Offshore Enforcement Trends
For the past several years, the US government has made offshore and international tax compliance a key enforcement priority. To promote the various global tax compliance initiatives, the IRS has developed several offshore disclosure campaigns on matters including FATCA Reporting, Expatriation, Section 965, and Voluntary Disclosure. As we approach 2023 — and with the Internal Revenue Service soon being flushed with funding, the government will now have the opportunity to pursue offshore enforcement more aggressively. Let’s take a brief look at the offshore enforcement trends heading into the 2023 tax year.
FBAR filing still remains at the forefront of offshore international tax compliance. In recent years, the number of cases that have resulted in FBAR penalty litigation has increased significantly. The outcomes are varied, depending on which circuit the litigation takes place — and whether or not it is determined that the taxpayer was willful or non-willful. This has become such an important issue that there is currently an FBAR case at the Supreme Court on the specific issue of how to assess non-willful FBAR violations.
FATCA refers to the Foreign Account Tax and Compliance Act. Since 2012 (for 2011 tax returns), certain taxpayers who have specified foreign financial assets have been required to report their foreign assets on Form 8938. For several years, the IRS was not seeking to enforce non-compliance with FATCA reporting. Then, the IRS began sending some taxpayers soft letters about missed Form 8938 reporting, which has now culminated in audits and taxpayers being penalized for failing to file Form 8938 (they will usually receive notice of the penalty on a CP15 Notice).
Malta Pension Plans
In late 2021, the US government released a Competent Authority Agreement involving the United States and Malta on the issue of how Malta retirement schemes are taxed under the treaty, in situations in which there was no employment. Some US Taxpayers were using these retirement schemes to shelter millions of dollars of appreciated assets and other assets — and then staggering the withdrawals to avoid tax by relying on the US/Malta tax treaty. Now the IRS is seeking to enforce taxes and penalties against taxpayers.
Offshore Cryptocurrency Reporting
It is not uncommon for taxpayers living overseas to have cryptocurrency, but the rules for reporting foreign crypto are currently in flux. For international cryptocurrency transactions, the main issues involve reporting. Specifically, the US Government seeks to require taxpayers to report their offshore crypto on forms such as the FBAR (FinCEN Notice 2020-2) — and already requires reporting in scenarios in which there are joint or hybrid foreign accounts crypto/fiat accounts. Beyond the reporting requirements for crypto, the IRS also believes many taxpayers with foreign crypto have not been compliant with paying US tax on their earnings. And, with the increased Form 1040 reporting requirements for Taxpayers who have purchased, sold, or exchanged cryptocurrency, the IRS hopes to increase enforcement.
Wealthy Taxpayers Abroad
Wealthy taxpayers are being targeted by the IRS — and especially taxpayers residing overseas. That is because the IRS is concerned that some US taxpayers abroad might be engaging in abusive tax schemes, investing in syndicated conservation easements abroad, not reporting their foreign bank and financial accounts — and not properly filing expatriation paperwork when renouncing their US citizenship or relinquishing their green card. Wealthy taxpayers overseas who are out of compliance should consider getting into compliance before they end up on the IRS’ radar.
Current Year vs Prior Year Non-Compliance
Once a taxpayer misses the reporting requirements for prior years, they will want to be careful before submitting their current year’s international reporting forms. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass file previous forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign IRS tax forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.