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FACTA, corporate inversion bring scrutiny to offshore earnings

New existing and proposed laws are attempting to limit the ability to keep assets abroad.

Offshore accounts and foreign income have received much recent scrutiny in the U.S. The Foreign Account Tax Compliance Act, or FACTA, went into effect on July 1 of this year, which requires foreign banks to report to U.S. authorities on accounts held by American citizens. Even more recently, President Obama, members of Congress and the media have focused on tax inversion, wherein companies declare themselves as headquartered abroad to reduce their tax burden. Companies have been more willing to take advantage of tax inversion in recent years, and more may be on the way. Walgreens, for example, estimates it could save billions over the next several years if they move their headquarters to Switzerland. Medtronic and AbbieVie are considering moving their tax domiciles to Ireland.

FACTA focuses on illegal offshore activity; tax inversion is perfectly legal, although options exist to eliminate this so-called loophole. But both FACTA and any actions President Obama and Congress make regarding tax inversion are intended to reduce the ability of corporations and individuals to lower their tax rates by holding assets abroad. Americans living abroad, companies doing business abroad and even simply those who have offshore bank accounts are wise to tread carefully to avoid potential fines and penalties.

The IRS audits less than 1 percent of returns every year. Generally, the IRS goes after big fish. The more money involved, the likelier an individual or corporation will receive IRS scrutiny. The IRS estimates it loses $100 billion to offshore accounts each year. Closing that tax gap has been a priority, especially since the Great Recession. FACTA became law in 2010 and accompanied other legislation aimed at financial regulation.

Individuals and businesses suspected of offshore tax evasion face significant penalties, including fines and interest payments that can add up quickly.

What to do when the IRS becomes involved

Few things are as stressful as an IRS audit or investigation, even if the person being investigated has done nothing illegal or simply made a mistake. People under IRS scrutiny can help themselves with a few simple actions, however:

  • Remain calm. Easier said than done, of course, but just because the IRS has begun an audit or investigation does not mean they have found wrongdoing. It simply means they are investigating. Tax evasion is difficult to prove, and taxpayers who are innocent of wrongdoing or willing to work with the IRS can mitigate penalties or prove innocence by providing further documentation.
  • Be cooperative. It can be tempting to ignore or tear up IRS letters, but the reality is that the IRS is not going away. Documentation, negotiation and timely responses can go a long way towards avoiding extra fines and even jail time.
  • Get representation. Most importantly, individuals and businesses faced with a tax controversy should get help in understanding what is at stake and how best to address IRS questions and concerns.

The U.S. has become one of the most aggressive countries in the world when targeting foreign accounts and income of its citizens and businesses abroad. People concerned with offshore holdings should contact an experienced tax law attorney to discuss their situation and potential next steps.

Keywords: Offshore accounts, tax evasion, inversion, IRS