The topic of US taxation usually puts people to sleep but gives them nightmares. It can be complex, overwhelming and at times indecipherable. Many people hire tax professionals to try to navigate the process and keep people in compliance with their US tax filings. However, there are some people who believe by living in or having investments in Costa Rica, that they can evade or ignore their tax filing responsibilities in the US or they just are not aware of what they should be reporting. The truth is many people over the years have been able to get away with either not filing at all or inadvertently not filing correctly.
This is now changing. The US government has recently enacted new legislation that will require all foreign financial institution to begin in 2013 of collecting and transmitting information about US persons who have bank accounts, trading accounts, life insurance policies and other assets. They will also start requiring tax withholding of 30% on all US source income starting in the year 2014. What this effectively means that if you have assets and/or earn income in Costa Rica and do not report these amounts correctly, the IRS will become aware of it and will take aggressive enforcement action against you. This can be both civil and criminal. And the IRS is devoting more financial and people resources on offshore tax evasion.
Some basics you should know now that can help you think about how to address these new rules:
1) Under the US tax law, you need to report all of your worldwide income regardless of source or type;
2) Under the Foreign Bank Account Reporting (“FBAR”), you need to disclose if you had a direct or indirect financial interest in and/or a signatory authority over a financial account held at any foreign financial institution if the account had a balance of $10,000 or more at anytime during the year;
3) Under the Foreign Account Tax Compliance Act (“FATCA”) you will need to disclose all direct and or indirect interests in specified foreign assets if the value of those interests exceeds certain thresholds. Examples of these kinds of assets include, depository and custodial bank accounts, ownership either directly or indirectly in any foreign corporations, partnerships or trusts, ownership of a foreign issued insurance policy that has a cash surrender value, debt and royalty agreements and real estate option contracts with non US person holders.
If you are not aware of the above or have not filed this information in the past, then you are subject to both civil penalties which can add up to substantial, six figure penalties and even criminal. Just look at recent article published about the owner of the Cocal Casino in Jaco.
There are ways to address these issues if you believe you either inadvertently have not filed properly in the past or if you have been lax because you thought you can just get away with it and not really have any problems. The first step is to consult with a tax professional to help assess your individual risk areas and exposure, including to FBAR and FATCA. If you determine after consulting a tax professional that you need fix these problems voluntarily (i.e. before the IRS finds you – as that will change many options that are available to you now) you can:
- File tax returns and or disclosures for past years previously not filed
- Amend past tax returns and disclosures previously filed
- If there are taxes due and you cannot pay them, you can enter into an either an installment payment plan or an offer and compromise agreement with the IRS. The requirements for these programs have recently changed to make it easier to qualify and may reduce what you have to pay.
- Restructure your holdings in Costa Rica now before the financial institutions will be reporting more extensive information to the US next year.
- If you have larger tax exposure, enter into an Offshore Voluntary Disclosure Program with the IRS to clean up all offshore tax issues.
If these issues seem overwhelming and or are difficult, do not feel too bad or nervous. There are many people out there who are in the same situation you may be. Not knowing your exposure and risk is what creates much anxiety. What is necessary is to act before the IRS does. Once they the government finds you, they have unlimited resources and time to destroy your life. Do not let that happen.
Robert L. Pioso, CPA, with 20 years of experience as a CPA, CFO and owner of a Costa Rican business can help you navigate through the complexities of US taxation for US expats and those who own investments and assets in Costa Rica. You can contact him for a free consultation.
CR 6050-3831 or US 312-235-2301 or visit him at www.richcoastaccounting.com
Rich Coast Accounting and Financial Services are focused at providing positive and tangible results that will bring real value to you or your business and offers a unique guaranty “You pay only for the value of the services received or the invoice, whichever is greater.”