The IRS has changed the reporting requirements for those who have assets stored overseas, working to make sure that honesty is the best policy among U.S. taxpayers.
Making money overseas can be exciting. Whether you have family or business assets located abroad, making goods or providing services overseas can lead to big profits here at home.
But after the IRS started to crack down on overseas tax dodgers in 2009, the agency decided to take a couple steps back and redo the rules.
If you have more than $10,000 in an overseas account that’s not reported to the IRS, the fines could be steep – upwards of $100,000. And if the account is really big, the fine could be even higher.
But the IRS now wants to lighten its grip. The IRS will mostly waive the penalties, but the IRS is making sure it isn’t rewarding bad behavior.
To get the penalties waived, taxpayers have to show that they weren’t intentional tax dodgers. Three years of tax returns must be filed, and any back taxes have to be paid. If you’re an American living abroad, you can make nice with Uncle Same provided you disclose your overseas accounts, and pay the penalty worth 5 percent of their value.
As with any IRS regulation, it’ll be subject to debate. What exactly needs to be shown to prove a taxpayer isn’t an intentional tax evader?
The IRS hasn’t given a clear definition on that, but it did indicate that if a taxpayer was negligent, made a mistake, or had a reasonable misunderstanding of the law, he or she may qualify to have the penalties waived.
That’s where a tax attorney would come in handy. Tax attorneys are typically skilled in the IRS’s overseas income reporting requirements, and are knowledgeable when it comes to when a good-faith mistake was made.
The IRS seems to be changing its tune after it started cracking down on overseas tax evasion. The IRS’s Foreign Bank and Financial Accounts and Offshore Voluntary Disclosure programs lead to nearly 50,000 taxpayers reporting more than $6 billion in unpaid taxes to the IRS. With more than 7 million American citizens living abroad, there’s bound to be a good chunk of financial assets not reported to the federal government.
Now, it seems to be a more conciliatory policy of helping those who simply made a mistake, which were people who had usually had a smaller, unreported financial account.
If you’re still not thinking about reporting your overseas financial assets to the IRS, then you could face criminal penalties. A 2010 law will soon coordinate the sharing of information between thousands of foreign banks and the IRS. Banks from about six dozen countries entered into agreements with the IRS to share information about U.S. citizens using offshore tax havens.
But by working with a tax attorney, you could stay out of the IRS’s crosshairs and avoid making your bad tax situation even worse.
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