Disclosure Requirements for Offshore Assets in Divorce

• Jurisdiction: California,United States,Federal
• Author: Steve S. Zand
• Publication year: 2014
• Citation: Vol. 36 No. 4

Disclosure Requirements for Offshore Assets in Divorce

Steve S. Zand

Steve Zand is a Certified family Law Specialist and a full-time Professor of Law atUniversity of West Los Angeles, College of Law. He was appointed to the Los Angeles Police Department, Police Commission, as the Chairperson ofthe Permit Review Panel in 2001, and served until 2006. He is the recipient of the Justice Bernard Jefferson Award of Excellence. He has received Commendations from the Governor of the State of California, Board of Supervisors of County of Los Angeles, Mayor of City of Los Angeles, and Speaker of the California State Assembly. He is also selected as a Super Lawyer.

Family law attorneys representing clients who are divorcing and who have offshore income and assets need to be well versed in the disclosure requirements of the federal tax code as well as California's Family Code. Attorneys and clients who are unaware of these disclosure rules run the risk of incurring hefty criminal and civil fines and even jail time. The duty to disclose assets in dissolution proceedings, juxtaposed with the civil and criminal penalties for failing to disclose offshore assets to the IRS, creates a legal mine field for unwary lawyers and their clients. The disclosure duties in divorce compel parties to deal with any previous failure to report offshore assets and income to the IRS.

Misconceptions of Disclosure and Offshore Assets

Regarding disclosure, two key misconceptions are common. The first is that only U.S. citizens are subject to these disclosures. In IRS jargon, however, a "U.S. Person" has a definition much broader than the term would suggest. A "U.S. Person" is generally defined as a U.S. citizen, resident alien, or domestic entity (corporation, partnership, estate, or trust).¹ The second erroneous belief is that only income earned in the United States is subject to U.S. taxes. The truth is that a U.S. person is taxed on worldwide income.

The problem is not limited to the wealthy and sophisticated. Recent immigrants to the United States face significant IRS issues when they leave money and reportable assets behind in their homelands. They often fail to file appropriate disclosures with the federal government. The IRS has been quite successful in its pursuit of taxpayers with offshore bank accounts, and it has recently expanded its program for disclosure of specified foreign financial assets held by U.S. persons. Starting with 2011 tax returns, the IRS has instituted an additional reporting requirement that is separate from and exceeds previous requirements for the Report of Foreign Bank and Financial Accounts (FBAR).

Two Distinct Reporting Requirements for Offshore Assets

1. Specified Foreign Financial Assets (SFFA)

Attorneys representing dissolution clients with foreign assets must understand that two distinct reporting requirements come into play for offshore assets. The first...