International Tax Compliance Requirements Guide (5 Key Facts)

International Tax Compliance Guide

International Tax Compliance (Penalties & Abatement)

When it comes to IRS tax compliance in general, the international tax reporting and disclosure rules tend to be much more complicated and ambiguous than their domestic tax counterparts. When a taxpayer is considered a US Person and holds certain foreign assets, accounts, and investments, they have certain reporting requirements that they must comply with. If the US taxpayer fails to comply with international tax compliance rules, they may find themselves on the receiving end of significant fines and penalties. Over the past 10 years, the Internal Revenue Service has significantly ramped up enforcement of international reporting for forms such as FBAR, Form 5471, Form 3520/3520-A, and now Form 8938. Unfortunately, there are many reporting requirements that taxpayers must be aware of in order to remain in international tax compliance. Let’s review some of the more important IRS international tax reporting and compliance requirements.

What if the Foreign Assets Pre-Date Becoming a US Person Status?

International tax compliance is confusing, and some of the biggest sources of confusion are determining at what point a person has to begin reporting their foreign assets and accounts and are assets acquired before becoming a US person reportable? When a person is required to report their foreign accounts and assets to the IRS, they are essentially providing the IRS and FinCEN with a snapshot in time of the current value of the foreign funds. Therefore, even if a person has accounts and assets that predate becoming a US person, if they are reporting in the current year all of their foreign accounts, assets, and investments, then it would include any assets that are currently open, which includes assets that were acquired before the person became a US person.

What if the Foreign Assets/Accounts Do Not Generate Income?

Whether or not the foreign assets generate income or not is not dispositive as to whether or not it is reportable. International tax compliance requires taxpayers to report overseas accounts, assets, and investments whether or not they generate income. Stated another way, whether or not the foreign assets generate income does not determine whether the asset is reportable.

What if You Do Not Have the Exact Foreign Asset Value? 

Even if you do not have the exact value of an offshore asset or account, you should still report the assets “the best you can” to the US government. This is not uncommon in situations in which the Foreign Financial Institution may only provide intermittent statements,  the account was transferred to another institution, or the account is a “Passbook Account” which only updates when the book is presented to the bank.  Taxpayers should work with a Board-Certified Tax Law Specialist to determine the best strategy for reporting. Noting, simply not reporting because a person does not have exact value would not be a sufficient basis to avoid reporting.

FATCA Agreement Exempts Reporting (Institution vs Person)

One of the newest additions to the IRS’ international tax compliance arsenal is FATCA — which refers to the Foreign Account Tax Compliance Act. The US has entered into 110+ agreements with foreign countries to facilitate reciprocal account holder information. These agreements are complex, and one common mistake we see is that sometimes taxpayers will stop reporting certain assets (such as foreign pensions for example) because the FATCA agreement exempts pension reporting. It is important to note that the exclusion from reporting refers to the Foreign Financial Institutions that house the investments and not the US person who is required to disclose the information on forms such as FBAR and Form 8938.

Can I Just Start Filing Forward Beginning This Year?

If you have been out of international tax compliance for prior years and want to get into compliance now, you have to be careful to not just start filing forward in the current year. If you do so, this is referred to as a quiet disclosure because you are intentionally avoiding reporting in the prior years by “quietly” submitting the prior years. The IRS will take this to mean you are intentionally trying to circumvent any potential penalty by intentionally withholding information about prior years. Depending on the facts and circumstances of your situation, this could take you down a dark and winding path with the IRS that could culminate in an international tax Special Agent Investigation.

Getting Into Compliance

If you are out of compliance for reporting in one or more prior years, there are various offshore tax programs that you can submit to through the IRS — which are collectively referred to as offshore voluntary disclosure. Some of these programs include the Streamlined Filing Compliance Procedures; Delinquent FBAR Submission Procedures; IRS Voluntary Disclosure Program (VDP), and Reasonable Cause. Offshore reporting is much more complicated than meets the eye, and you should discuss your case with one or more Board-Certified Tax Law Specialists who specialize exclusively in international tax before you make any proactive representations to the IRS or DOJ. 

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