
What do you need to know about the IRS and state tax complications of offshore investments? It is common to have international investments in your portfolio, not to mention business interests. How do you navigate the changing financial, business, and tax environment of global investment and business interests?
Key Takeaways Regarding IRS and State Tax Complications of Offshore Investments and Business Interests:
- There are profitable investment and business opportunities outside of the United States. However, one must balance the increased opportunity for growth and profitability with reporting requirements and tax implications.
- The IRS and several U.S. states tax the worldwide income of a taxpayer.
- The GAAP accounting standards and practices in the United States differ significantly from those in Europe and the rest of the world. This makes reporting and tax compliance much more complex (read: time-consuming and expensive).
- IRS and state tax complications of offshore investments and international business are quite complex. U.S. taxpayers with offshore business, assets, investments, and accounts should have an experienced international tax attorney who offers integrated legal services and accounting to ensure compliance with complicated U.S. and individual state tax laws.
Did You Realize Your State May Require You to Report and Pay Taxes on All Income, Worldwide?
Several U.S. States, including California, Hawaii, Massachusetts, Minnesota, New Jersey, New York, Oregon, South Carolina, Virginia, and Wisconsin, tax any and all income (worldwide) for the taxpayers of their state. It is the responsibility of each U.S. and state taxpayer to fully understand and comply with all regulations, compliance, as well as informational and tax reporting requirements.
Accounting Standards in the U.S. (GAAP) are Quite Different From the International Financial Reporting Standards (IFRS) and other Accounting Standards Around the World
It is essential to understand the substantial difference between the Generally Accepted Accounting Principles (GAAP), the International Financial Reporting Standards (IFRS), and other offshore accounting standards. Each is an established "common" set of procedures, processes, formulas, or standards to compile, structure, and analyze financial data and reporting.
One specific example involves the reporting of assets in mutual funds in the U.S., compared to how mutual funds are reported and taxed globally, particularly in Europe.
The financial reports provided by many offshore investments and mutual funds used to prepare the tax returns of U.S. persons do not provide the detailed financial specifics necessary to establish the initial and year-end valuation of each investment asset so that appropriate gains and losses can be reported on state and IRS tax returns.
Generally speaking, a gain or loss is based upon the value of each asset at the beginning of the tax year, versus its value on the last day of the tax year. Foreign accounting standards often do not realize gains or losses until a transaction involving the qualifying asset(s) occurs.
Therefore, any financial reports provided by these offshore investments to a U.S. taxpayer do not contain the specific beginning and ending valuations required to calculate and report financial data to the IRS and state tax agencies. Many U.S. taxpayers are surprised when their accountant(s) or tax attorney(s) are required to investigate the individual valuations of single, dozens, or hundreds of assets contained within an offshore investment or mutual fund to determine gains and losses for U.S.-based tax reporting and compliance.
There Are Several Valid Reasons for a U.S. Citizen or Taxpayer to have International Investments and Business Interests
There are a variety of valid reasons for a U.S. taxpayer or citizen to choose to invest in international investments or offshore business interests. In some cases, it's simply a matter of profitability and a much higher rate of return.
The world has undergone substantial change here in 2025, and the rate of change grows exponentially each year. Change brings risk and reward. Diversification and other strategies can help to spread financial and strategic risks and build in protections against economic and political developments worldwide.
In some cases, the U.S. taxpayer is a foreign national who simply has income, assets, and accounts in their native land(s). In other cases, any U.S. taxpayer may choose to consider an expatriate life or establish investments and business in locations where they enjoy spending time or a different lifestyle.
There is a potential for double taxation in many circumstances; however, an experienced tax attorney can help you to leverage legitimate deductions, strategies, deferrals, or international tax treaties to take advantage of available opportunities while minimizing the impact of taxation.
