If you’re a US citizen, and you make the decision to buy property abroad, you need to immediately find out what your obligations are in reporting these offshore assets to the IRS.
You may think that since you have only purchased a vacation or retirement property and there is little or no income associated with it, that you have no reporting requirements. Boy, does the IRS have a million dollar surprise waiting for you!
Let’s look at an example:
John & Julie traveled to Costa Rica in 2002 and just fell in love with the place. They found a home that was just perfect for $250,000. Their attorney in Costa Rica advised them that, since they were foreigners, they should form a Costa Rican corporation, a Sociedad Anomia (S.A.) to buy and hold the property.
So, with the help of the attorney, John & Julie formed the corporation and they each acted as officers, directors, and shareholders. John wired the $250,000 to his attorney to buy the house and the sale went off without a hitch.
John & Julie never thought to report the purchase to the IRS as there was no income there to be taxed. It was just a vacation home, and hopefully someday, a retirement home. For the next decade, John & Julie enjoyed their home in paradise having no idea of the bomb that is ticking just for them.
You see, because John & Julie were US citizens who each owned more than 10% in a foreign corporation, they were required to file an IRS Form 5471 for the year of purchase and every year since. Even though this purchase is not a taxable event, there is a $10,000 penalty for not filing this form and for every year that it goes un-filed.
Since John & Julie are “married filing jointly” taxpayers and residents of the US, and since the value of their holdings in the foreign corporation exceed $200,000, they are also required to file IRS Form 8938 annually. And again, there is a $10,000 “disclosure penalty” for each year that each required form goes un-filed.
Since John transferred money to the foreign corporation in order to buy the house, he should have filed an IRS Form 926 to disclose the transfer. And again, there is a $10,000 penalty for each year that the form has gone un-filed.
Sometime in early 2013 (prior to April 15), something happens to bring John & Julie’s Costa Rican paradise to the attention of the IRS and the IRS sends them a “come hither” letter. What do John & Julie owe in penalties ?
Well, they owe ….
2002 Form 5471 $100,000 ($10,000/year for ten years)
2002 Form 8938 $100,000 ($10,000/year for ten years)
2002 Form 926 $100,000 ($10,000/year for ten years)
2003 Form 5471 $90,000 ($10,000/year for nine years)
2003 Form 8938 $90,000 ($10,000/year for nine years)
2004 Form 5471 $80,000 ($10,000/year for eight years)
2004 Form 8938 $80,000 ($10,000/year for eight years)
2005 Form 5471 $70,000 ($10,000/year for seven years)
2005 Form 8938 $70,000 ($10,000/year for seven years)
2006 Form 5471 $60,000 ($10,000/year for six years)
2006 Form 8938 $60,000 ($10,000/year for six years)
2007 Form 5471 $50,000 ($10,000/year for five years)
2007 Form 8938 $50,000 ($10,000/year for five years)
2008 Form 5471 $40,000 ($10,000/year for four years)
2008 Form 8938 $40,000 ($10,000/year for four years)
2009 Form 5471 $30,000 ($10,000/year for three years)
2009 Form 8938 $30,000 ($10,000/year for three years)
2010 Form 5471 $20,000 ($10,000/year for two years)
2010 Form 8938 $20,000 ($10,000/year for two years)
2011 Form 5471 $10,000 ($10,000/year for one year)
2011 Form 8938 $10,000 ($10,000/year for one year)
In case you’ve lost track, that’s $1.2 million. Not a dime in taxes, mind you, ALL disclosure penalties.
Not only can the IRS attach any funds or property that you have in the US to collect these penalties, they can also sequester your Social Security Income payments.
And God help you if had ownership, constructive ownership, or signature authority over a foreign financial account in excess of $10,000 and failed to file US Treasury Form TDF 90-22.1 otherwise known as a FBAR.
Doesn’t it just make you proud to be an American?
You may have heard a lot lately about the IRS’s Offshore Disclosure Initiative (OSDI). This is primarily for folks who have been hiding money in offshore accounts and it provides a streamlined process for repatriating the money and settling with the IRS. From what I can tell, it does nothing for the disclosure penalties detailed above.
Accountants will tell you that if you come forward and file all back returns, prior to the IRS catching you, there will be no criminal penalties. True, but what you see above are civil penalties and the IRS is not being nearly as accommodating these days in abating those penalties as they have been in the past. The US is broke and looking under every rock for any penny that they can find.
Be sure to find out, sooner rather than later, what your obligations are to report offshore assets.
Please feel free to see more on this topic and to give us your feedback in our Discussion Forum here.
IRS Reporting Obligations For U.S. Citizens When Buying Real Estate in Costa Rica. Don’t make this million dollar mistake!
Written by VIP Member Bill N. who recommends Don Nelson at TaxMeLess.com and says that: “Don has been an invaluable resource to me on international taxation issues. He is someone that can advise you as an attorney and as an international tax accountant.
Don Nelson doesn’t work for free but I don’t think that any of us try to. BTW, we live a country apart and I don’t get kickbacks, incentives or otherwise for recommending him. I tell people about him because he has been a great help to me and most folks don’t understand the total ramifications of all of their actions when acquiring assets abroad.
Being an officer of the court, Don can’t advise you to do anything that isn’t specifically legal, however, there is a conventional wisdom that folks that aren’t compliant should simply try to slide sideways into the system i.e. start filing the proper forms as if your obligation just began.”
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