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What if a taxpayer doesn’t disclose international resources?

On Behalf of | Jan 15, 2025 | Tax Law |

Filing a federal tax return can be a complicated process. The more resources an individual accumulates and the more they diversify their portfolio, the more forms they likely have to submit to the Internal Revenue Service (IRS).

People have to disclose their assets and their income. Sometimes, people make mistakes and oversights because they believe that only domestic income or assets apply for federal income tax purposes. They could then face consequences when the IRS discovers those errors.

International information sharing has become commonplace in the world of tax and finance. Domestic taxpayers can expect foreign banks and governments to make disclosures to the IRS that could highlight discrepancies and oversights in their income tax returns. What happens in cases where those with domestic income tax obligations do not accurately report foreign resources?

The IRS assesses large penalties

Often, the assets that lead to income tax controversies are financial. Domestic taxpayers may have financial accounts in other countries that they fail to disclose on their tax returns. Filers who fail to execute and submit Form 8938, which is the IRS’s State of Specified Foreign Financial Assets, are at risk of large financial penalties.

Those who fail to submit the form by the relevant due date could face a penalty of $10,000. The IRS generally sends notices warning taxpayers about the failure to submit disclosure paperwork. If the taxpayer doesn’t submit the form within 90 days, the taxpayer can accrue another $10,000 in penalties for every 30-day period that passes. The maximum penalty is $50,000, but interest can accrue on that amount to increase it.

Similar rules apply to international trusts and business holdings, although the forms required are different. Any assets owned by domestic taxpayers generally require disclosure when filing an income tax return, even if the taxpayer acquired those resources before entering the United States. In more severe cases where the IRS suspects fraudulent intentions, the taxpayer might be at risk of prosecution. The IRS can refer tax fraud and evasion cases to the Department of Justice for prosecution.

Taxpayers responding to allegations of undisclosed foreign resources may need help correcting their situation and communicating with the IRS. Acting swiftly to resolve tax controversies can help taxpayers minimize the consequences they might otherwise face.

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