If you have just opened an envelope from the IRS or refreshed your IRS Online Account and seen a letter you weren’t expecting, take a breath. Receiving an audit notice is unsettling. It does not have to be a disaster.

I represent both U.S. and foreign clients in IRS examinations, and I can tell you that audits are, more than anything else, a process. The taxpayers who get the best outcomes treat it that way, methodical, deadline-driven, evidence-based, rather than as a crisis. This guide walks you through how to do that, from the day the notice arrives through Appeals, Tax Court, and post-assessment options. If you have cross-border facts such as foreign accounts, foreign entities, foreign trusts, foreign gifts, or treaty positions, read the international section below even if the audit notice does not appear to raise those issues. The information-return penalties can dwarf the underlying tax.

Understand What An Audit Actually Is

An audit is a review of a tax return and supporting records to confirm that what was reported is accurate. The IRS accepts most returns as filed. The ones it examines are usually flagged for a third-party mismatch (W-2, 1099, K-1, brokerage), an algorithmic score, a related-party examination, or random selection.

The most important point I make to clients in the first conversation is this: an audit is a verification process, not an accusation. Holding that distinction in mind changes how you behave during the audit, and how you behave changes the outcome.

It is also worth noting that our tax system depends on honest reporting. In consultations, prospective clients often ask, “But how would they know about…” followed by whatever amount or issue concerns them.

Identify The Type Of Audit

Correspondence Audit – Handled by mail or through the IRS Document Upload Tool. Usually, one or two specific items, such as a credit, deduction, or a 1099 mismatch.

Office Audit – You appear at an IRS office with documentation. Typically broader than a correspondence audit but narrower than a field audit.

Field Audit – A Revenue Agent visits your home, business, or your representative’s office. The most comprehensive type, common for business taxpayers, high-income individuals, and complex international cases.

If you have a choice about where the meeting takes place, hold it at your representative’s office. You control the documents produced and avoid letting the examiner form impressions based on what is sitting on a desk.

Step 1: Read The Notice Carefully Before You Do Anything Else

The audit letter is the operative document. Before you call, email, or send anything, identify five things:

1. The tax year (or years) under examination.
2. The specific items the IRS is questioning.
3. The response deadline.
4. The form of response the IRS expects (mail, fax, upload, in-person).
5. Whether the IRS is requesting documents or proposing a change.

A document request calls for substantiation. A proposed change calls for a decision; you either agree, partially agree, or appeal. Resist the impulse to call the IRS the moment the notice arrives. An unprepared call expands issues, creates confusion, and produces statements you may later need to correct.

Step 2: Do Not Ignore Notice

Ignoring an IRS notice is the single most damaging response I see. The audit does not go away. The IRS proceeds without your input, disallows deductions and credits it cannot independently verify, and assesses tax, penalties, and interest. Even if you cannot fully respond by the deadline, contact the IRS or have your representative do so. Most deadlines can be extended for a reasonable period if you ask before they expire. Almost none can be extended after they expire.

Step 3: Decide Whether You Need Representation 

You have the right to represent yourself, but for many audits, representation is the difference between a clean resolution and a multi-year proceeding. I generally recommend representation when the audit involves business income, Schedule C, rental real estate, or cryptocurrency; foreign accounts, foreign assets, or foreign entities; an in-person interview; multiple tax years; proposed penalties; incomplete records; or any potential exposure beyond civil tax.

A qualified representative communicates with the examiner on your behalf, preserves legal privileges where they apply, organizes the evidence so the examiner can verify your position quickly, and keeps the audit focused on the items in the notice instead of letting it spread.

A Note For Non-U.S. Taxpayers: The U.S. tax system is procedurally different from most foreign systems, and the consequences of routine missteps like admissions in an interview, late information returns, and signing the wrong form can be severe. If you have U.S. tax exposure, do not attempt an IRS audit without U.S. tax controversy counsel.

