The IRS has issued a 2022 Dirty Dozen Scams warning including crypto and offshore accounts urging US taxpayers to be aware of “bogus tax avoidance strategies.” One of the most substantial buckets referenced in the report is an attempt to use offshore accounts or digital assets such as cryptocurrency in an attempt to shield income from US taxation.
One of the most important concepts for a US taxpayer to understand is that the United States taxes its citizens on all income, regardless of where it is earned. US taxpayers must report all income on our tax returns under penalty of perjury. This includes all sources of income at home and abroad. Attempting to conceal income or assets using offshore accounts, property or investments makes no impact whatsoever on your responsibility to report income and pay appropriate taxes each year.
One of the most sobering issues discussed in the IRS scams warning including crypto and offshore accounts was a simple explanation for how the IRS finds these assets. “The IRS is able to identify and track otherwise anonymous transactions of international accounts as well as digital assets (read: cryptocurrency).” How is this possible?
Over ten years ago the US introduced FATCA, a powerful set of laws which would cripple access to US markets for any entity, institution or bank who did not comply. FATCA requires all domestic and international banks, financial houses, investment firms and even cryptocurrency exchanges to provide the IRS with electronic data encompassing the list of all US persons associated with financial accounts or investments which in many cases involves transactional data as well. The IRS simply compares the data against the accounts and investments reported by US taxpayers. If your foreign bank, investment house or cryptocurrency exchange provides your information they compare it to your recent FBARs and your tax return. If it isn’t there you can imagine how quickly an audit will follow.
The IRS scams warning including crypto and offshore accounts adds a final ominous note: The failure to file penalty is much higher than the failure to pay penalty. In other words, there is a substantial financial incentive to file an accurate return on-time and work out a payment plan if there is not enough money on hand to pay the tax.
The days of hiding income and assets in offshore accounts or digital currency are over. Swiss banks, the Cayman Islands and even cryptocurrency exchanges are no longer safe havens. It isn’t a matter of “if,” it’s a matter of “when.” Allen Barron can help you to come into compliance with any previously unreported offshore accounts or assets. Ask about the protections of the “attorney-client privilege” and how we can provide sound counsel for your unique circumstances.