Divorce: Finding Offshore Assets

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One of the more important issues in a divorce proceeding is identifying and dividing community and separate property. The task of asset identification and location may have been made both easier and more complex at the same time by changes to the Internal Revenue Code (“Code”). The changes have resulted in serious modifications to the statute of limitations on the filing of various “Information Returns”. The statute of limitations, under the Code has been extended to three years from the actual filing date for late or unfiled Information Returns, such as Form 3520, Report of Foreign Gift, Devise, Bequest, or Transfer to Foreign Trust, or Form 8938, Statement of Specified Foreign Financial Assets.

In the case of Form 3520 the penalty for failing to timely file the form is up to 25% of the value of the foreign gift(s) and up to 35% of the value of inherited assets. Form 8938 has lesser penalties, but if a Form 8938 is required to be filed, under the Bank Secrecy Act (“BSA”), then in all likelihood a Report of Foreign Bank or Financial Accounts (FBAR) must be filed which has severe penalties for non-compliance. Failing to file an FBAR can result in penalties that range from $10,000 per account per year for “non-willful” violations to $100,000 per account or 50% of the highest account balance per account per year all for up to six years and possible prosecution for “willful” violations.

So what does this have to do with Divorce? An important strategic decision to be made by the taxpayer and his/her advisers in a divorce is how to disclose the nature and extent of offshore assets, including gifts, and preserve the asset base while at the same time minimizing the penalties which may be imposed under the Code and BSA. For reasons of human nature, divorcing parties may try to use the existence of unreported foreign assets for tactical advantage. The best advice for non-compliant taxpayers with offshore assets, or who are recipient of offshore gifts, is to consider entering the Offshore Voluntary Disclosure Program (OVDP) and thereby, if eligible, avoid penalties under the Code or the BSA. Coming forward could be done by either party to the divorce. The methods of coming forward for the spouse who does not control the offshore assets can be a bit complicated, but should include a Post OVDP filing with the court in the divorce proceeding requesting that the spouse who controls the offshore assets be held to account for those assets and the OVDP and other penalties which may be imposed. The tactical and strategic decision need to be made with counsel after full disclosure of the situation. Counsel expert in offshore compliance should be part of the team. In some cases, there is no simple solution, but that does not mean that there is no legal solution.

The risk and choices are ultimately the clients, but the client needs to be fully informed about those risks and then he/she can make a decision

Topics:  Divorce, Marital Assets, OVDP

Published In: Civil Procedure Updates, Family Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

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