Step 4: Gather And Organize Your Documentation

Documentation is the foundation of an audit defense. The burden of proof is on you to substantiate deductions, credits, and most return positions. The IRS does not have to prove you are wrong; you have to prove you are right.

Beyond the return itself, assemble the third-party reporting forms (W-2, 1099, K-1, 1095, 1098); bank and credit card statements; receipts, invoices, contracts, and closing statements; mileage logs and calendars; loan and payroll records; accounting ledgers; and prior-year and later-year returns that explain carryovers, basis, or depreciation.

Organize by issue, not just chronologically. For each item the IRS has questioned, build a short proof schedule that ties documents to the tax return. The goal is to make it easy for the examiner to verify your position. One practical rule: never send originals. Send photocopies and keep complete copies of everything you submit, along with mailing or upload confirmation.

Step 5: Know Your Rights

The Taxpayer Bill of Rights and the Internal Revenue Manual give you specific protection. The IRS lists quality service, representation, the right to challenge the IRS and be heard, the right to appeal, the right to pay only the correct amount, and the right to privacy and confidentiality. These are not theoretical. If an examiner is not considering the documents you provided, you can ask for a manager conference. If an examiner is applying the wrong legal standard, you can challenge it. If negotiations are deadlocked, you can move the matter to Appeals.

Step 6: Respond And Answer Only What Is Asked

The cardinal rule of audit defense is to answer the question that was asked and nothing more. If the IRS asks for substantiation of your charitable contributions, send that, not unsorted bank statements full of unrelated transactions. Cooperation is not the same as expansiveness.

A focused written response usually includes a copy of the IRS notice; taxpayer name, identification number, and tax year; a short statement that you are responding to the notice; a list of the issues addressed; organized photocopies of supporting documents; a summary schedule tying documents to the return; a clear statement of the outcome you are requesting; and representative authorization (Form 2848 or 8821) where applicable.

Step 7: Prepare Carefully For Any Interview

If the audit involves an in-person meeting, prepare. Review the return line by line. Review the documents you have produced. Anticipate what the examiner will ask. A few rules I give clients before any IRS interview: do not guess (if you do not remember, say you need to check); answer only the question asked; do not volunteer unrelated information, even if it feels harmless; defer to your representative on what is produced and what is said; and do not allow a tour of a business without a plan for what is shown and why.

Step 8: Pay Special Attention To International Compliance

This deserves its own section because international compliance is where I see the most damage done in audits.

The U.S. international tax system runs on information returns. These are forms that disclose foreign accounts, assets, entities, trusts, and gifts. They are separate from your income tax return, separate from each other, and each carries its own penalty regime. Penalties apply even where no additional income tax is due.

If you have foreign accounts, foreign financial assets, ownership of or signature authority over a foreign entity, an officer or director role in a foreign corporation, CFC or PFIC exposure, an interest in a foreign partnership, a foreign disregarded entity or branch, a relationship with a foreign trust, a large gift or bequest from a non-U.S. person, or any treaty or cross-border withholding position — treat the audit as an international case until proven otherwise.

The main international information returns and their penalty exposure:

Form	Trigger	Initial Penalty Exposure
FBAR (FinCEN Form 114)	U.S. person with foreign financial accounts exceeding $10,000 in aggregate at any time during the year	Up to $10,000 per non-willful violation; willful violations up to the greater of $100,000 or 50% of account balance; criminal penalties available
Form 8938	Specified foreign financial assets above filing thresholds (IRC §6038D)	$10,000, plus $10,000 per 30-day continuation after IRS notice, capped at $50,000
Form 5471	Certain U.S. officers, directors, or shareholders of certain foreign corporations	$10,000 per annual accounting period, plus $10,000 per 30-day continuation, capped at $50,000; foreign tax credit reductions also apply
Form 8865	Controlled foreign partnerships, transfers, and certain interest changes	$10,000 for certain failures, plus continuation penalties; foreign tax credit reduction may apply
Form 8858	U.S. persons operating a foreign branch or owning a foreign disregarded entity	Generally follows IRC §6038 regime
Form 3520 / 3520-A	Foreign trust creation, transfers, ownership, distributions; large foreign gifts	Greater of $10,000 or 35% of gross reportable amount for many trust events; 5% per month, capped at 25%, for unreported foreign gifts

