United States taxpayers with financial ties outside the country face heightened reporting obligations. A failure to disclose certain foreign assets can create audit risk because federal reporting systems allow cross matching of third-party data, treaty-based exchanges and prior filing history. This means that the Internal Revenue Service (IRS) will likely notice if a foreign asset is not disclosed. Once an audit starts, the IRS often expands the scope to multiple years, related entities and offshore structures.
When am I required to disclose foreign assets?
There are many different laws and regulations that guide disclosure requirements. The most common are FBAR reporting for foreign financial accounts and the Form 8938 under FATCA for specified foreign financial assets as well as income reporting for interest, dividends, capital gains, rentals, royalties, plus business income.
- FBAR FinCEN Form 114: Required when foreign financial accounts are over $10,000 at any time during the year. This includes bank accounts, securities accounts, certain foreign pensions plus some foreign pooled funds.
- Form 8938 FATCA: Required when specified foreign financial assets are over applicable thresholds, which vary by filing status, residency and time of year. This can include foreign accounts, stocks outside a United States brokerage, foreign partnership interests and certain foreign trusts.
These filings are examples of the more common forms required for those with foreign accounts. There may be additional reporting requirements. The specifics vary depending on the details of each situation.
How does nondisclosure trigger an audit?
Nondisclosure can trigger an audit through multiple channels including FATCA reports from foreign financial institutions, information exchange agreements, Currency Transaction Reports, Form 1099 mismatches tied to inbound transfers, plus discrepancies between lifestyle indicators and reported income. Late filed disclosures after an IRS inquiry can be viewed as reactive, which can increase scrutiny of willfulness.
What are the penalties for failure to report foreign assets?
Penalties can be severe as they are cumulative and assessed per year, per form. Financial penalties can quickly reach the hundreds of thousands and, if the prosecution can establish a willful intent to avoid tax obligations, imprisonment is also possible.
Taxpayers with offshore accounts, foreign entity interests, or cross border income should seek individualized legal guidance to help determine what they need to report on their tax filings to mitigate the risk of allegations of a violation.