Understated Income from Undisclosed Foreign Financial Assets

Understated Income from Undisclosed Foreign Financial Assets

Undisclosed Foreign Financial Asset Understatement for Expats Section 6662(J)

When U.S. taxpayers are required to file a tax return and fail to include certain income that results in a tax implication, it may result in fines and penalties in addition to any taxes that are due. There are many different types of penalties that a taxpayer may be subject to — especially when it involves foreign assets, accounts, and investments — but one of the most common types of penalty is the IRC 6662 penalty for income relating to undisclosed foreign financial assets. That is because when a person has an underpayment that relates to an undisclosed foreign financial asset coming not only can the taxpayer be penalized, but the penalty kicks up to 40% instead of 20% — the latter which is the typical penalty amount for violation of this code section. Making it more complicated for the taxpayer is that undisclosed foreign financial asset has a very broad definition under this code section and includes all different types of foreign financial assets, such as foreign bank accounts, foreign trusts, foreign corporations, and other foreign assets. Let’s work through the basics of code section 6662 with a focus on 6662(j), which relates to income generated from undisclosed foreign financial assets.

6662(a) Imposition of Penalty

• • • (a) Imposition of penalty If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.

6662(b) Portion of underpayment to which section applies

• • • (b) Portion of underpayment to which section applies

    • This section shall apply to the portion of any underpayment which is attributable to 1 or more of the following:

      • (7) Any undisclosed foreign financial asset understatement. 

6662(j) Undisclosed foreign financial asset understatement

• • • (1) In general

      • For purposes of this section, the term “undisclosed foreign financial asset understatement” means, for any taxable year, the portion of the understatement for such taxable year which is attributable to any transaction involving an undisclosed foreign financial asset.

• • • (2) Undisclosed foreign financial asset

      • For purposes of this subsection, the term “undisclosed foreign financial asset” means, with respect to any taxable year, any asset with respect to which information was required to be provided under section 6038, 6038B, 6038D, 6046A, or 6048 for such taxable year but was not provided by the taxpayer as required under the provisions of those sections.

    • (3) Increase in penalty for undisclosed foreign financial asset understatements

      • In the case of any portion of an underpayment which is attributable to any undisclosed foreign financial asset understatement, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.