FATCA “generally requires that foreign financial Institutions,” such as foreign banks, “and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments.” In other words, foreign banks are financially incentivized to report their clients to the IRS.
Additionally, “The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.” The key phrase here is “depending on the value”: specifically, amounts of or above $50,000. To comply with FATCA, you must file Form 8938 (Statement of Specified Foreign Financial Assets), which should be attached to your personal income tax return and timely filed.
The FBAR is an electronic tax document, officially titled FinCEN Form 114 (previously TD F 90-22.1), which certain taxpayers are required to file under the Bank Secrecy Act, which was enacted in 1970. You are required to file an FBAR if:
To meet FBAR requirements, you must electronically file FinCEN Form 114 (also called FinCEN Report 114), via the BSA E-Filing System, by the applicable FBAR deadline, which is generally April 15 unless the filer utilizes an extension.
Taxpayers frequently run into problems – often in the form of a tax audit – because they mistakenly assume that fulfilling their FBAR requirements also fulfills their FATCA requirements, or vice versa: an understandable misunderstanding, considering the overlap that exists between these offshore disclosure rules. However, this is a costly error which can cost a taxpayer dearly in FBAR penalties or FATCA penalties, both of which – at the “low” end – begin at a $10,000 civil penalty. Penalties may be assessed per violation, as in cases involving failure to file an FBAR, or per month that the failure to fail persists, as in cases involving failure to file Form 8938.
Even if you do not believe that you are included in the Paradise Papers, it is not only prudent but mandatory, to disclose offshore financial interests to the IRS. Failure to do so will, at “best,” expose you to a risk of expensive fines. In a worst-case scenario, failure to file may even lead to criminal charges, such as tax evasion charges, potentially resulting in conviction and imprisonment.
If you require assistance reporting foreign income to the IRS, make sure you are guided by a trusted, zealous, and meticulous tax attorney with more than 20 years of experience in international tax law. To arrange a reduced-rate consultation with the experienced FBAR lawyers at the Tax Law Office of David W. Klasing, contact us online, or call today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
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Foreign income and information non-compliance
Here is a link to our practice video on warning signs than an audit has gone criminal.
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