Know The IRS’s Foreign Tax Traps: Unexpected Situations Taxpayers Found Themselves Caught In

Mitchell R. Miller - Estate And Trust Lawyer, Beverly Hills, CA

In spite of the IRS’s information campaign, many people still do not know that the IRS has mounted a huge enforcement effort in the international arena to get people to report foreign accounts and foreign income. And if you have foreign assets, you might be surprised that this enforcement effort could apply to you.

Specifically, the IRS has for all practical purposes eliminated bank secrecy for U.S. citizens and residents, forcing foreign banks to identify all their U.S. account holders. In many cases, foreign banks have simply kicked out all their U.S. depositors. And the penalties for not reporting foreign accounts, income and transactions grow larger every year.

In one recent case, a federal jury held that a man who had failed to report the existence of his foreign account or include the interest from the account in his income was liable for a penalty of 150% of the highest value of the account. That’s right — ONE AND A HALF TIMES THE ENTIRE VALUE OF THE ACCOUNT!

And that’s only the penalty. There’ll be tax, interest on the tax, and interest on the penalty to boot!

What types of foreign items are you required to report?

  • Bank accounts (ownership OR signature authority)
  • Securities accounts (ownership OR signature authority)
  • Credit cards issued by a foreign bank
  • Ownership of a foreign trust
  • Transfer of funds to a foreign trust
  • Receipt of and distribution or loan from a foreign trust
  • Receipt of a large (over $100,000) foreign gift or inheritance
  • Ownership of more than 10% of a foreign company
  • Being an officer or director of a company owned 10% or more by a U.S. person
  • Being a company 25% or more owned by a foreign person
  • And more …

Here are some of the unexpected situations taxpayers found themselves in that required reporting:

  • A U.S. resident woman inherited one-half her parent’s apartment in Paris. Her brother, a French citizen and resident, took care of the apartment and sent her a report of her half of the revenue, which she included in her income. But there was a bank account in France for receiving rental income and paying expenses that she had signature authority over in case her brother was out of town when a check needed to be written. She failed to file the necessary form in the U.S. and was thus liable for penalties.
  • A dual Canadian-U.S. citizen lived in Canada for many years. He had always filed a U.S. tax return but never reported that he had his Canadian bank accounts since, to him, they weren’t foreign. He needed to report the Canadian bank accounts on his U.S. tax return.
  • A U.S. resident received a gift from her father, a French citizen and resident of Martinique. The gift was less than $100,000 so she thought she didn’t have to report it. But it actually came from her father’s trust, so again there were special forms to be filed.

All of these situations required reporting, and in some cases payment of penalties.

As you can see, it can be very easy to get into big trouble because of a foreign transaction. If you have ANY dealings with any foreign account or entity, consult a qualified tax professional to advise you on exactly what you should do.

Have questions? Contact Mitchell R. Miller or call 310.277.1848



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