Reporting Requirements and Compliance
IRS and state tax complications of offshore investments and business interests include extensive reporting requirements and compliance. Some of these include, but are not limited to:
FBAR
The existence of foreign bank accounts and assets usually requires the preparation and filing of the FinCEN Form 114, Report of Foreign Bank and Financial Accounts or FBAR. The requirement to complete an FBAR is based upon the aggregated value of qualifying worldwide financial accounts, including most banking, investment, business, and cryptocurrency exchange wallets or accounts. If the aggregated value of any or all accounts exceeds $10,000 at any point in the calendar year, even for an hour, the U.S. citizen is required to file an FBAR with FinCEN. This includes those with signature authority on a qualifying foreign account.
FBAR reporting requirements pertain to any U.S. citizen (regardless of residency), a non-U.S. citizen who is a U.S. resident including those with a green card who reside in the U.S. for at least 183 days out of the year, any entity formed in the U.S. or its territories, as well as any taxpayer who files a "first-year election."
IRS Form 8938
If a U.S. taxpayer has an entity, investment, trust, or business interest that generates any offshore income, losses, gains, distributions, credits, deductions, or international holdings or accounts, they may be required to file IRS Form 8938, Statement of Specified Foreign Financial Assets. Reporting requirements are based upon specific foreign assets and accounts that exceed specific reporting thresholds. The potential requirement to file IRS Form 8938 is one of the IRS and state tax complications of offshore investments or business interests.
IRS Form 3520/3520-A
The 'Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts' (Form 3520), and the 'Annual Information Return of a Foreign Trust with a U.S. Owner (Form 3250-A) apply to those with investments or interests in a foreign trust, as well as those who may receive a qualifying gift from a foreign individual, group, or entity.
IRS Form 5471 or 8865
Form 5471, 'Information Return of U.S. Persons with Respect to Certain Foreign Corporations,' and Form 8865, 'Return of U.S. Persons with Respect to Certain Foreign Partnerships.'
If a U.S. taxpayer is an officer, director, or shareholder in qualifying foreign corporations, there are forms and reports required to satisfy the qualifying regulations and reporting requirements. This also applies to those with qualifying interests in Controlled Foreign Corporation (CFCs), foreign partnerships, Controlled Foreign Partnerships (CFPs), and those who have qualifying 'acquisitions, dispositions, or changes in foreign partnership interests.' There are specific ownership thresholds and activities that trigger reporting compliance. 'Constructive ownership' can be attributed through an entity or even through family associations.
IRS Form 8621 (PFIC)
The IRS Form 8621 relates to the Information Return by a Shareholder of a Passive Foreign Investment Company (PFIC) or Qualifying Electing Fund.
Offshore investments and ownership interests in foreign corporations automatically trigger the highest U.S. marginal tax rate if the investment or foreign entity is determined to be a Passive Foreign Investment Corporation or PFIC by the IRS. Many forms of income, including rents and royalties, dividends from external investments, and other triggers, make these investments a taxation challenge for U.S. taxpayers seeking a greater return on investment through offshore strategies.
As part of FATCA, the IRS developed a comprehensive set of reporting requirements for any U.S. taxpayer who has an interest in a PFIC or foreign corporation or trust. You may be required to report the participation of other U.S. taxpayers or face additional taxes, penalties, and interest. It is important to note that the IRS has mutual information exchange agreements with most nations, Foreign Financial Institutions (FFIs), banking and investment houses, as well as Cryptocurrency exchanges and specific wallet providers. The IRS and even U.S. state tax agencies are receiving direct, electronic information about specific U.S. taxpayers and entities, including account, balance, and transactional information.
The Value of an Integrated Tax, Legal, Accounting, and Business Advisory Provider
This is the value of an integrated tax, legal, accounting, and business advisory provider. IRS and state tax complications of offshore investments and international business are quite complex. U.S. taxpayers with offshore business, assets, investments, and accounts should have an experienced international tax attorney who offers integrated legal services and accounting to ensure compliance with complicated U.S. and individual state tax laws, as well as associated informational and tax returns.