A Few Patterns I See Repeatedly: the taxpayer reported foreign interest on Schedule B but did not file the FBAR (the income is on the return; the FBAR is still required); the foreign company had no profit, so the taxpayer assumed there was nothing to report (Form 5471 is still required); the foreign LLC is disregarded for U.S. income tax (Form 8858 is still required); the foreign trust did not make a taxable distribution (Form 3520 and possibly Form 3520-A may still be required); the receipt from a non-U.S. relative was a gift, not income (for large foreign gifts, Form 3520 may still be required).

Income reporting and information reporting are separate compliance questions. During an audit, you have to answer both.

One Practical Word: do not casually file a late FBAR, Form 8938, Form 5471, Form 8865, Form 8858, Form 3520, or Form 3520-A during an audit without first developing a procedural strategy. Once the IRS has opened an examination, your options narrow. Some penalties are immediately assessable and are not subject to ordinary deficiency procedures. Reasonable-cause defenses depend on what you knew, what you told your advisor, and what advice you received. Get the facts and the file complete before you argue the penalty.

Step 9: Evaluate The Examiner’s Findings

When the examination closes, you will receive either an acceptance of the return as filed or a report of proposed adjustments. The possible outcomes:

Outcome	Meaning
No change	The IRS accepts the return as filed for the issues examined.
Agreed adjustment	You agree to the IRS changes and sign the agreement form.
Partially agreed	You agree to some changes and dispute others.
Unagreed adjustment	You preserve your appeal rights and do not sign.
Penalty proposal	The IRS proposes penalties in addition to tax and interest.

If you intend to appeal, do not sign the agreement page. If you partially agree, sign only what reflects the items you actually accept and continue to dispute the rest.

Step 10: The 30-Day Letter And Appeals

If you do not agree with the examiner’s proposed changes, the IRS generally issues a 30-day letter transmitting the examination report. You have 30 days to agree and sign, submit additional information, or request Appeals consideration.

The IRS Independent Office of Appeals is separate from the examination function. Appeals officers have broad settlement authority and are trained to consider the “hazards of litigation” — the risk to both sides of going to court. In my experience, Appeals is where most disputes that survive examination actually get resolved, often on terms that examiners cannot offer.

The form of the Appeals request depends on the amount in dispute. For $25,000 or less per tax period, you may use a small case request (Form 12203 or a brief written statement). For more than $25,000 per tax period, a formal written protest is required, signed under penalties of perjury, identifying the disputed adjustments, the amount in dispute, the facts supporting your position, the legal authority you rely on, and any disputed penalties with reasons they should not apply. The protest is the first impression Appeals gets of your case, thus draft it carefully.

Fast Track Settlement can be an alternative for appropriate cases. It keeps the case in examination jurisdiction while a trained Appeals employee acts as a neutral facilitator. You retain your normal appeal rights if Fast Track does not produce a settlement.

Step 11: The 90-Day Letter And Tax Court

If the matter is not resolved at examination or Appeals, the IRS issues a statutory notice of deficiency — the 90-day letter. You have 90 days from the date of the notice (150 days if the notice is addressed outside the United States) to file a petition with the U.S. Tax Court.

The 90-day deadline is one of the most important deadlines in tax practice. The IRS cannot extend it. Missing it forfeits your right to petition the Tax Court without first paying the tax. You can still litigate in U.S. District Court or the U.S. Court of Federal Claims, but only after paying the assessed tax and filing a refund claim.

