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Scrutiny of Foreign Accounts Puts Taxpayers in Tough Spot

Finding foreign accounts and assetsWe’ve all seen the headlines: assets hidden offshore, millions in penalties, jail time. They get your attention. But what does it boil down to? The rules regarding the reporting of financial and non-financial accounts and assets are getting increasingly complicated.  The U.S. government has taken numerous steps over the past five years to increase income tax compliance by U.S. taxpayers with overseas assets, including:

  • stepping up enforcement regarding reporting of foreign bank and financial accounts and payment of all U.S. income tax on those foreign accounts;
  • enacting new, additional reporting requirements for individuals (Form 8938);
  • enacting new withholding requirements for foreign financial institutions and other foreign entities if they don’t enter into agreements to report annual information on U.S. citizens.

The Treasury Department, Financial Crimes Enforcement Network, Department of Justice and the Internal Revenue Service are aware of the problems (and panic) that the new rules and penalties are causing, especially among those who did not owe taxes on a foreign asset and had no idea they were required to file.  Last year, the IRS provided select filers an extension to file the FBAR form. The IRS continues to work on providing electronic filing options. In addition, the IRS created offshore voluntary disclosure programs that allowed more than 33,000 people to comply with the filing requirements.

The complex rules don’t just affect account holders.  Tax advisors, whether in public practice or working in corporate America, have been thrown into a role that many don’t see as their traditional role. However, learning new rules and explaining potential filing and income tax responsibilities come with being a tax advisor. Practitioners also have to:

  • grapple to understand their responsibilities as CPAs and as tax advisors in these “foreign” areas, especially around those reporting requirements that are not in the tax code;
  • consult with insurance carriers and change standard practices regarding engagement letters, client organizers and interviews to ensure coverage in these areas;
  • explain to employees that because their job responsibilities include signature authority over the business’s foreign accounts, they may have an individual FBAR filing responsibility;
  • work with criminal attorneys to help clients comply with filing requirements for past FBAR filings and income tax liabilities;
  • gain new levels of understanding regarding individual and business clients and their situations.

To help taxpayers and practitioners comply with the new rules, the AICPA called for guidance and deadline extensions, among other changes, as part of its advocacy efforts on foreign accounts and assets reporting.  But the question remains - has (or will) the government obtained the benefits it is striving for? 

Trying to understand what needs to be reported, when and how, not to the mention the risk of potential significant civil and criminal penalties for those subject to the rules, has led me to one conclusion--the higher cost and hassle associated with having assets outside the U.S. probably isn’t worth it for some, depending on the value of the assets.  People should consider disposing of those foreign assets and accounts they don’t need. 

How about you as a tax practitioner? Has this challenge to stretch had a positive impact on you and your interactions with other employees or clients?  Any suggestions for other tax advisors?

Michelle Koroghlanian, CPA, Technical Manager - Taxation, American Institute of CPAs. Michelle serves as staff liaison to the AICPA’s International Taxation Technical Resource Panel and Tax Methods and Periods Technical Resource Panel, and all task forces under these TRPs. Michelle works to develop AICPA tax policy positions, shapes and communicates the Institute’s initiatives in tax matters, and provides tax products and services for members.

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