Increased Scrutiny over Foreign Assets

The IRS is becoming increasingly interested in US citizens who have sizable investments sitting in foreign banks and brokerage accounts. Not that there's anything wrong with having a foreign bank account. Rather, the IRS is looking for people who haven't reported investment income from abroad, such as interest, dividends and capital gains from their offshore accounts. That's the gist of an article in the Times Online (UK) that caught my eye today, "US expands foreign bank tax evasion probe." According to the Times reporter, the IRS is reaching out to accountants at large, international firms in an effort "to clamp down on tax evasion by US citizens."

The reporter also mentions the ongoing investigation of offshore banking practices at UBS in which wealthy clients allegedly are using foreign accounts to hide income from the IRS.

In my own practice, I more often meet people who are genuinely confused about how to report the income. Sometimes, people don't even realize they are earning significant amounts of money in an overseas account until they, or their accountants, start asking the right questions. One reader shared exactly this sort of situation in the tax forum, relating that he's trying to figure out how to determine how much income he earned from an inheritance left to him years ago by his uncle. It's not that this reader didn't know about the money, because he did. The issue is the banks seem unable to provide the documents he needs to accurately calculate how much income he earned on the investments. And that's going to make filing his taxes much harder, especially with the intense scrutiny the IRS is sure to bring on this and similar situations.

The best advice is to keep track of your investments yourself, and to report all income annually to the IRS, including foreign investments. Also, it's a good idea to report all your foreign bank accounts you own or have signature authority over.