Be prepared, taxpayers: A bigger IRS might be coming

Written by MLHA Team

July 2, 2021

President Joe Biden recently released his 2022 budget to the public. In it he proposes a significant increase in funding to the IRS, over $1.2 billion more. This includes hiring additional IRS auditors and IRS collection officers. 

It is my understanding that one of the areas of focus is foreign assets held by U.S. citizens. So, today I want to talk about some of the tax issues arising for those who have foreign bank assets such as a bank account. There are several disclosure provisions not commonly known that the IRS is really pushing hard on and that can result in significant fines. 

The federal tax code requires us to disclose certain foreign activities, such as foreign bank accounts. For example, if you have an interest in foreign bank accounts with an aggregate value in excess of $10,000, you need to file a report with the Financial Crimes Enforcement Network. Also, if you are receiving foreign income or hold foreign assets, you might be required to file a statement of special foreign financial assets. Finally, if you hold shares in a foreign corporation or serve as an officer or director of a foreign entity, there’s also a reporting requirement for that. These are just some of the disclosure rules. 

Failing to file the disclosure forms can result in a penalty. Here are the elements of one of the penalties: 

1.) You are a U.S. citizen.  

2.) You have or had an interest in, or authority over, a foreign financial account. 

3.) The account had a balance exceeding $10,000 at some point during the reporting period. 

4.) You willfully failed to disclose the account. 

The penalties range from $10,000 to $60,000 per year. The IRS will assess and collect the penalties the same as if they were taxes. Folks, this is really harsh as the penalty can exceed the funds in the foreign bank account. 

These penalties can be abated, but the standard is high and often depends upon the discretion of the IRS agent. The legal defenses, and the procedural remedies to implement those defenses, are far too lengthy to even summarize in this article. Instead, let me just say that the best way to avoid the penalties is to retain a competent tax professional who is well versed in the foreign reporting requirements and follow their advice. And even though professionals sometimes get it wrong, their mistake might serve as one possible defense in trying to get the penalty reversed if it’s imposed.   

Over the years I have represented many clients who had failed to file tax returns for many years. Many people likewise might have failed to file the disclosure forms for many years. If you are in this situation, be aware that there can be some administrative options available that may significantly mitigate the damage, but only if you act before the IRS discovers the omission. 

So, don’t be a victim. If you have a foreign asset disclosure problem, know that there’s likely a possible solution and get after it with a competent tax adviser.  

David Leeper is a board certified federal tax attorney with 40 years of experience. He may be reached at 915-581-8748, leepertaxlawelpaso@gmail.com or leepertaxlaw.com.  

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