Forum	When Used	Payment Required First?
U.S. Tax Court	Within 90 days of a statutory notice of deficiency (150 days if addressed outside the U.S.)	No
U.S. District Court	Refund litigation after payment and a refund claim	Yes
U.S. Court of Federal Claims	Refund litigation after payment and a refund claim	Yes

Tax Court has subject-matter expertise; District Court offers a jury option; the Court of Federal Claims has unique precedential authority for certain issues. Forum selection deserves serious analysis with experienced tax litigation counsel. A note on interest and payment: interest accrues on unpaid balances throughout the dispute, and paying part or all of a deficiency at the wrong moment can shift you out of the deficiency-jurisdiction track. These are strategic decisions, not clerical ones.

Step 12: Post-Assessment Options

Audit Reconsideration – The IRS will reconsider a prior audit if you present information that was not previously considered. This is most useful when the original audit closed without taxpayer participation, when records were unavailable at the time, or when a credit was reversed, and you now have proof it should be allowed. You do not have to pay first. But audit reconsideration is not a do-over for taxpayers who failed to respond on time; the IRS expects new information.

Refund Claims – A refund claim (Form 1040-X for individuals) must generally be filed by the later of three years from the date the original return was filed or two years from the date the tax was paid. If the IRS denies the claim, Appeals rights typically follow, and a refund suit becomes available if the claim is denied or not acted on within six months.

Common Mistakes To Avoid

The same mistakes recur in audit after audit: ignoring the notice; sending originals instead of photocopies; signing an agreement while intending to appeal; missing the 30-day letter deadline; missing the 90-day Tax Court deadline; producing an unorganized document dump; volunteering unrelated information; lying to the IRS or providing false documentation (this converts a civil audit into a criminal investigation — never do it); signing a statute extension on Form 872 without understanding the consequences; and treating audit reconsideration as a guaranteed second chance.

Final Thoughts

The taxpayers I see come out of audits in the best shape are the ones who treat the process with the seriousness it deserves and the discipline it rewards. They read the notice. They get representation early when the stakes warrant it. They organize their records. They answer only what is asked. They meet every deadline. They preserve their appeal rights. They do not sign away positions they intend to fight.

If you are facing an audit and want help thinking through your position before responding, my colleagues at CST Tax Advisors and I are here to help.

The US Market Is Not One Market: What Australian Businesses Must Understand Before Expanding

For Australian businesses with global ambition, the United States often represents the defining opportunity.

It is the world’s largest consumer market, one of the deepest capital markets, and home to many of the customers, investors, strategic partners and industry ecosystems that can transform a company’s trajectory. For businesses in technology, sport, health, consumer products, professional services, education, financial services and advanced manufacturing, the US is often not simply an expansion market. It is the market that determines whether the business becomes regional or genuinely global.

Yet the same qualities that make the US attractive also make it unforgiving.

Australian businesses often approach the US with a degree of familiarity. The language is familiar. The legal heritage feels familiar. The commercial culture is recognisable. The brands, investors and institutions are globally known. On the surface, the US can appear to be a larger version of a market Australian businesses already understand.

That assumption is dangerous.

The United States is not just a bigger market. It is a different legal, tax and regulatory environment altogether. More importantly, it is not one market in any simple sense. It is a federation of states, cities, regulators, courts and commercial norms layered on top of a federal system. A business may enter through California, raise capital in Delaware, hire in New York, sell into Texas, store data in Virginia and use contractors in Florida — and each of those choices can carry different legal and commercial consequences.

This is where many Australian businesses underestimate the challenge. They do not fail because the US opportunity is too difficult. They fail because they treat US expansion as a sales project when it is also a structural, legal, tax and governance project.

The distinction matters.

A company that enters the US with the wrong structure, weak contracts, unprotected intellectual property, inadequate insurance, poor employment processes or unmanaged privacy exposure may still generate revenue. It may even grow quickly. But growth without structure can simply scale the risk. By the time the issue appears — an investor diligence request, a lawsuit, a tax notice, a product complaint, a data incident, a distributor dispute or a regulatory inquiry — the cost of fixing the problem is usually far greater than the cost of preparing properly at the outset.

