In 2016, the release of the “Panama Papers” sent shockwaves through the financial world, exposing the methods that many wealthy individuals and corporations use to avoid paying taxes. This issue has received additional scrutiny recently due to the release of new documents, known as the “Paradise Papers,” which have revealed more details about how trillions of dollars are transferred through offshore tax havens.
The Paradise Papers include more than 13 million documents, most of them related to Appleby, a company with headquarters in Bermuda that helps its clients pay less taxes by moving money into offshore accounts. The financial dealings of a number of prominent people and entities were brought to light by this release, including companies like Apple and Facebook, celebrities like Madonna and Bono, and public figures like Queen Elizabeth II and U.S. Commerce Secretary Wilbur Ross.
The release of the Paradise Papers has brought a great deal of scrutiny to offshore accounts held by U.S. taxpayers, and the IRS will be investigating foreign income and investments, especially in locations such as the Cayman Islands, Bermuda, the Bahamas, Barbados, Jersey, Guernsey, Switzerland, and Hong Kong.
Reporting Foreign Assets
To avoid incurring tax penalties for misreporting foreign income or assets, taxpayers should participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP). This program allows taxpayers to become compliant with their tax requirements and avoid civil penalties and criminal prosecution.
Taxpayers participating in the OVDP may need to file a number of forms, including:
- Report of Foreign Bank and Financial Accounts (FBAR) - Taxpayers must file a FBAR (FinCEN Form 114) if they have foreign accounts with an aggregate valued at more than $10,000 USD at any time during the year. Failure to file a FBAR can result in civil penalties of up to $100,000 or 50 percent of the balance of the undisclosed foreign account.
- Statement of Specified Foreign Financial Assets - Form 8938 must be filed if a taxpayer lives in the U.S. and owns more than $50,000 in foreign assets, or if a taxpayer lives outside the U.S. and owns more than $200,000 in foreign assets. Failure to file this form can result in a civil penalty of $10,000.
- Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts - Failure to file Form 3520 can result in a penalty of $10,000 or 35 percent of the gross reportable amount.
- Information Return of Foreign Trust With a U.S. Owner - Form 3520-A must be filed to report ownership interests in foreign trusts. Failure to file this form can result in a penalty of $10,000 or 5 percent of the gross value of trust assets.
- Information Return of U.S. Person With Respect to Certain Foreign Corporations – Form 5471 must be filed to report ownership interests in specified foreign corporations. Failure to file this form can result in a penalty of between $10,000 to $50,000 per corporation and a reduction of the foreign tax credit.
Contact a San Jose Offshore Tax Compliance Attorney
If you have any questions about voluntary reporting of foreign assets or streamlined compliance, John D. Teter Law Offices can help you make sure you are meeting your requirements and work with you to avoid any civil or criminal penalties. Contact a San Jose tax lawyer today at 408-866-1810.