U.S. taxpayers who own assets in other countries must meet a number of requirements when filing tax returns with the IRS. Reporting of foreign assets can be complex, and in some cases, taxpayers may wish to avoid providing the IRS with more information than is necessary. Form 8938 (Statement of Specified Foreign Financial Assets) will provide information about multiple types of foreign accounts, and taxpayers may be required to submit this form along with their annual tax return. However, there are some exceptions to this requirement, and depending on the tax strategies a person uses and the extent of their assets, they may be able to avoid submitting Form 8938 in certain situations.

Exceptions to Form 8938 Requirements

Taxpayers who are considered “specified individuals” or “specified domestic entities” are required to submit Form 8938 if they own foreign assets with a value above a certain threshold. However, a person who is not required to file a tax return for a certain year will not need to submit Form 8938.

Specified individuals include U.S. citizens, people who are considered resident aliens, and nonresident aliens who choose to be treated as resident aliens so that they can file a joint tax return with their spouse. If a nonresident alien does not elect to be treated as a U.S. resident, they will not be required to file Form 8938. Specified domestic entities include closely held domestic corporations or partnerships that earn at least 50% of their gross income from passive income or hold at least 50% of their assets for the production of passive income. Entities that own foreign assets but do not use at least 50% of their assets for passive income will not be required to file Form 8938.

There are a variety of situations where taxpayers may be accused of violating U.S. tax laws. These violations may be uncovered during a tax audit, or a taxpayer may have failed to properly report foreign assets and income. In cases where a person may face criminal charges or civil penalties for non-compliance with tax laws, they may be able to come into compliance by voluntarily disclosing information to the IRS. Taxpayers who are considering a voluntary disclosure will need to be aware of some recent changes to tax forms used to report information to the IRS.

What Is Voluntary Disclosure Practice?

Taxpayers are encouraged to disclose information to the IRS that may affect the determination of the taxes they are required to pay. Some disclosures may be civil in nature, for example if the taxpayer has made an honest and nonwillful mistake and omitted disclosure of a foreign account required to be disclosed via annual Forms 114 (FBAR). Such disclosures may be made to the IRS via Streamlined Disclosure Procedures where taxpayers may be required to pay a civil penalty without criminal prosecution. However, the IRS Criminal Investigation (CI) division is focused on uncovering criminal violations of tax laws, and depending on its findings, it may choose to pursue criminal charges against non-compliant taxpayers. If such a taxpayer voluntarily discloses applicable information to the IRS, this may affect the CI division’s decisions on whether to recommend criminal prosecution. Voluntary Disclosure Practice is an option if a taxpayer has willfully violated tax laws, and taxpayers will be required to cooperate with the IRS to determine their tax liabilities and make arrangements to pay the taxes they owe, as well as any applicable penalties or interest.

Updates to Disclosure Preclearance Forms

In Voluntary Disclosure Practice cases, one of the key forms that a taxpayer will be required to submit is Form 14457 (Voluntary Disclosure Practice Preclearance Request and Application). This form will provide information about a person’s tax liabilities, their financial accounts, and other information related to their non-compliance with tax laws. The IRS recently released a revised version of this form, including the following changes:

Homeowners in California will often be subject to high property taxes. However, the state’s laws do provide some benefits for property owners by limiting the amount that property taxes can be increased each year. When a home is bought or sold, a reassessment will be performed to determine the property taxes that will apply based on the home’s current market value. In certain cases, homeowners may be able to avoid a reassessment by transferring the value of their current home to a new property. A recent change in the law has affected when these “base year value transfers” may be performed.

Proposition 19 and Base Year Value Transfers

California’s Revenue and Taxation Code was amended in 2021 after the passage of Proposition 19. New provisions regarding base year value transfers went into effect on April 1, 2021. These included changes to who may perform these types of transfers and the time limits for doing so. 

A property’s factored base year value is determined based on the value of the property in 1975 or the last time a reassessment was performed due to a change in ownership or new construction. This amount may be increased by a maximum of 2% per year, and property taxes will be assessed based on this value. A person who performs a base year value transfer will be able to transfer the factored base year value of their current primary residence to a new primary residence. If the full cash value of the replacement residence is higher than the full cash value of the original property, the difference in these values will be added to the transferred base year value.

There are a variety of situations where taxpayers may need to respond to claims that they owe taxes to the IRS. In some cases, different forms of relief may be available that will absolve a person of their tax debts or allow them to reduce the amount they owe. Some taxpayers may be able to ask for innocent spouse relief, including when the IRS seeks to recover tax debts from a person after their divorce based on an audit of a joint tax return filed while they were married. A person may believe that they will qualify for innocent spouse relief if they had not signed a joint tax return, but they will need to understand how the IRS will address this issue.

The Tacit Consent Doctrine

Married couples will often divide different types of responsibilities, and one spouse may primarily handle matters related to a couple’s finances, including preparing and filing joint tax returns. In these situations, the other spouse may not have a full understanding of the income and assets that have been reported to the IRS, the types of deductions and credits that have been claimed, or other issues that affect the taxes they have paid or the refunds they have received.

If a spouse was not involved in preparing or filing taxes, they may not be aware of potential tax debts or penalties. In some cases, a person may not have actually signed a joint tax return, or their spouse or another party may have signed their name on tax forms for them with the intent of streamlining the tax filing process. However, even if a person had not signed a tax return or was unaware of what was being filed, the IRS may still find that they are liable for tax debts based on what is known as the “tacit consent doctrine.”

There are a variety of reasons why taxpayers may disagree with decisions made by the IRS. Following a tax audit, the IRS may perform a tax assessment and take steps to collect tax debts. However, if a taxpayer believes that the IRS made errors when determining tax deficiencies, they may file an appeal in the U.S. Tax Court. There are multiple issues that may be addressed during a tax appeal, and understanding the types of cases that are litigated in U.S. Tax Courts can help a taxpayer determine their options for resolving tax-related concerns.

Top U.S. Tax Court Issues in 2021

According to a report submitted to Congress by the Taxpayer Advocate Service, the top issues addressed in U.S. Tax Court litigation in 2021 were:

• Gross income - Section 61 of the Internal Revenue Code (IRC) details the types of income that may be considered when determining a taxpayer’s gross income, including compensation received for performing services, commissions, fringe benefits, interest, dividends, royalties, business income, pensions, and annuities. However, controversies may arise regarding what constitutes gross income and the taxes that should apply to the income a taxpayer receives.

  ...