Structure Is A Strategic Decision, Not An Administrative Step

The first serious question for an Australian business entering the US is not where to sell, but how to exist in the market.

Should the business operate directly from Australia? Should it form a US subsidiary? Should that subsidiary be a corporation or an LLC? Should it be established in Delaware, the state of operation, or somewhere else? Should the group structure be reorganised before a US capital raise? Should intellectual property remain in Australia or be licensed to the US entity? How should intercompany arrangements be documented?

These questions are often treated as technical matters. They are not. They influence tax outcomes, investor appetite, legal liability, operating flexibility, employee equity arrangements, state filing obligations, exit planning and the perceived maturity of the business.

For many Australian companies, a US subsidiary can be a sensible way to separate US operating risk from the Australian parent. But that protection is not automatic. A subsidiary is not a piece of paper that magically insulates the group from all exposure. It must be respected as a real entity. That means separate accounts, proper contracts, appropriate capitalisation, clear decision-making, arm’s-length intercompany arrangements and disciplined corporate governance.

Where the business is a high-growth startup seeking US venture capital, a different issue may arise. US investors, particularly venture funds, often prefer investing into a US parent company, commonly a Delaware corporation. This can lead to a “flip-up”, where the corporate structure is reorganised so that the US company becomes the parent of the group.

For the right business, this may be commercially sensible. It can align the structure with US investor expectations, simplify future funding rounds and position the company for a US exit. But it should never be treated as a cosmetic change. A flip-up can have consequences for Australian tax, US tax, shareholders, employee equity plans, intellectual property ownership and future exit proceeds. It is one of those decisions that looks simple only when viewed from too far away.

The broader point is that structure should follow strategy. A founder-led software company preparing for US venture capital does not necessarily need the same structure as an Australian manufacturer selling through US distributors. A professional services firm establishing a US client base has different issues again. A sports, entertainment or talent-related business may need to think carefully about immigration, state law, withholding, image rights, contracting and agency arrangements.

The correct structure is not the most popular one. It is the one that supports the commercial plan while managing tax, legal and operational risk.

Contracts Are The Operating System Of US Risk

In the US, contracts carry more weight than many Australian businesses expect.

A contract is not merely a record of what the parties agreed. It is a risk allocation tool. It determines who bears responsibility if something goes wrong, whether liability is capped, whether consequential damages are excluded, who owns the intellectual property, how confidential information is protected, which law applies, where disputes are heard, whether arbitration is required, whether legal costs can be recovered and what happens when the relationship breaks down.

This matters because the US litigation environment is expensive. Discovery can be broad and intrusive. Legal fees can escalate quickly. Claims that appear commercially manageable can become financially distracting. Even a strong defence can consume executive time, damage relationships and create pressure to settle.

Australian businesses should therefore treat US contracts as a commercial control system, not as administrative paperwork.

The key clauses are not boilerplate. Indemnities, warranties, limitations of liability, governing law, jurisdiction, dispute resolution, confidentiality, IP ownership, non-solicitation, termination, payment terms, audit rights and insurance obligations all need to be drafted for the transaction and the relevant US context.

This is also where businesses need to be cautious about relying on AI-generated documents or generic templates.

The issue is not that AI has no role. It can be useful for early drafting, issue spotting and helping business owners understand common contractual concepts. The problem is that a contract can sound sophisticated and still be wrong. It can use terminology that appears legal but does not achieve the intended result. It can import concepts from the wrong jurisdiction. It can omit state-specific requirements. It can include a clause that is unenforceable, commercially unrealistic or unsuitable for the industry.

In the US, the difference between a contract that looks right and a contract that works can be very expensive.

Intellectual Property Should Be Protected Before The Business Becomes Visible

For many Australian companies, the most valuable assets entering the US are not physical assets. They are brands, software, product designs, proprietary processes, client data, trade secrets, content, know-how, commercial relationships and reputation.

