Finalizing Your Onshore and Offshore Disclosures Before Year-End

As the year draws to a close, it’s a good time to assess whether your tax reporting is on track. For individuals with both domestic and foreign financial connections, wrapping up onshore and offshore disclosures now can save you from unnecessary stress and potential penalties later. Whether you're managing income from overseas clients, maintaining foreign bank accounts, or working with U.S.-based clients while living abroad, these disclosures are critical to remaining compliant with tax laws.

This guide simplifies what you need to know about completing your onshore and offshore tax filings before December 31.

Why Onshore and Offshore Disclosures Matter

The U.S. tax system requires taxpayers to report their worldwide income, which means income from both domestic (onshore) and international (offshore) sources must be disclosed. Here’s a breakdown of what this involves:

Onshore Income: This includes earnings from U.S. sources, such as salaries, self-employment income, or payments received from U.S.-based clients. All onshore income is reported on your federal and state income tax returns, typically using Form 1040.

Offshore Income: Income from foreign clients, businesses, or investments must also be reported. If you hold foreign bank accounts, you may need to file additional forms like the FBAR (FinCEN Form 114) or Form 8938, depending on account values and asset thresholds.

Failing to disclose offshore accounts or income can result in steep penalties. For example, the FBAR comes with penalties of up to $10,000 for non-willful violations, while willful violations can lead to fines of $100,000 or 50% of the account balance.

Essential Steps for Finalizing Disclosures

Offshore Account Reporting: If you held foreign accounts exceeding a combined value of $10,000 at any point during the year, you must file an FBAR. This filing is separate from your income tax return and is submitted directly to the Financial Crimes Enforcement Network (FinCEN).

Additionally, Form 8938 may be required if your specified foreign financial assets exceed certain thresholds. For example, single taxpayers living in the U.S. must file Form 8938 if their foreign assets are valued at more than $50,000 on the last day of the year or $75,000 at any point during the year.

Claiming Foreign Tax Credits: To prevent double taxation on offshore income, you can claim a Foreign Tax Credit using Form 1116. This allows you to offset U.S. taxes with taxes paid to foreign governments. However, ensure that you have proper documentation of the foreign taxes paid to avoid complications during filing.

Onshore Income Reporting: All domestic income must be accurately reported, including any earnings from U.S. sources deposited into foreign accounts. Keep a clear record of your income sources and payment dates to ensure full compliance with IRS rules.

Common Mistakes to Avoid

Mistakes in tax reporting can be costly, both financially and legally. Here are some common errors to watch out for:

Overlooking FBAR and Form 8938 Deadlines: While income tax returns are due in April, FBAR filings have a separate deadline, with an automatic extension to October 15. Missing these deadlines could result in hefty penalties.

Failing to Track Foreign Asset Changes: Even temporary spikes in the value of your foreign accounts could trigger reporting requirements. Regularly review your account balances throughout the year.

Ignoring Currency Exchange Impacts: Foreign income and account balances must be reported in U.S. dollars. Use the IRS’s approved currency conversion rates to avoid errors.

Navigating onshore and offshore tax requirements can be overwhelming, especially if your financial situation involves multiple countries. A tax professional, such as an IRS Enrolled Agent, can help you determine your reporting obligations, claim applicable credits, and file all required forms accurately. If you’re unsure about your onshore and offshore disclosure obligations, now is the time to act. Contact MKHS Tax Group at info@mkhstaxgroup.com to get expert assistance and finalize your tax filings before the year ends.