If you think Uncle Sam has too many other problems to worry about what assets you may be hiding overseas, think again.
"Governments are catching up to the fact that there is now a global economy and are requiring increasing reporting to ensure they collect ‘their fair share’ of tax on your assets and income," says Laura Zwicker, a tax and wealth planning partner at Greenberg Glusker.
If you hold interests in foreign assets, they likely have reporting requirements in addition to reporting the income generated by those assets on your individual income tax returns. "Depending on the nature of the foreign asset, there may be more than one set of reporting requirements to comply with and the reporting may be due at different times during the year," explains Zwicker.
Under FATCA (Foreign Account Tax Compliance Act), individuals need to file Form 8938 to report foreign assets if they are worth more than $50,000. There is also an FBAR filing requirement to report foreign bank accounts on FinCen Form 114, if the accounts are worth more than $10,000. You will also need to answer the questions on Form 1040 Schedule B, Part III, about foreign accounts and trusts, says Mark Luscombe, principal analyst, tax and accounting with Wolters Kluwer.
FATCA Form 8938 is due with your federal tax return April 15, though you can apply for a six month extension. The FBAR form is to be filed by June 30. As of next year, it will be due with your tax return.
Know what matters
The types of assets reportable under FATCA include: financial accounts held at foreign financial institutions, foreign stock or securities not held in a financial account, foreign partnership interests, foreign mutual funds, foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor, and foreign private equity and hedge funds.
Understand this is serious business
If you’re inclined to dismiss these regulations and choose not to comply, be ready to pay the price. Under FATCA, penalties could be up to $10,000 for each 30 days in non-compliance, up to a maximum of $50,000 for each year of non-compliance. A 40 percent accuracy related penalty could apply. Under FBAR, a penalty of the greater of $100,000 or 50% of the account balances, or the IRS may set the penalty at $10,000 if not willful. There could also be some threat of criminal prosecution, warns Luscombe.
Don’t think you can keep assets secret
"The IRS is gaining increasing cooperation from the vast majority of foreign banks to provide information on U.S. account holders," says Luscombe.
It’s better to fess up. There is a voluntary disclosure program to come forward and avoid some penalties or criminal prosecution if you come forward and into compliance before the IRS busts you.
One of the best known offshore account cases involved the founder of Beanie Babies Ty Warner. In that situation the IRS found in excess of $93 million in offshore accounts that were not disclosed to the U.S. government. "Miraculously, he was able to avoid any jail time in that situation due to the specific facts of his case. He apparently paid $53 million in penalties. Nonetheless, whether it’s $50 million or $50,000, the requirement and potential penalty factors remain the same," says Eric Kalnins, a partner with Handler Thayer.
You’ll only dig yourself deeper in a hole if you do things to avoid detection. "You’re building a case for the IRS for willful tax evasion. How does one explain the continuous movement and structuring of accounts throughout the world? In addition, how do you eventually get the assets back to the U.S.? Every transaction now creates a paper, or digital trail," says Kalnins.
What would be your game plan? If you transfer $1 million from your foreign account to your U.S. account in order to repatriate the assets, how do you explain where the assets came from if you never disclosed an offshore account? Are you going to fly overseas, and illegally bring back a briefcase full of cash or purchase expensive jewelry or other items? "Now you’re potentially breaking additional laws in an attempt to cover your failure to comply with FATCA and FinCen requirements. Now the government is potentially pursuing all types of claims against you. What went from a simple disclosure and penalty matter, has arisen to a criminal proceeding," says Kalnins.
Take stock of your assets
An older relative or parent may have had an account overseas for his or her lifetime and thought nothing of it. If you inherit it, or you have a power of attorney over such an asset, you need to contact an attorney in order to figure out the best way to take title and to properly disclose such an account or asset.
"Most of the situations we assist with deal with individuals who did not know they had a disclosure requirement and the client is shocked when we tell them about the potential penalties that they are subject to," says Kalnins. Some people follow through and get him the information needed to make a proper disclosure to the IRS, others thank him for his time, say they will get back to him and he never hears from them again. "They decide to roll the dice and do nothing at all to remedy the situation. Eventually you will get caught and there will be a lot of explaining to do. The regulatory requirements and disclosures that banks now have to comply with are extensive and it is only a matter of time before the technology and information sharing that goes on between governments will catch up to you," warns Kalnins.
What’s the best advice?
"If you already have an offshore account, do not simply close it because you do not need it at this time. You may need it later and it will be much more difficult to set up in the future," says Kalnins.
However, make sure you properly disclose that account each year, pursuant to the FinCen and FATCA requirements. Says Kalnins, "Failure to do so will only open you up to potential IRS scrutiny and cause a lot of sleepless nights, wondering if, and more likely when, the IRS is going to come knocking. It’s important, now more than ever, to have good, competent tax counsel for any offshore structures or planning."