Those assets need to be protected before the business becomes visible.

Too many companies reverse the sequence. They launch the product, appoint a distributor, speak to investors, hire contractors, share technical information, run a campaign, build a customer base and only then ask whether their intellectual property is protected in the US. By that stage, the business may discover that a similar brand is already registered, a contractor agreement does not properly assign IP, confidential information has been shared too broadly, or a competitor has moved faster.

In the US, trade marks, patents, copyright and trade secrets each require different thinking.

A brand that is available in Australia may not be available in the US. A name that feels distinctive to an Australian founder may already be used by a US company in a related category. A trade mark search and filing strategy should therefore be addressed early, particularly where the US brand will be central to market entry.

For technology and product businesses, patent timing can be critical. Public disclosure, investor presentations, product launches and commercial negotiations can all affect the position if not managed properly. Businesses with potentially patentable technology should obtain advice before they disclose too much.

For software, content and creative assets, copyright protection may be important, but businesses should also ensure that ownership is clean. That means reviewing agreements with developers, agencies, consultants, employees and contractors. It is surprisingly common for companies to assume they own what they paid to create, only to find the legal position is more complicated.

Trade secrets require discipline. Confidential information is not protected merely because the business considers it confidential. Protection depends on practical steps: non-disclosure agreements, access controls, internal policies, employee obligations, contractor restrictions, cybersecurity practices and careful management of commercial discussions.

The principle is simple. If the US market is important enough to enter, the assets being taken into that market are important enough to protect.

Product Liability And Consumer Risk Can Change The Economics Of Expansion

For businesses selling physical products, the US requires particular care.

The US product liability environment can be far more aggressive than Australian businesses expect. Claims may arise from alleged design defects, manufacturing defects, inadequate warnings, poor instructions, breach of warranty, misleading marketing or failure to act once a product risk becomes known. Manufacturers, distributors and retailers can all be drawn into disputes, even where the business believes it acted responsibly.

This can be especially confronting for Australian companies that have strong internal quality standards and assume those standards will be enough. In the US, the question is not only whether the product was made carefully. It is also whether the design was appropriate, whether foreseeable misuse was considered, whether warnings were adequate, whether instructions were clear, whether claims made in marketing were supportable, whether warranties were properly drafted and whether the company had systems to respond to complaints or safety issues.

Before entering the US, product businesses should review packaging, warnings, instructions, safety certifications, warranties, recall procedures, supply chain contracts, distributor obligations and insurance coverage. The insurance point is critical. Australian policies may not provide the protection required for US exposure, or may contain territorial exclusions, product exclusions or limits that are inadequate for the US market.

A business should not ask only whether it can sell the product in the US. It should ask whether it is prepared for the legal consequences of selling the product in the US.

Compliance Is Fragmented, And Fragmentation Creates Risk

One of the defining features of the US market is regulatory fragmentation.

There are federal regulators, state regulators and local authorities. There are national rules, state-specific rules and city-level requirements. There are industry-specific regimes and general consumer laws. There are licensing rules, employment rules, tax rules, privacy rules, advertising rules, import rules and product safety rules.

The relevant obligations depend heavily on what the business does.

A food, cosmetics, health, medical device or pharmaceutical business may need to consider FDA requirements. A financial services or investment-related business may need to consider securities regulation. A company making environmental claims may need to substantiate those claims carefully. A consumer product business may need to consider product safety standards. An online business may need to consider privacy, automatic renewal rules, digital marketing obligations and state consumer protection laws. A business importing goods may need to consider customs, tariffs, sanctions and restricted-party screening.

This is why there is no single US compliance checklist that works for every Australian business. The right analysis depends on the product or service, the states involved, the customer base, the distribution model, the industry and the way the business earns revenue.

The problem is that many compliance risks arise before the company thinks it has “entered” the US in a formal sense. A business may create US exposure by selling online to US customers, engaging US influencers, collecting data from US residents, appointing a US sales agent, attending trade shows, hiring contractors, storing inventory, using a fulfilment provider or raising capital from US investors.

