U.S. citizens and permanent residents engage in financial activity overseas for a variety of reasons. Despite the stigma surrounding offshore bank accounts and other assets held overseas, they are completely legal and not exclusively used by the ultra-wealthy for tax evasion. Sometimes, citizens might have familial or other personal connections to individuals in foreign countries and want to keep an account there.
However, there are complex rules for reporting and notifying the IRS and other U.S. agencies about offshore assets. While you should always consult with an experienced and knowledgeable tax law attorney if you are in a dispute concerning offshore bank accounts, our firm has compiled a list of three common mistakes taxpayers make in this type of situation.
1. Simply not reporting offshore bank accounts, income, investments, stock, and other assets (including pensions and retirement accounts). Some taxpayers make the mistake of thinking that because they opened the account and are in compliance with the foreign country’s rules, they do not need to notify any U.S. agencies about the account. There are various forms that must be completed for accounts held offshore, including the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938.
2. Not reporting cryptocurrency. Up to an estimated 80 percent of the servers that host cryptocurrency are in foreign countries. This means that taxpayers must report these cryptocurrency accounts as offshore bank accounts. To ensure you are not neglecting to report cryptocurrency as foreign holdings, you should ascertain the whereabouts of the servers by contacting the exchange which holds your cryptocurrency.
3. Not reporting real estate held indirectly. Real property held directly by American taxpayers generally does not have to be reported on many of the common forms used for reporting offshore bank accounts. However, in many situations, commercial foreign real estate (not personal property) is owned by a trust, corporation, or other business entity. If this is the case, you might be obligated to note this on an IRS form.
Consequences of Not Reporting Offshore Accounts
You will likely be on the hook for penalties, interest and back taxes for not reporting your offshore financials to the IRS. The penalties can be draconian — even up to 50% of the highest balance of the account. Also, a recent amendment to the Fair Credit Reporting Act requires countries to notify the U.S. when citizens open a bank account in their respective jurisdictions. Countries are motivated to comply with this amendment because they face sanctions for not complying.
Attorney Robert V. Boeshaar can help you if you have been contacted by the IRS, or are concerned you may be contacted by the IRS, regarding your unreported offshore assets. Our firm exists to help individuals and small businesses resolve their disputes with the IRS. Please reach out to us by calling at 206-899-0869 to get started on your free 15-minute consultation. We look forward to hearing from you!
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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