Jointly Filed Tax Returns with Undisclosed Foreign Accounts

Jointly Filed Tax Returns with Undisclosed Foreign Accounts 

Most spouses file their tax returns Married Filing Jointly. And, it is not uncommon for one spouse to be a foreign national who is in the United States as a visa holder, permanent resident or naturalized citizen who has foreign accounts, assets, and/or investments. In a now all-too-common situation, at some point after the fact and sometimes even years after the original returns were filed, taxpayers realize that they missed reporting foreign accounts, assets, investments, or income on their U.S. tax return. Sometimes, the taxpayers are no longer married — and disclosing previously unknown foreign accounts can cause serious tax consequences and even marital consequences depending on whether these assets were disclosed in the divorce decree. Let’s look at some of the different options and scenarios when only one spouse has missed foreign accounts.

Was it Willful or Non-Willful?

The first question to determine is whether the missed foreign asset and income were willful or non-willful. In other words, did the taxpayer knowingly or with reckless disregard or willful blindness not include the foreign income or was it just an inadvertent mistake and the taxpayer’s noncompliance is non-willful? This will help determine which options the taxpayer has to get into international tax compliance.

Tax Return (Joint)

If the return was filed jointly, both taxpayers are responsible for the information contained in the return in other words, if a tax return is missing certain information about foreign accounts or assets the non-compliance is attributed to the return and not the individual.

As provided by the IRS:

• • • Married Taxpayers Filing a Joint Income Tax Return If you are married and you and your spouse file a joint income tax return, the failure-to-file penalties apply as if you and your spouse were a single person.

    • Your and your spouse’s liability for all penalties is joint and several.

FBAR (Per Person)

The FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114) is different than the tax return. And, while it is not uncommon for U.S. taxpayers may be required to file both an FBAR and Form 8938, typically, FBARs are filed per individual. Therefore, if only one person has foreign assets or accounts that need to be reported, then while the joint return may be subject to joint and several penalties, the FBAR penalties are per account holder — even if the tax return was jointly filed.  In other words, when it comes to FBAR penalties, it is typically based on a per-person filing requirement — although some spouses who only have joint accounts may file together while preparing a FinCEN Form 114a, which may impact the outcome of how penalties are assessed against the joint filers.

Are the Spouse Still Married?

Another important although sometimes uncomfortable issue is whether the taxpayers who file jointly are still married. If the taxpayers are still married then typically they will submit any amnesty submissions to the IRS together when their prior returns were filed married filing jointly. If the taxpayers are no longer together this can unfortunately open up a pandora’s box in terms of how to fix prior year non-compliance, assessing wilfulness versus non-wilfulness, and determining whether the taxpayers will cooperate. In addition, it may have other impacts on the divorce filing such as whether those foreign assets were considered as part of any divorce decree.

What if Only One Spouse Wants to Do Streamlined

For most taxpayers who did not properly report their foreign accounts, assets, investments, or income and are non-willful, the Streamlined Filing Compliance Procedures are the best submission procedures to pursue to get into compliance. Sometimes both spouses do not agree on wanting to enter the program and only one spouse wants to do the streamlined. If that is the case, then at the current time the IRS does provide that only one spouse may submit.

As provided by the IRS:

• • • “In one or more of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, I filed joint income tax returns. But my spouse/former spouse will not sign joint amended returns or a joint certification on Form 14654 for a Streamlined submission. What can I do? Am I precluded from using the Streamlined Domestic Offshore Procedures?

    • We understand that in certain cases (including but not limited to separation or divorce), your spouse/former spouse may not be willing to sign joint amended income tax returns or a joint certification on Form 14654.

    • You may submit a joint amended income tax return with only your signature to Streamlined Domestic Offshore Procedures so long as your joint amended return shows a net increase in tax. Please explain your inability to secure your spouse’s/former spouse’s signature in the narrative statement of facts on Form 14654. And write “SDO FAQ 14” in red ink in the area for your spouse’s signature on the amended returns and Form 14654.

    • As a matter of routine processing, the Service will request the other spouse’s signature on joint amended returns with only one signature. If at the time the Service makes a request for your spouse’s/former spouse’s signature on a joint amended return or joint certification you are still unable to secure your spouse’s/former spouse’s signature, please respond to the inquiry by referencing this FAQ.

    • You may not submit a joint amended income tax return with only your signature to Streamlined Domestic Offshore Procedures showing a net decrease in tax or an increase in credit.”

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. 

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.