Doing business abroad can be beneficial, but entrepreneurs that are considering expanding abroad or who currently do so should be aware of tax implications. The Internal Revenue Service (IRS) has increased efforts to find and prosecute those who use foreign markets as a means of avoiding tax obligations.
Savvy entrepreneurs can still take advantage of business opportunities abroad without clashing with the IRS. These three tips can help:
- Be aware of FATCA. The Foreign Account Tax Compliance Act is a federal law that requires the reporting of qualifying foreign assets. The rules around this law are often changing. One of the more recent changes is an expansion in reporting requirements. In addition to individuals, certain businesses will also need to report. Essentially, this expansion applies to corporations or partnerships that are closely held. This refers to those that have more than 80 percent ownership by an individual. Qualifying businesses that now need to report must also have primarily passive assets. Examples include dividends, rent and interest.
- Know if you need to file an FBAR. The Report of Foreign Bank and Financial Accounts (FBAR) is a financial accounting form that is filed with the Treasury Department. Individuals and businesses with financial interests or signatory authority over foreign accounts that have more than a $10,000 value are required to file this form.
- Know when you need to report ownership in a foreign entity. In addition to reporting assets, certain ownership rights must also be reported. This generally applies to certain stock percentages in foreign corporations, but forms are also required for certain foreign trusts and partnerships.
The IRS takes violations of reporting requirements seriously. The penalties have escalated in recent years. Penalties are often in the tens of thousands of dollars and more and, in some cases, prison sentences can apply.