Market entry is not always marked by opening an office. Sometimes it begins with the first US customer.

Marketing, Privacy And Data Practices Need To Be US-Ready

The US is a powerful market for digital growth, but it is also a market where marketing practices, consumer disclosures and data handling can create significant risk.

Advertising must be accurate. Performance claims need support. Pricing needs to be clear. Promotional terms need to be properly disclosed. Influencer relationships need to be transparent. Subscription arrangements and automatic renewals need careful attention. Environmental claims, health claims and financial claims require particular care because they can attract scrutiny if they are exaggerated, vague or insufficiently substantiated.

This matters for Australian businesses because many enter the US digitally. They sell through a website, run paid advertising, use influencers, collect customer information, offer subscriptions, promote through social media and sell across multiple states before building a physical presence.

That model can scale quickly. It can also scale legal exposure quickly.

Privacy is another area where Australian assumptions can be misleading. The US does not operate under one simple, comprehensive national privacy regime that applies uniformly to every business. Instead, it has a patchwork of state privacy laws, federal sector-specific laws, breach notification obligations and industry-specific requirements.

California is often the best-known example, but it is not the only state that matters. Health data, children’s data, biometric information, financial information and sensitive personal information may carry additional obligations depending on how the business operates.

Privacy should therefore be treated as an operational issue, not merely a website policy issue. Businesses need to know what information they collect, why they collect it, where it is stored, who receives it, how long it is retained, how it is protected and what rights customers may have.

A privacy policy that looks acceptable on a website is not enough if the underlying systems do not match it.

Governance Protects The Business When Growth Accelerates

In early-stage expansion, governance often feels secondary to sales. That is understandable, but it is also risky.

A company entering the US needs basic corporate discipline. It should maintain proper records, document key decisions, separate group entities, keep accurate accounts, ensure contracts are signed by the correct entity, manage tax registrations, comply with employment obligations and maintain appropriate insurance.

This is not bureaucracy for its own sake. It is what protects the business when pressure arrives.

If a dispute arises, the company’s documents matter. If an investor conducts due diligence, the records matter. If a regulator asks questions, the systems matter. If a customer makes a claim, the contract and insurance position matter. If the business is eventually sold, the buyer will examine whether the US operations were built properly or improvised.

Poor governance can also create personal exposure for executives in certain circumstances, particularly where there are unpaid taxes, employment law breaches, personal guarantees, fraud, misuse of entities, commingling of funds or serious compliance failures. While corporate structures can provide important protection, they are not a substitute for responsible management.

Insurance is part of this framework. Depending on the business, relevant policies may include general liability, product liability, cyber, directors and officers, employment practices liability, professional liability and workers’ compensation. But insurance should not be treated as a cure-all. Coverage depends on policy wording, exclusions, limits, retentions, notification requirements and the nature of the claim.

Good governance does not slow growth. Done properly, it makes growth more durable.

The Businesses That Succeed Prepare Before The Market Tests Them

The US rewards ambition, but it also tests assumptions.

Australian businesses that succeed in the US usually understand that expansion is not a single event. It is a sequence of decisions that must fit together: structure, tax, contracts, IP, employment, privacy, insurance, regulatory compliance, financing and governance. None of these issues should be considered in isolation because each one affects the others.

The businesses that struggle often follow a familiar pattern. They sell first and structure later. They use Australian contracts in US transactions. They assume a template agreement will be sufficient. They leave IP protection until after launch. They hire contractors without understanding worker classification. They underestimate state taxes and sales tax. They use marketing claims that have not been reviewed. They collect data without mapping their obligations. They discover insurance gaps only after a claim.

None of these mistakes necessarily comes from carelessness. More often, they come from momentum. The company sees an opportunity, moves quickly, wins customers and assumes the infrastructure can catch up later.

In the US, that can be an expensive assumption.

