Offshore Tax Compliance

For nearly two decades, the United States has maintained a sustained focus on offshore assets held by U.S. taxpayers and on compliance with related tax and reporting obligations. In response to tax evasion and other cross-border enforcement concerns, the U.S. Department of the Treasury has imposed extensive reporting requirements involving foreign bank accounts, overseas inheritances, foreign trusts and other offshore holdings. Penalties for noncompliance can be severe and, in some cases, may exceed the value of the unreported assets.

The IRS Criminal Investigation Division has opened thousands of investigations involving taxpayers, financial advisors and bankers in alleged tax evasion matters. Although the IRS does not indict individuals directly, it maintains an international presence and investigates potential criminal violations, referring cases to the U.S. Department of Justice (DOJ) or U.S. attorneys for possible prosecution.

Holland & Knight's Offshore Tax Compliance Team advises clients with foreign assets on structuring, reporting compliance and enforcement risk, helping you address issues proactively before they become disputes.

Our lawyers bring substantial experience with Foreign Bank and Financial Account (FBAR) reporting, the Foreign Account Tax Compliance Act (FATCA), Bank Secrecy Act, Foreign Corrupt Practices Act, immigration-related issues and the enforcement priorities of the Treasury Department, IRS and DOJ.

We collaborate seamlessly with colleagues on our Tax Controversy and Litigation Team to advise on sensitive civil and criminal tax matters. Many of our attorneys previously served as prosecutors or government lawyers and draw on that experience to help clients navigate investigations, disclosures and high-stakes disputes.

Offshore Enforcement Remains a Significant Priority

Changes in political control are unlikely to diminish offshore tax enforcement. The IRS has continued these efforts under both Democratic and Republican administrations, and the broader global trend has been toward increased transparency and stronger cross-border enforcement. FATCA and the Automatic Exchange of Financial Information, commonly known as the Common Reporting Standard (CRS), remain firmly in place.

The Panama Papers, published by the International Consortium of Investigative Journalists in 2016, remain a leading example of the global enforcement environment. The leaked records exposed detailed information about nearly 215,000 offshore entities. The resulting investigations contributed to more than $2 billion in recovered taxes and penalties, hundreds of tax cases, and legislative changes to corporate transparency rules. Other governments have pursued similar initiatives.

Holland & Knight's Offshore Tax Compliance Team closely monitors enforcement developments, including investigations by the IRS Global High Wealth Industry Group, often referred to as the "Wealth Squad." This group focuses on high-net-worth individuals with foreign assets and is known for aggressive audit activity. In our team's experience, early and thoughtful engagement with examiners can materially improve the path to resolution.

Voluntary Disclosure and Other Resolution Options

For decades, the IRS Criminal Investigation Division has permitted taxpayers to address tax issues through voluntary disclosure, as described in the Internal Revenue Manual. A properly evaluated voluntary disclosure may help taxpayers avoid criminal prosecution and reduce civil penalties. Because the IRS offers multiple paths for addressing unreported foreign accounts and other offshore noncompliance, taxpayers may have opportunities to resolve issues on materially more favorable terms than they would face in an audit or enforcement action.

The IRS offers five options for resolving noncompliance involving foreign assets:

• IRS Criminal Investigation Voluntary Disclosure Practice
• Streamlined Domestic Offshore Procedures
• Streamlined Foreign Offshore Procedures
• Delinquent FBAR Submission Procedures
• Delinquent International Information Return Submission Procedures

Our attorneys work closely with our clients to evaluate these options, assess the risks and benefits of each approach, and determine the strategy best aligned with your facts, objectives and risk profile. Since 2009, the IRS has collected more than $11.1 billion through these programs.

Gifts and Bequests

Taxpayers who receive gifts from a foreign person or entity are often surprised to learn that those transfers may be reportable to the IRS if they exceed specified thresholds. Reportable transfers can include gifts from individuals, foreign corporations in which the taxpayer owns no stock, foreign partnerships in which the taxpayer is not a partner, and distributions from a foreign trust. Our lawyers work with clients to help them file the required form to avoid penalties and the statute of limitations being suspended on the underlying tax return until the filing is made.

Use of Foreign Trust Assets

Taxpayers also should exercise caution when using assets held in a foreign trust. Depending on the circumstances, use of the asset may be treated as a taxable distribution and may require the beneficiary to file Form 3520. In general, the fair market rental value of the asset's use is treated as the amount of the distribution. Paying fair market value for the use of the asset may help avoid that result, and our attorneys work with you on the best compliance strategy in each case.

A Sampling of Common Forms

We advise clients on the proper manner to report a wide range of foreign assets, including:

• gifts and bequests from foreign persons and foreign estates
• gifts from foreign corporations and partnerships
• gifts and bequests from a covered expatriate
• distributions from foreign trusts
• ownership of a foreign trust
• ownership of foreign bank accounts
• ownership of shares in a foreign corporation
• ownership in a foreign partnership
• ownership of shares in a passive foreign investment company
• ownership of specified foreign financial assets
• ownership of foreign disregarded entities
• foreign ownership of disregarded entities

Taxpayers who fail to file required forms reporting foreign gifts, foreign asset ownership or certain foreign receipts may face significant financial exposure. Whether the issue is identified by the taxpayer or raised by the IRS, our Offshore Tax Compliance Team advises clients on reasonable-cause positions and other strategies for addressing noncompliance.

FATCA Compliance

FATCA requires foreign financial institutions and certain nonfinancial foreign entities to report foreign assets held by U.S. account holders. Failure to comply can result in withholding on certain payments. Depending on asset values, U.S. taxpayers also may need to report foreign financial accounts and other foreign assets on IRS Form 8938.

Enacted in response to the use of overseas tax havens, FATCA carries both civil and criminal consequences. It applies not only to U.S. citizens, including those living abroad, but also to insurance companies, financial institutions and fund managers. Our Offshore Tax Compliance Team advises on Form 8938, the proper completion of Form W-8BEN-E and broader FATCA compliance issues.

Proactive Planning Is Essential

We encourage taxpayers before making foreign investments, as well as those who already own foreign assets, to seek advice on the most effective way to structure and report those assets. Our Offshore Tax Compliance Team, together with our broader Tax Practice, helps clients navigate the rules related to taxation and reporting of foreign activities. Our attorneys partner with clients across the full range of tax, wealth planning, litigation, investigations and international wealth preservation to stay ahead of legal and regulatory developments and help clients manage potential exposure associated with foreign assets and offshore business activities.