How Will Increased IRS Funding Affect Offshore Tax Compliance?

 Posted on September 28, 2022 in Taxation Law

In August 2022, the U.S. Congress passed the Inflation Reduction Act, which is a key part of President Joe Biden's agenda. One much-discussed component of this act involved an increase in funding to the IRS. Nearly $80 billion of additional funds will be allocated to the IRS over the next 10 years, and officials have stated that this funding may be used to hire around 87,000 new IRS employees and increase tax audits on individuals and businesses that earn large incomes or own high-value assets. With this increased funding, the IRS will most likely be making efforts to crack down on offshore tax evasion. Taxpayers who own foreign assets and investments will need to be aware of the potential consequences they may face if they fail to abide by the applicable tax laws, and by working with an attorney, they can determine the best ways to come into compliance with their offshore tax reporting requirements.

Addressing the Tax Gap Related to Offshore Assets

The increase in funding to the IRS is meant to help decrease the "tax gap," which is the difference between the total amount of taxes owed by U.S. taxpayers and the amount of taxes that are actually collected each year. While the IRS has reported that the tax gap is over $400 billion, testimony provided to Congress by IRS officials indicates that it may be much larger, and it may add up to more than $7.5 trillion over 10 years. Offshore tax evasion is a significant component of the tax gap, and officials have estimated that it accounts for between $40 billion and $123 billion of lost IRS revenue each year.

With additional funding, the IRS will most likely be increasing its scrutiny of the documentation filed by taxpayers who own foreign assets. This may result in more tax audits related to forms such as:

• Form 114 (Report of Foreign Bank and Financial Accounts) - This form, which is commonly known as the FBAR, is used to report foreign financial accounts to the IRS. U.S. taxpayers with foreign financial accounts totaling in aggregate more than $10,000 USD in value are required to file an FBAR. This requirement applies to taxpayers who are individuals, corporations, partnerships, LLCs, trusts, or estates.

• Form 8938 (Statement of Specified Foreign Financial Assets) - This form is used by taxpayers to report foreign financial assets that are above a certain threshold. Generally, unmarried taxpayers who live in the United States must file this form if the total value of their foreign assets as of the last day of a tax year is more than $50,000, and married taxpayers who file jointly must report foreign assets totaling more than $100,000. For taxpayers who live outside the United States, this threshold is increased to $200,000 for unmarried taxpayers and $400,000 for married taxpayers who file jointly. Specified domestic entities such as corporations, partnerships, and trusts may also be required to file Form 8938 if they own at least $50,000 of foreign financial assets.

• Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) - This form is used to report certain transactions with foreign trusts, as well as gifts and bequests from foreign persons. Taxpayers who are required to file Form 3520 include U.S. persons who transferred assets to foreign trusts, were considered to be the owner of foreign trusts, or received distributions from foreign trusts. U.S. persons who received gifts or bequests of over $100,000 from foreign individuals or estates will also be required to file Form 3520.

For taxpayers who have unreported foreign assets, making use of the IRS's streamlined compliance procedures is often the best option for meeting their reporting requirements while minimizing the applicable penalties. However, the increase in IRS funding may result in greater scrutiny for those who use these procedures, and taxpayers will need to be sure to work with an experienced tax attorney to address any issues they may encounter during this process.

Contact Our San Jose, CA Offshore Tax Reporting Lawyer

While it remains to be seen how extra IRS funding will affect taxpayers with offshore accounts, it is likely that enforcement will increase in the near future. If you own any foreign assets, it is important to make sure that you are in compliance with all applicable tax laws. If you need to determine how to address any issues with offshore tax compliance, or if you want to know the best ways to avoid or minimize potential tax penalties, John D. Teter Law Offices can provide the legal help you need. Speak with a qualified San Jose tax attorney by calling our office at 408-866-1810.

Sources:

https://www.cnbc.com/2022/08/08/reconciliation-bill-includes-nearly-80-billion-for-irs-funding.html

https://www.cbpp.org/research/federal-tax/rebuilding-irs-would-reduce-tax-gap-help-replenish-depleted-revenue-base

https://www.whitehouse.senate.gov/news/release/tax-gap-and-offshoring-hearing-sheds-new-light-on-trillions-in-us-income-stowed-abroad