The electronic age has cracked open a world of investment possibilities. Offshore accounts are viable options for today’s savvy investors. Add the skyrocketing popularity of cryptocurrencies, and more Americans are generating assets all around the globe.
However, foreign assets – whether virtual or old-school — have U.S. reporting requirements. Now is the time to think about tax implications, because an IRS program offering leniency for voluntary disclosure of foreign accounts expires on September 28, 2018.
Are you affected? Make sure you know your risk.
Most financial income earned offshore by U.S. citizens is subject to U.S. taxes. With a few exceptions such as wages and salaries, offshore income must be reported and is taxable according to IRS rules.
U.S. taxpayers are required to file a Foreign Bank Account Report, or FBAR, for foreign bank or securities accounts that exceed $10,000 at any point in the tax year.
Failure to file an FBAR can draw civil and criminal penalties of $10,000 or more. In cases of willful failure to file, the civil penalty is 50 percent of the highest account balance in all foreign accounts during a six-year period per year, plus any tax owed, interest, and additional penalties. Criminal penalties could also apply.
Some taxpayers may also be required to file under the Foreign Account Tax Compliance Act, or FATCA. The filing threshold constitutes a total of $50,000 in foreign bank accounts, securities accounts, and other foreign financial assets at any point during the tax year.
Relief through voluntary disclosure
Since 2014, holders of foreign accounts and assets who willfully fail to file have had the opportunity to lessen potential penalties through the Offshore Voluntary Disclosure Program (OVDP). Under OVDP, taxpayers who voluntarily report foreign assets and income avoid criminal penalties and pay penalties usually equaling 27.5 percent of the maximum value of offshore assets.
The OVDP’s country cousins are the Streamlined Filing Compliance Procedures. Those who certify, under penalty of perjury, that their conduct was non-willful might pay only a 5 percent penalty.
Here’s what you need to know about OVDP right now:
- It expires September 28, 2018. Complete disclosures must be received or postmarked by that date. Partial filings or placeholders don’t count.
- Once the IRS receives an OVDP submission, which goes to IRS’ Criminal Investigation division, the taxpayer is not eligible to use Streamlined Filing Compliance Procedures. Conversely, an SFCP filer generally loses the right to seek OVDP protection.
- Amended returns that report income previously undisclosed from foreign financial assets, without voluntary disclosure review, can be subject to significant penalties.
Holders of foreign accounts and assets should know that the IRS has tentacles all over the world, uncovering accounts through intergovernmental agreements, automatic reporting, and even “John Doe summonses” requiring recipients to name names. Once the IRS learns of an unreported account or assets, the holder loses the right to pursue voluntary disclosure.
The cryptocurrency conundrum
Virtual currency, or cryptocurrency, flows in and out of virtual currency exchanges. Since many of those exchanges are offshore, they trigger FBAR reporting requirements.
The IRS considers “convertible” virtual currency – the type that can be digitally traded and purchased or exchanged into U.S. dollars or other real or virtual currencies – like property, subject to taxation. In fact, financial advisors note that despite the “currency” in the name, virtual currencies are treated more like stock, subject to capital gains taxes.
Under IRS rules, cryptocurrencies values depend on the virtual currency’s fair market value on the date of payment or receipt. That includes profits made by the practice of “mining” to verify new transactions in exchange for additional cryptocurrency.
Because virtual currencies receive the same treatment as stock, investors are advised to save every transaction email or document. It’s crucial to document losses, because if they can’t be proven, the IRS will consider sale proceeds as taxable gains, without subtracting for the loss. Underpayments and failure to file a correct or timely report can subject the taxpayers to penalties.
And remember those IRS tentacles probing for foreign accounts? In February 2018, the virtual currency exchange Coinbase lost a long-running fight and turned over information on about 13,000 customers to the IRS.
The rules can be confusing, and the consequences for noncompliance harsh. Anyone with concerns can consult with the financial advisers of Boyer & Ritter, who are equipped with the skills and capabilities to help holders of foreign accounts, with or without virtual currencies, stay on the right side of the law.
Edward R. Jenkins is an instructor of accounting at Penn State University and a consultant with Boyer & Ritter CPAs and Consultants. Contact Ed at 814-234-6919 or firstname.lastname@example.org.