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As a U.S. citizen or tax resident, you are required to report worldwide net income. It makes no difference if you earn income offshore that is taxed in a foreign jurisdiction, it is also taxable in the U.S. The U.S. government provides relief from double taxation through the foreign tax credit, foreign earned income exclusion or via a tax treaty.
Annually, tens of thousands of U.S. citizens and tax residents report income earned in foreign countries every year, and many keep this money in offshore or international bank accounts. These bank accounts are required to be disclosed to the IRS each year in what is known as a foreign bank and financial accounts report (FBAR) where the combined balance of the offshore accounts exceeds $10,000 U.S. at any time during the calendar tax year.
A surprising number of taxpayers make the mistake of thinking that there is no need to disclose foreign information and offshore income on their tax return because the money and income-generating assets are not located in the U.S. and many incorrectly assume thus out of reach of the IRS. Moreover, out of a misguided fear that an offshore inheritance or gift will get taxed in the U.S. if reported, offshore gifts and inheritances that give rise to the offshore income-generating assets or offshore funds go undisclosed on form 3520. These omissions, especially where deemed willful, can have very serious life-altering repercussions, including criminal tax and information reporting exposure.
Most foreign banks are complying with FACTA and voluntarily reporting U.S. taxpayers that have offshore bank accounts and annually supply such information to the IRS. This offshore reporting can very easily lead to an offshore foreign account audit. If you are audited or criminally investigated, and the IRS finds out you did not disclose your foreign income, accounts, or assets, you could face severe civil and criminal penalties in addition to being required to pay what you owe. Our experienced International Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing can help those who have failed to adequately disclose this information be brought into compliance, potentially through the expat or domestic streamlined disclosure program or the traditional offshore voluntary disclosure program. Read below to learn if you need to file for voluntary disclosure if you failed to disclose money made abroad in 2018.
Income earned abroad can be reported on your tax returns in the same way you usually report your U.S. income. For example, earned income (wages) is reported on line 7 of Form 1040, interest and dividend income is reported on Schedule B, etc. If you fail to report income earned abroad, and this is discovered during an audit or criminal tax investigation, you could face severe penalties, including a potential referral to the department of justice income tax division for criminal prosecution.
Often, an experienced tax lawyer like those at the Tax Law Offices of David W. Klasing will be able to help get you back into compliance by filing the appropriated amendments to your returns, preparing any missing foreign information returns, and helping you enter into a streamlined of voluntary disclosure program, depending on if badges of fraud are apparent in your fact pattern that show your actions were willful. Even if you have willfully committed tax crimes, self-reporting the fraud through a voluntary disclosure program before the IRS has started an audit or criminal tax investigation will usually result in the taxpayer being brought back into compliance without ever facing criminal tax prosecution.
As noted above, if you make money abroad and hold it in a foreign or offshore bank or financial account, you may have to disclose these accounts on a separate IRS form known as a foreign bank and financial accounts report (FBAR). In this form, you will be required to report all of your foreign financial accounts, including brokerage accounts, bank accounts, mutual funds, and more. This law also requires you to keep specific records on each of these accounts throughout the year. The purpose of the report is to inform the Internal Revenue Service of any accounts or other assets you own overseas. In recent years, the IRS has been taking investigations into unreported offshore accounts and assets very seriously, and many criminal investigations and prosecutions have been opened regarding taxpayers whose audits show that they failed to make disclosures required under FBAR.
In the early 2010s, the IRS initiated a program known as the Offshore Voluntary Disclosure Program (OVDP), which allowed taxpayers who failed to make required FBAR reports in previous years to self-disclose the information that should have been reported. In exchange, they could severely limit potential penalties. This program was a tremendous success but was canceled in 2018 due to declining taxpayer participation. However, the IRS has other options for foreign account holders who have failed to make past disclosures, including the delinquent FBAR and Foreign Information programs, streamlined disclosure programs for both taxpayers living in the U.S. and U.S. citizens living abroad.
To be eligible for a streamlined voluntary disclosure you must first certify that your conduct was non-willful, meaning you did not deliberately try to avoid paying taxes. If you qualify for the program, you must fill out a form disclosing the previously undisclosed accounts or assets and provide the agency with your tax returns from previous years. The experienced International Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing can help you gather and reconstruct the necessary records to submit your application. If your application is accepted, you will be given a near-guaranteed pass on criminal liability, and your civil liability will also be limited to the program terms.
Of course, this specific option is open only to those whose conduct in failing to disclose the accounts was non-willful. Falsely certifying non-willfulness can result in severe criminal penalties. It is important to note that willfulness in these cases can sometimes be found through legal terms of art like “willful blindness,” and that you consult with a tax lawyer before making any such certifications. Even if your conduct was willful, our tax lawyers at the Tax Law Offices of David W. Klasing might be able to bring you back into compliance through other means, such as filing through the traditional voluntary disclosure program or at least work to mitigate the damage and help you avoid the most severe penalties.
For those who failed to disclose foreign income or foreign bank accounts, gifts, inheritances or assets, there are pathways back to compliance without having to face criminal tax charges or draconian fines. However, which voluntary disclosure program is best for you will vary depending on your circumstances, and you may be required to certify that your conduct was not willful. You must consult with an experienced tax attorney like those at the Tax Law Offices of David W. Klasing before making a voluntary disclosure. We can make sure you are not opening yourself up to more criminal liability and that the paperwork is filed correctly and completely. To schedule a consultation, call us today at (800) 681-1295.
See our 2011 OVDI Q and A Library
See our FBAR Compliance and Disclosure Q and A Library
See our Foreign Audit Q and A Library
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