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It’s Time to Get Compliant with Foreign Tax Reporting

It has been nearly 10 years since author Thomas Friedman published The World Is Flat, in which he discussed the trend toward globalization of economies and business activities. In our client base, we have certainly seen an increase in cross-border activity, from sales of products by a U.S.-based company to customer overseas, to foreign ownership of a company located in Michigan, or something in between. Of course, with all this money flowing back and forth across borders, the IRS wants to know about it, and they have some pretty big penalties for failure to tell them about it.

For those of you who receive our annual 1040 Client Organizer, you may recall that there are always several questions about whether you have an interest in, ownership of, or signature authority over any foreign financial accounts. The hope is that these questions would be a starting point for a conversation about any and all foreign dealings you and/or your company may have. But the questions are buried in with so many others, that we worry that some clients may miss the importance of this topic.

Every taxpayer needs to consider the following questions, among others, for knowing whether they need to do any foreign account reporting:

  • Do you directly own any foreign stocks or bonds?
  • Have you received a gift or inheritance from any foreign individuals, trusts or estates?
  • Are you an officer of a corporation not created under the laws of the United States?
  • Do you do business with customers in certain countries that are boycotting Israel?
  • Do you make payments to any foreign parties for rent, royalties, interest or services performed?

The IRS is both stepping up its enforcement of foreign tax compliance, while also providing for some fairly lenient voluntary disclosures of these foreign activities. In other words, they really want people to come forward voluntarily and will make it worth your while by letting you off much easier than if they find you first.