United States citizens are legally responsible to pay taxes on income that they earn worldwide, including from overseas. They must report this income on their tax return each year. There may be serious penalties for not reporting overseas income as well as assets located overseas. These may even include criminal tax evasion charges. It is crucial that you correct the error before the IRS catches it and takes action. If they do, you can defend against any investigation or charges with the help of a New York tax lawyer.
Tax Reporting Obligations for Foreign Assets and Income
The United States employs a worldwide taxation system, requiring U.S. citizens and resident aliens to report and pay taxes on all income earned globally, regardless of where they live or where the income originates. This distinguishes the U.S. from most countries that use territorial tax systems, taxing only domestic income.
U.S. taxpayers must report foreign wages, business income, investment returns, rental income, and capital gains on their federal tax returns. This obligation applies even if you live abroad permanently, work for foreign employers, or never bring the money into the United States.
For foreign assets, U.S. citizens must file a report with FinCEN, using Form 114. If the value of your foreign assets exceeds a certain threshold, you must also file Form 8938 with the IRS when you submit your tax return. Depending on your circumstances, there are several additional IRS tax forms that you may need to complete to report foreign assets.
As a US taxpayer, you must report to the IRS for all accounts that are in your name or that you control. This includes account that may not be yours but that you have signature authority over, e.g. if you are the CFO of a company with signature authority over the company’s account as a function of your position.
The IRS has a way of tracking your foreign accounts. Foreign banks collaborate with the IRS, to report on these accounts, pursuant to reciprocal, information-sharing agreements between the United States and most foreign countries.
Penalties for Underreporting on FinCEN Form 114
There are different penalties for underreporting assets on FinCEN Form 114, depending on whether the error was willful or intentional. If the mistake was due to negligence, misunderstanding, or an innocent error, there is a fine of up to $10,000 per violation per year. The IRS may waive penalties if you show reasonable cause and promptly correct the filing. If the IRS believes that there was willful conduct, you may be penalized the greater of $100,000 or 50% of the account balance at the time of the violation.
The matter may become criminal if the IRS determines that the underreporting was willful and knowing. Then, the agency may conduct a criminal investigation and potentially refer your case to the Department of Justice for criminal prosecution. Then, you may even face tax evasion charges for underreporting foreign assets if it has resulted in an underpayment of your taxes.
You Need to Disclose Underreporting to the IRS
The IRS has programs that allow you to correct an underreporting of foreign assets in the hopes of avoiding the worst penalties and potential criminal prosecution. The exact program that you choose depends on whether the underreporting was willful or a simple mistake.
If the underreporting was willful and there are potential criminal charges, you may use the IRS Voluntary Disclosure Practice. The IRS Voluntary Disclosure Practice allows taxpayers with unreported income or unfiled tax returns to come forward voluntarily and avoid criminal prosecution. By proactively disclosing tax violations before the IRS discovers them, taxpayers can resolve their tax obligations while significantly reducing penalties and eliminating the threat of criminal charges.
The program requires full disclosure of all tax liabilities, payment of back taxes with interest, and cooperation with IRS requests. Taxpayers must provide complete and accurate information for all relevant years. While civil penalties still apply, they are typically reduced compared to penalties imposed on taxpayers caught through IRS investigations, making voluntary disclosure far preferable to waiting for enforcement action.
If the underreporting was the result of a mistake, and it was not willful, you would use streamlined filing compliance procedures. The IRS Streamlined Filing Compliance Procedures provide qualifying taxpayers a simplified path to resolve unreported foreign income and assets. This program is designed for taxpayers whose failure to report was non-willful, meaning unintentional or due to a misunderstanding rather than deliberate evasion.
Eligible taxpayers must file amended returns for the past three years, FBARs for the past six years, and certify their non-compliance was non-willful. U.S. residents pay a five percent penalty on the highest aggregate foreign account balance, while foreign residents qualify for penalty relief entirely. This program offers significantly reduced penalties compared to traditional voluntary disclosure, making it attractive for taxpayers who inadvertently failed to report foreign holdings.
How a Tax Lawyer Can Help You
To correct your underreporting, you must choose the correct program. If you attempt to certify that the mistake was not wilful, and the IRS learns otherwise, you may still face criminal consequences. Then, you must get your filings done correctly in a way that fixes the error.
Your tax attorney could help by determining at the outset whether you may face criminal exposure. If the answer is yes, they can guide you through the voluntary disclosure and work with the IRS on your behalf. They may negotiate penalties with the IRS, seeking a waiver whenever possible. Since you are facing potential prosecution and steep penalties, you should not try to deal with this situation on your own. You should get help from a tax attorney as soon as you realize that you underreported assets, so you can take action to correct the problem before the IRS takes action against you.
Contact a New York Tax Lawyer
Reporting foreign assets involves many complexities, so you should get help from a tax lawyer on your return. You certainly need legal representation if you come to realize that the forms that you filed with FinCEN or the IRS were wrong. The New York tax attorneys at the Thorgood Law Firm can guide you through this difficult situation and work to obtain the best possible result. You can schedule a free initial consultation by filling out an online contact form or by calling us today at (212) 490-0704.
