It sounds like something out of Hollywood: A successful global business owner diverts income and hides assets in an offshore account. His spouse is fully aware of the account, and is aware that the funds haven’t been reported for tax purposes. When their marriage ends in divorce, however, the proverbial gloves are off and the wife uses the existence of the account as leverage to try to increase her settlement in the divorce.
The IRS has provisions designed to protect “innocent spouses” from being liable for their other halves tax obligations under certain circumstances. However, in this situation, the wife is hardly “innocent.” If the existence of the offshore account is raised during the couple’s divorce proceedings, it’s possible both spouses could face criminal prosecution and penalties, up to and including imprisonment, for willfully failing to report the assets in the foreign account.
An in-depth review of the unique challenges unreported foreign assets bring to divorce appeared in an article,”Taxes and Penalties on Unreported Foreign Assets: Who Foots the Bill?”, which appeared in the Journal of the American Academy of Matrimonial Lawyers. A full review of that paper is outside the scope of this blog post, but it’s interesting to consider the potential unplanned-for consequences that can arise when a couple intentionally tries to sidestep IRS filing, reporting, and tax obligations.
Individuals, couples, and business owners who are tempted to hide assets in unreported foreign accounts should know that such accounts are more “discoverable” today than ever before. Financial institutions are increasingly subject to IRS reporting requirements, making it often just a moment of time until the tax authorities, spouses, and creditors to find hidden accounts.
Of course, such unreported accounts pose a challenge when it comes to estate planning too. Leaving such offshore accounts to loved ones at your death could inadvertently subject them to scrutiny from tax officials and law enforcement. As a good rule of thumb, think twice before deliberately not reporting (or underreporting) income or assets held in foreign accounts.
If you are unsure of how your foreign assets work with your estate plan, contact us today! We will discuss your unique situation and build an effective estate plan for you and your family to fit your needs. Our services alleviate wealth concerns and help you to enjoy life and focus on what really matters, your family.