Representing Clients in California and in Federal Courts Throughout the United States

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Defense For Offshore Bank Accounts

The IRS has set up a trap for the unwary foreign resident working or studying in the United States. Did you know that anyone spending more than 182 days in the U.S. has to report all their foreign holdings to the government at the risk of losing all of those assets?

Even if you didn’t know about those reporting obligations, and most people we have talked to have no idea about the extent of their obligations to report foreign holdings, the IRS recently issued a press release reminding people of their obligations to make timely filings.

The IRS requires anyone residing in the United States to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. This foreign source income may have to be reported in three separate places. Part III of Schedule B of your tax return asks whether you have a financial interest, or signature authority, over a foreign financial account and requires taxpayers to report the country in which each account is located. The definition of a financial account is fairly broad. If that account is worth more than $50,000 the taxpayer also has to file a form 8938 which requires the taxpayer to list and identify each foreign account. To make matters worse, if the total value of the foreign financial interests exceeds $10,000 at any time during the year, you also have to file the dreaded Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1. This form duplicates much of the information on the IRS form 8938, and has to be in the hands of the Treasury, not the IRS, by the end of June.

What Are The Penalties?

The penalty for the failure to file an FBAR can be draconian, 50 percent of the value of the account. Moreover, since the penalty can be imposed on a yearly basis, and interest is imposed on top of the penalty, failing to file the form for two years could cost more than the balance of the foreign account.

To many Americans, the idea of penalties on people hiding money offshore seems appropriate, and in some circumstances it may be, but we are a nation of immigrants and more than half of the students in our graduate schools are foreign nationals. Any resident who has signature authority over a foreign account risks the draconian penalties.

For example, any American who has signature authority over his or her parents’ accounts in Mexico or Canada must disclose that account to the government. Workers on an H-1 visa have to disclose all of their foreign assets. Indian immigrants with extended families, and often real estate back home, are legally required to disclose their foreign financial interests. Anyone with foreign assets has to disclose those assets to the government or risk losing them, and going to jail, if the government finds out about those assets.

The likelihood of the government finding out about those accounts is growing daily. The government has entered into information-sharing agreements with many countries. Even Switzerland recently agreed to provide financial information to the United States. Moreover, the U.S. Foreign Account Tax Compliance Act, or FATCA, requires the foreign banks themselves to provide the account information to the United States government or the bank itself will be subject to penalties.

The IRS has had a series of Offshore Voluntary Disclosure Initiatives, each with increasingly more substantial penalties as a way to encourage taxpayers to disclose and report. Those disclosures have led the IRS to a treasure trove of data highlighting banks, promoters, and accountants who have assisted the participants in the Voluntary Disclosure Initiative. The information from those entities and individuals is being screened and will lead to the discovery of many others who have not reported their foreign interests. In this era of tight budgets and fiscal need, owners of foreign accounts are an easy and lucrative target. The IRS has already collected $6 billion from those who volunteered to come forward; they are looking to drastically up that number in the future.

We have represented many people whose foreign assets have been discovered by the government, and many others looking for a way to disclose those assets and avoid the draconian penalties. The era of going to Switzerland for the summer to visit your money, or spending the winter in your second, undisclosed, Mexican home, is over. You need professional help to navigate through this minefield, stay out of jail, and, hopefully, remain solvent.