by Mark Nestmann

You probably wouldn’t ask the IRS out on a date or join the IRS for happy hour at the bar.

Nonetheless, if you’re a U.S. citizen or you live in the United States you have a relationship with the IRS, whether you like it or not. And if you invest or do business offshore, the IRS needs to know about it.

In any relationship, it pays to put your best foot forward from the outset. And that’s particularly true of the IRS, because the IRS can impose severe penalties for not following the reporting rules for investing or doing business offshore.

If you have signatory or “other” interests in foreign bank, securities or “other” financial accounts, with an aggregate value of US$10,000 or more, you must report those interests.

Given that the deposit minimums for many offshore banks now exceed US$100,000, it’s not hard to meet the US$10,000 threshold. 

What’s Reportable?

There are two separate annual reporting requirements. You must:

• Acknowledge that you have signatory or “other” authority over one or more foreign accounts each year on Schedule B of your federal income tax return.
• File Form TD F 90-22.1 (the “foreign bank account reporting” or “FBAR” form) with the Treasury Department. (This is a simple form and it only takes a few minutes to complete.)

If you don’t comply with these requirements, you could face severe penalties. You could be fined a civil penalty up to US$10,000 for negligent noncompliance and criminal penalties up to five years. You could even get both, for “willful” noncompliance.

You should also report various “bank-like” offshore financial relationships.

For instance, several non-U.S.-based “digital gold” services permit users to make financial transactions over the Internet in gold-backed accounts. While these services clearly aren’t banks, they carry out “bank-like” functions. For that reason, the safest course is to report such accounts.

I also recommend reporting foreign variable annuities or life insurance contracts as a foreign account. According to U.S. Treasury Department analyst Elizabeth B. Witzgall:

“The position of the Department of the Treasury is that premium payments for insurance policies with cash surrender value or other investment features constitute ‘deposits’ within the meaning of Form 90-22.1. Therefore, if a life insurance policy is a ‘whole life’ or other type of policy with investment value, then it is an ‘other financial account’ subject to reporting.”

Some offshore promoters claim that you don’t need to report the existence of an offshore account if it’s not in your name and/or you don’t have signature authority over it.

Let me set the record straight. If you hold a debit card for your offshore account, and you can use the card to withdraw money, or even have absent signatory authority over the account, then you clearly have “other authority” over it. And that means you must report it.
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“IF YOU’RE A U. S. CITIZEN YOU HAVE A RELATIONSHIP WITH THE IRS, WHETHER YOU LIKE IT OR NOT.”

Four Non-Reportable Offshore Investments

The reporting rules suggest several possible exceptions:

• Securities purchased directly from an offshore bank. A securities account is a reportable account. But if you purchase securities from an offshore bank, without opening an account, and keep the certificates in your safety deposit box, the reporting requirements don’t appear to be triggered.
• Real estate. Direct ownership of real property (including timeshare arrangements) in a foreign country isn’t a foreign account. But you must report income from your real estate holdings, wherever they’re located.
• Safekeeping arrangements. Valuables purchased outside the United States and placed directly into a non-U.S. private vault don’t appear to trigger the reporting requirements.
• Warehouse receipts and similar instruments. Certificates that represent ownership of a specified quantity of precious metals or other commodity, stored outside the United States, may not be reportable. A certificate should provide for “allocated” or “non-fungible” storage qualify. This means you own specific barrels, bars, coins, etc. that aren’t available to meet other claims of the warehouse company. Commodities held in non-allocated, pooled, or fungible form may be reportable.
• Foreign safety deposit box. Neither a safety deposit box in a foreign bank, nor the contents in it, constitutes a foreign bank account. However, if you open an account with the bank to secure the box, it counts toward the US$10,000 reporting threshold.

A Date to Remember

The deadline for filing Form TD F 90-22.1 is June 20, to report foreign accounts for the previous year. Don’t miss this deadline. Otherwise, you might have a date — and an unwelcome one — with the IRS.

WARNING: If you have unreported foreign bank accounts, seek immediate legal counsel from a criminal tax attorney. It’s possible that you can work out an arrangement with the IRS to file the appropriate tax returns, pay the taxes, penalties and interest, and avoid criminal prosecution.

What Else Do You Need to Tell the IRS About Your Offshore Dealings?

Offshore bank accounts are just the beginning.

If you’ve formed any kind of offshore business entity or offshore trust, invested in an offshore mutual fund, or purchased an offshore insurance policy, a variety of reporting obligations apply. Here’s a summary, which I’ll elaborate on in an upcoming article:

• Form 720 for premiums paid to foreign insurance companies, unless payment of excise tax is waived under a tax treaty. In that event, you must file Form 8833
• Form 926 for transfers of property to a “controlled foreign corporation”
• Form 1041 to report the income and expenses of an offshore grantor trust. If the trust earns U.S. source income, you must file Form 1040NR annually
• Form 5471 annually for a controlled foreign corporation
• Form 8621 to report income from or dispositions of a foreign mutual fund
• Form 8832 to elect to have a foreign entity disregarded for U.S. tax purposes
• Form 8858 annually for a disregarded entity
• Form 8865 annually for a controlled foreign partnership