If you have unreported foreign accounts of more than $10,000 and unreported income, you better come clean with the IRS or you could be in a heap of tax trouble, the type that can cost you hundreds of thousands of dollars and even land you in jail.
While trading has gone global, the IRS is becoming xenophobic over reporting foreign income and accounts.
Americans are trading different types of instruments all around the world. Some trade from U.S. brokerage and bank accounts, but others trade directly through foreign brokers and banks. The U.S. taxes all income, which means it taxes foreign accounts too.
The IRS is getting very tough on so-called “tax cheats,” — U.S. taxpayers hiding income and assets in offshore accounts. These include, but are not limited to, foreign-based banks, brokerage firms, and some retirement funds, entities and trusts.
Hiding offshore income or just didn’t know to report it?
While some Americans set up offshore bank accounts in clandestine ways to purposely cheat the IRS and others including creditors, investors, customers, and spouses, others inadvertently omit reporting offshore bank and brokerage accounts, even though they report this foreign annual income on their income tax returns. These taxpayers don’t even realize they have to file a separate Reports of Foreign Bank and Financial Accounts (FBARs) to the Treasury.
In many cases, the group that has reported all income can comply by filing late FBARs and thereby avoid tax penalties. But those taxpayers with both hidden foreign income and foreign accounts face a much greater burden with the IRS. Keep in mind the IRS figures that if you report foreign income, you probably will report the foreign accounts and vice versa.
Unfortunately, it’s not easy for the IRS to distinguish between purposely cheating the IRS or inadvertently omitting forms and income. Generally, if a taxpayer hides large amounts of income and related assets offshore over many years, he is likely trying to cheat the IRS.
Consider reporting hidden offshore income and accounts under a new IRS program
The IRS is offering a second voluntary compliance FBAR reporting program, which ends on Aug. 31, 2011. Its first program ended Oct. 15, 2009 and it drew out many more taxpayers than envisioned.
It’s a complex filing and many of those taxpayers are still being sought out, even though they filed by the deadline. It’s a gamble to assume there may be a third program, so it’s wise to consider coming clean and joining this second program before it ends.
FBAR reporting includes obvious foreign accounts like bank and brokerage accounts, and the less-obvious ones like foreign mutual funds, foreign pension plans and life insurance. This applies also to individuals with signature or other authority over, but no financial interest in, such accounts/plans (e.g., offshore mutual fund managers). IRS and the Treasury just announced that certain individuals with only signature authority over foreign accounts have a one-year extension to file the FBAR, after the upcoming June 30, 2011 filing deadline. Offshore entities and trusts require special tax reporting too.
Don’t put your head in the sand on these tax issues because the consequences are beyond your wildest imagination — possible jail time for willful and very serious cases, plus big payments for all sorts of penalties, interest, and back taxes. That’s why I say xenophobia, because it’s that scary and attacking.
Congress and the administration are backing the IRS here to “close the tax gap.” They agree they should first improve the current rates and rules before resorting to raising tax rates, which is viewed as a third-rail of politics for Republicans.
Forget about trying to sneak in amended income tax returns to report hidden foreign income with late FBARs. The IRS made it clear that “quiet disclosure” of hidden offshore income won’t work. The IRS crafted its voluntary compliance program as a “my way or the highway” program.