We live in a truly international world, and the boundaries of nations are seemingly insignificant due to our interconnected digital economy. Today, setting up a foreign bank account is a relatively easy process, and many people may find themselves doing this for a number of reasons. Perhaps you hold citizenship in two different countries. Perhaps you spend considerable amounts of time in a different nation throughout the year. Maybe you worked for months in a different country, and during this period you set up a local account to make financial matters easier. Whatever the case may be, there are many legitimate reasons for setting up a foreign account, and this does not necessarily mean that you are trying to commit fraud or hide assets from your spouse.
The issues arise when these accounts go unreported, as this could potentially cause a spouse to miss out on considerable assets when the estate is divided. What can a spouse do if they suspect this is happening? What consequences might a spouse face if they continue to hide assets using a foreign account?
Former Spouses May Draw the Attention of the IRS
The IRS tends to view new divorcees with a higher degree of suspicion compared to other “average” taxpayers. This is because they know that a divorce can lead to all kinds of financial and emotional issues, and the mixture of these two factors can cause spouses to act in extremely unpredictable and questionable ways. Often, spouses are driven to commit financial fraud and other types of misconduct in order to keep hold of as much property as possible during a divorce, and the IRS is well aware of this fact. This is when unreported foreign accounts tend to be discovered.
Why Reporting Foreign Accounts Can Backfire
Some spouses suspect (or know for a fact) that their exes are hiding cash in unreported foreign accounts. They then report their exes to the IRS in the hopes that this money will become available. At the very least, they hope that their ex will experience consequences for trying to hide cash. But this strategy can backfire if the spouse has filed a joint return. In some cases, these spouses may actually be implicating themselves in illegal activity by drawing attention to the offshore account.
What are the Penalties?
If you are caught engaging in hiding foreign funds from your spouse, you may face significant penalties. First of all, you may be required to pay back tax. Secondly, you may be required to pay significant fines for this misconduct. Once again, this can affect both spouses if they filed a joint return.
These types of situations may arise in two different ways: First of all, a spouse may intentionally neglect to disclose their foreign account when filing a return. In this situation, criminal charges may be a possibility. Secondly, a spouse may unintentionally fail to disclose their foreign account. Perhaps they were not available to provide the information due to work conflicts or travel. In this situation, the implicated parties will most likely face financial penalties alone.