Unreported Offshore Assets: What You Need To Know
Understanding reporting requirements for U.S. residents with cross border assets. In this taped interview, Mr. Fisher and Mr. Colvin discuss tax reporting requirements for U.S. residents with bank accounts and other assets held abroad, as well as potential trouble spots and methods to move into greater tax compliance.
Key topics to be addressed:
• Reporting requirements for U.S. residents with cross border assets
• Potential tax trouble spots
• How to improve tax compliance
Hello and thank you all for joining us today. My name is Andrew Fisher, the president of Worldview Wealth Advisors. In today’s discussion I’ll be talking with David Colvin, CPA CFP, he’s a director and consultant to Worldview and also the owner of CLVN a boutique tax and financial advisory practice in Amsterdam. Hi Dave.
Today we’re going to be talking about unreported offshore assets, what people need to know and understanding the requirements, particularly for US residents located in the US with cross-border assets. So Dave, we get this question a lot with clients that we run into, “what do I do about bank accounts, investments, real estate, various things I have abroad that may not be reported,” often because they didn’t really know that they had to report them. So why don’t I just get your thoughts on unreported bank accounts and other financial assets. What are the issues there?
Well I think is extremely common for people to innocently not report assets located outside of the US. The US is a fairly unique country in that they really crack down on these things. From my experience it just doesn’t make sense to try and hide assets or not report them properly. The IRS has really been cracking down on these things, and the penalties are severe. But if you’re proactive, in my experience, usually you can avoid all the penalties.
You know what Dave, what I find a lot of times people come to the US on an expatriate contract with their employer and maybe they don’t think it’s going to be all that long, maybe two or three years, and so they don’t bother reporting everything that they should. Then after a while they’ve been here, maybe they get a promotion and either the contract is extended or they stay more permanently. What are the issues, like specifically, talk to us about the FBAR and the 8938 reporting requirements?
Well there are two main forms where you report your foreign assets to the IRS. One is the FBAR which stands for Foreign Bank Accounts Reports; the other is the 8938 which is the foreign financial assets report. They are very similar forms; the FBAR is separate form that is sent to the Department of Treasury and the 8938 is a form that is part of your tax return. The thresholds for when you need to file these are pretty low. If you all your accounts combined exceed $10,000 you would file at least one, possibly both, of these forms. Like I said the penalties are severe, it can be up to 50% of the value of each account that you have, for each year that you don’t report.
Talk to me a little bit about, this bank account thing has been around for a while but they sort of expanded it, or they’re now kind of looking to understand all of someone’s assets abroad right?
Well I think they’re smelling blood in the water basically. A few years ago there was a whistleblower at UBS in Switzerland that basically gave the names of thousands of Americans who had their assets offshore. This started the ball rolling and the IRS caught wind of it and they caught a whole bunch of people. They decided that there is a lot of money on the table from people hiding their assets, and they really don’t like this. Therefore they really started cracking down on it.
Obviously, bank accounts, I think people pretty well understand if they’ve left an account in Western Europe or London or Singapore or somewhere, that they need to report those cash balances. No one’s earning a lot with those assets right now assets right now with the low interest rate environment so the actual taxes owed a really nil or next to nothing. But there are also, international or cross-border families also, have to report their investment accounts right?
That is correct. There is a very broad definition of what needs to be reported in this sense, basically any sort of financial assets. That could be a savings account, bank accounts could be your investment accounts could be your pension, could be your life insurance that builds up cash value, could be shares you hold in a company outside the US, that you just hold directly, not from any other sort of account. It’s an extremely broad definition.
And if I’m right, Dave, that F BAR is pretty specific to bank accounts but then the 8938 is kind of the more all-encompassing?
Exactly, the 8938 form just came out with the 2011 tax year and includes everything that you put on the FBARs, its reported on the 8938 form as well so it is a duplicative form. But the 8938 is much broader is what is covers. The FBAR only covers bank accounts and investment accounts, but the 8938 also covers things like pensions, life insurance policies, things like that.
Let’s shift gears for a moment, Dave, and talk a little bit about real estate that US residents hold abroad. We work with a lot of her family’s here in the US and the Bay Area, up and down the West Coast, and we find that almost all of them own property back in Europe or Asia, wherever they are form originally, and quite a lot of them are not reporting those properties. Maybe because they didn’t know that they had to or maybe because they are fearful of what reporting it to the IRS might mean. What are your thoughts?
I think it’s pretty common that it’s not reported and I think a large part of it is people don’t understand, first, that they do need to report it, and second, how to report rental properties. Reporting a property is a little bit complicated and if you’re not used to the system you may not know how to do it and you might think “hey I’m only here for a couple of years so I’m just going to leave that one off.” I think that’s a mistake for a few reasons. One is that you are legally obligated to it, that’s one of the main reasons. Aside from that, typically, rental properties end up resulting in a loss, depending on your level of income you can take that loss on your tax return.
I found exactly that. In fact, many of the cases where we have a client who has a rental abroad that it would actually end up making it a loss for US tax purposes. But there are some situations where it’s a very, very low mortgage or a lot of people work hard to pay off the mortgage on these rentals. In those cases it usually does amount to a gain situation, even after depreciation. But in almost all those cases they’re paying tax on that in whatever country it’s in. So really, doesn’t that create a credit that is applied against whatever the US tax would have been?
Yes, it’s very common for real estate to be taxed in the country where the property is located and to the extent you pay taxes to a foreign country you can use the tax as a credit on your US tax return. Typically the income will be lower for US purposes, you just briefly mentioned depreciation, not everyone is aware of it but the IRS requires you to take depreciation against the property. That’s a non-cash expense that usually lowers significantly, the income, or produces a loss.
Dave, we just have a few more second here, but if you wouldn’t mind commenting: if someone has had a property abroad for quite a while that has not been reported, how they go about fixing that?
Well, generally what you do is a mandated tax return. You can go back as far as you want, if it results in a — you are limited to years where they take out the refund, but in many cases it makes sense to go back further if you’ve been in the US — (un-interpreted audio)
Okay, well thank you very much Dave for your time and I appreciate everyone’s attention, that’s all. Bye, bye.