International Enforcement is an IRS Priority: Immigrants are particularly vulnerable
By admin of MillarLaw A Professional Corporation On Sunday, May 12, 2019
The IRS announced its enforcement priorities include international reporting among the top two categories. I have represented taxpayer’s in disputes with the IRS and state taxing agencies over international and domestic tax issues for decades. What I have found is that there is a group of taxpayer’s facing international penalties; immigrants (typically first generation U.S. citizens) who are particularly vulnerable to penalties for various forms of failing to report (file Information Returns).
What are Information Returns? An Information Return is a disclosure document. Its intent is to advise the IRS or other agencies of the fact that the taxpayer (1) has an off-shore bank account, (2) is the grantor of or beneficiary of a foreign trust or (3) has an interest in a foreign corporation or partnership, (4) has received a gift or inheritance from a foreign person; or (5) has investment assets off-shore. Typically, no tax is due with the filing of an Information Return, but the penalties for late filing or non-filing can be huge.
Examples, (A) there is no tax due on the receipt of a foreign gift or inheritance regardless of amount, but the failure to timely file a Form 3520 can result in a penalty assessment of 25% -35% of the face amount of the gift or inheritance. (B) By now, most people are aware of the obligation to file a Report of Foreign Bank Account (FBAR), but the non-willful penalty is $10,000per year per account. A finding of “Willfulness” carries a penalty of the greater of $100,000 or 50% of the Highest account Balance in each year up to six (6) years. These are the civil penalties, criminal charges can also be brought. (ask Paul Manafort).
In my experience one class of taxpayer’s has a greater chance of non-compliance than any other, immigrants. First generation Americans may have family or business interests in their country of origin. Most are dual citizens. For various reasons many fail to report gifts and inheritances. In many cases the penalty for failing to report the inheritance or gift, results in a seven figure penalty. So whose fault is the non-compliance?
Tax returns are signed under penalty of perjury. Taxpayer’s are presumed to know the contents of their returns. Failing to read the return is not an excuse, but rather “willful blindness”. If a taxpayer uses the services of a professional to prepare their returns, the professional must be told about the offshore assets and income and render an opinion that the income or asset is not reportable. The defense of “Reasonable Reliance” requires a well reasoned opinion in writing to succeed.
The international reporting agreements and advances in computing power will make it easier for the IRS to track down non-compliant taxpayers. There are two important agreements that are leading to discovery of previously unreported accounts. First, the U.S. has adopted the Foreign Account Tax Compliance Act (“FATCA”) and , second, the Europeans have adopted Common Reporting Standards (“CRS”). When layered with Mutual Legal Assistance Agreements, between the U.S. and another country, the odds favor discovery of unreported accounts. The “matching programs” will search the FATCA reports and compare the information with FBARS and other filings by U.S. taxpayers to determine if a taxpayer has unreported accounts. If unreported accounts turn up then the IRS will refer the taxpayer to exam (audit) and potential penalty assessment.
There are on-going refinements to the audit process, but taxpayer’s with “roots” in other countries who have reportable income or assets in that country or elsewhere need to realize need to be advised by their tax professionals and by the IRS (on its website) on an on-going basis of their compliance obligations.
I often see clients when an audit is under way and the issue of unreported foreign income or assets has been raised by the auditor. Audit and penalty defense cases with international issues are often lengthy and complex. It is always better to come forward and clean-up the past rather then have to defend acts of non-compliance. There are several methods to come forward, the choice is based upon the facts.
Conclusion: Report and disclose foreign holdings timely. If there are unreported items consider coming forward. If under exam, hire skill counsel to guide you through the traps and minimize penalty exposure and risk of prosecution.
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