{"id":30471,"date":"2017-11-21T08:00:04","date_gmt":"2017-11-21T14:00:04","guid":{"rendered":"https:\/\/resource-center.hrblock.com\/?p=30471"},"modified":"2021-07-06T12:46:07","modified_gmt":"2021-07-06T17:46:07","slug":"cayman-islands-tax-haven","status":"publish","type":"post","link":"https:\/\/hrbcomlnp.hrblock.com\/tax-center\/irs\/audits-and-tax-notices\/cayman-islands-tax-haven\/","title":{"rendered":"IRS May Start to Tax Your Account in the Caymans"},"content":{"rendered":"

Editor’s Note:<\/strong> Due to increased scrutiny from the IRS, U.S. persons should take necessary steps to ensure that foreign accounts are accurately reported.\u00a0<\/em><\/p>\n

Consider the following: you\u2019re a U.S. citizen, green card holder, or resident alien, and you must report your worldwide income on your Form 1040. This requirement is assumed to be true regardless of where you live in the world.<\/p>\n

An important missing step is that these same taxpayers may also be held to the requirement to report their foreign accounts on the\u00a0Foreign Bank Account Report<\/a>\u00a0(FBAR) and Form 8938.\u00a0Unfortunately, potential penalties related to\u00a0not reporting\u00a0foreign accounts and assets can exceed $10,000 per document for offshore tax bills owed.<\/p>\n

Offshore Banking Tax Letters<\/h2>\n

To give you a better sense of the governments’ international examination scope, the IRS sent\u00a0855,000 notices<\/a>\u00a0and letters\u00a0to the 7+ million U.S. citizens living abroad. Additional\u00a0taxes and penalties are not the focus of these letters.<\/p>\n

However, you can see the high percentage of these clients receiving IRS correspondence. A possible major contributor for these notices, which would hit home in the U.S. as well, is a push from the IRS to have taxpayers get in compliance with their foreign income and account reporting requirements.<\/p>\n

A possible major contributor for these notices, which would hit home in the U.S. as well, is a push from the IRS to have taxpayers get in compliance with their foreign income and account reporting requirements.<\/p>\n

IRS Offshore Accounts<\/h2>\n

In addition to the IRS taking over enforcing compliance of the FBAR in the mid 2000\u2019s, in 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), which requires all foreign financial institutions to report accounts of U.S. citizens or face a mandatory 30% withholding tax on certain U.S. sourced payments made to them.<\/p>\n

The FACTA law also paved the way for the U.S. government to sign agreements with governments of foreign countries, forcing the hand of financial institutions to comply with the law. These agreements\u2212now exceeding 100 countries<\/a>\u2212allow the IRS to obtain details about U.S. account holders from foreign financial institutions.<\/p>\n

What does this mean to you, the taxpayer?\u00a0It means that if you meet the filing requirements discussed below, you will want to submit the required reports for your foreign accounts in a timely manner to avoid costly penalties.<\/p>\n

Foreign Accounts<\/h2>\n

Foreign account\u00a0is a misleading term for U.S. taxpayers as it includes more than just bank accounts. For FBAR and Form 8938 reporting purposes, a foreign account includes a bank, investment, or retirement account amongst others.<\/p>\n

The FBAR (FinCEN Form 114) is filed if a U.S. person has a financial interest in or signature authority over any financial account(s) outside of the U.S. and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year. Even if you don\u2019t have to file a return,<\/p>\n

Even if you don\u2019t have to file a return, an FBAR\u00a0is still required if you meet the set thresholds.<\/p>\n

Form 8938<\/h2>\n

The filing thresholds for Form 8938 are much higher than the FBAR. However, it’s possible you may be required to file both forms.<\/p>\n

Additionally, Form 8938 requires reporting of both\u00a0foreign accounts and assets<\/a>. Since Form 8938 is filed with your 1040, if you don\u2019t have a 1040 filing requirement, then you do not have to file the form either. Following are the filing thresholds for Form 8938 for taxpayers living in the U.S. (note that the thresholds are higher for U.S. taxpayers living abroad).<\/p>\n

You must file 8938 if the total value of all foreign assets and accounts exceeds the following thresholds and you are filing:<\/p>\n