More US Taxpayers at Risk

In last month’s article, I explained how US taxpayers face horrendous fines for failing to accurately report foreign financial assets on the annual 1040 tax return using form 8938. The fines range from 50%-125% of the asset value every year not accurately reported. This is very serious stuff.

The IRS Misleads Property Owners
One reader pointed out that the IRS has a document called “Question & Answers on Form 8938” which says that ownership of “foreign real estate is not is not a specified foreign financial asset required to be reported on form 8938.” While this is narrowly true, it is dangerously misleading. Here’s why.

The US Tax Code in section 26 USC 6038D(b) defines a “specified foreign financial asset” to included “any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person”.

Always Report Foreign Real Estate
Thus by law, foreign real estate must be reported on form 8938 when the property is purchased (if after October 2010 when the law was passed). If the purchase of the property was partly financed by the developer using payment terms or a mortgage, it must be reported each year. Also report annually any open pre-sale condo purchase agreement. If you transferred money to an escrow account of a Panamanian attorney, that could be a contract to be reported. If you sold the property to a non-US person (after October 2010), that must be reported. For any other year, the property doesn’t have to be reported unless owned by a foreign corporation, foundation or trust. The bottom line is simply reported the property every year to be safe.

Don’t Panic!
1) Buying real estate in Panama is still a GREAT investment! Simply report it every year. Don’t hide from the IRS!
2) If you haven’t accurately reported, penalties could still be minimized or waived altogether if you correct them before the IRS discovers the error. Get professional help to do this.
3) Get knowledgeable help to complete your US tax returns. Errors could be costly.

If you have any questions, email me.

Clinton Donnelly is an international tax law advisor assisting businesses and individuals seeking greater tax efficiency and wealth retention. He also prepares US tax returns and helps people with resolving tax problems and debts with the IRS.  He can be reached at clinton.donnelly@gmail.com. This article is informational and simplified and not offered as legal advice.