The Internal Revenue Service (IRS) has consistently called out high-income earners for tax compliance issues, particularly those with assets and accounts beyond U.S. borders. This focus aims to minimize tax evasion and ensure that taxpayers contribute their fair share. For high-income individuals, the stakes are particularly high, as the complexity of their financial portfolios can often lead to scrutiny.
Understanding IRS reporting requirements for foreign assets
High-income earners with interests in foreign assets must navigate a complex web of reporting requirements. As if attempting to navigate these difficult regulations was not enough, the IRS is also using advanced methods, including AI tools, to help search through filings for any potential mistake. If found, such mistakes could escalate into allegations of a failure to comply and lead to significant penalties.
Taxpayers are wise to have a basic understanding of these requirements to help better ensure compliance. Two key examples include:
- FBAR (Foreign Bank and Financial Accounts Report): Tax authorities generally require taxpayers to file this form if they have financial interest or signature authority over one or more accounts outside the U.S. that have an aggregate value that exceeds $10,000 at any time during the calendar year.
- FATCA (Foreign Account Tax Compliance Act): Tax authorities also expect taxpayers holding foreign financial assets with an aggregate value exceeding the reporting threshold (varies by residency and filing status) to report these assets on Form 8938, Statement of Specified Foreign Financial Assets.
These are just a few examples of reporting mechanisms the IRS uses to track funds in foreign accounts. It is important that those with foreign accounts review their situation to better ensure they are in compliance with applicable tax regulations. It is also important to note that these rules evolve. Tax strategies that were compliant years ago may no longer be today. As such, it is important to regularly review your holdings and applicable laws and make adjustments as needed to better ensure compliance.
Penalties for non-compliance
Compliance is important because the penalties for failing to report foreign assets are severe. Those who fail to file an FBAR can face penalties up to $10,000 for non-willful violations, or the greater of $100,000 or 50% of the account balances for willful violations. Failing to file Form 8938 can result in a $10,000 penalty, with an additional $50,000 for continued failure after IRS notification, plus a 40% penalty on an understatement of tax attributable to non-disclosed assets. These penalties are often updated so it is important to check for changes on a regular basis.
Even more concerning, if the IRS can establish that these failures were willful attempts to avoid one’s tax obligations, the agency could push for criminal penalties, potentially including imprisonment. The consequences of non-compliance are not worth the risk. Consulting with a tax professional who understands the intricacies of international tax law can review your situation and discuss your options — mitigating the risk of any surprises.