The better approach is not to over-lawyer the opportunity or delay commercial progress. The better approach is to build a practical expansion framework before the business is exposed. That means identifying the highest-risk issues early, prioritising what must be fixed before launch, and creating a structure that can evolve as the US business grows.

A business entering the US does not need perfection from day one. But it does need clarity. It needs to know which entity is contracting, who owns the IP, what taxes may apply, which states matter, what the contracts say, what insurance covers, what employment obligations exist, what data is collected and what regulatory regimes are relevant.

That clarity gives management the confidence to grow without constantly discovering hidden risk.

The Real Opportunity Is Building A US Platform, Not Just Making US Sales

The US can be transformational for Australian businesses. It can provide access to capital, customers, strategic partners, talent, acquirers and industry ecosystems that are difficult to replicate elsewhere.

But the businesses that create lasting value in the US do more than make sales. They build a platform.

A platform has the right structure. It has contracts that allocate risk properly. It protects intellectual property. It understands its tax position. It has employment and contractor processes. It manages privacy and data. It has suitable insurance. It complies with relevant regulation. It keeps records. It can withstand investor diligence, customer scrutiny, regulator questions and commercial disputes.

That is the difference between entering the US and being ready for the US.

For Australian businesses, the message is not that the US is too complex. Complexity is manageable. The real issue is whether the business recognises the complexity early enough to turn it into a competitive advantage.

A well-structured Australian business can enter the US with confidence. It can move faster because the major risks have been considered. It can negotiate better because its contracts are prepared. It can raise capital more effectively because its structure makes sense. It can protect value because its IP is secured. It can respond to disputes because its documents and insurance are in order.

US expansion should not be approached with fear. It should be approached with discipline.

The companies that do this well will not see legal, tax and compliance planning as obstacles to growth. They will see them as part of the architecture of growth.

Because in the US, getting to market is only the first challenge.

The real test is whether the business has been built to survive success.

CHECKLIST: Australia – US Market Entry Checklist

The IRS enforcement environment in 2026 is moving in two directions at once. On one hand, the agency has publicly committed to higher audit coverage for large corporations, complex partnerships, and very high-income individuals. On the other hand, the IRS is operating with a materially smaller workforce than it had at the beginning of 2025.

This does not mean the IRS is stepping back from enforcement. It means enforcement is becoming more selective, more data-driven, and more focused on taxpayers and transactions that the agency believes offer the highest compliance risk or revenue potential. For many taxpayers, the risk is not simply that the IRS will open more audits. The greater risk is that, when an audit is opened, the IRS may already have substantial third-party data, foreign account information, digital asset reporting, Form 1099 data, K-1 information, and statistical comparisons against similar taxpayers.

The result is a different type of examination environment. Fewer taxpayers may be selected overall, but those selected can expect a more focused and more technically demanding audit.

The IRS’s Stated Enforcement Priorities

The IRS has continued to identify three categories of taxpayers for increased audit coverage: large corporations, large and complex partnerships, and wealthy individuals. At the same time, the IRS has stated that it does not intend to increase audit rates for small businesses and taxpayers making under $400,000, relative to historical levels.

For large corporations with assets over $250 million, the IRS has stated that it intends to increase the audit rate from 8.8% to 22.6% by the 2026 tax year. These examinations are expected to remain specialist-driven and document-intensive, with continued attention on transfer pricing, intercompany transactions, foreign tax credits, basis-shifting transactions, and complex entity structures. The IRS’s own budget materials note that large corporate examinations have an average case cycle time of approximately 36 months, which means staffing and training changes can affect examination capacity over several years.

For large and complex partnerships with assets over $10 million, the IRS has stated that it intends to increase audit rates from 0.1% to 1.0%, a nearly tenfold increase. This remains one of the most significant enforcement developments for pass-through entities. Partnerships have historically been difficult to examine because of tiered ownership, special allocations, partner-level tax attributes, capital account issues, debt allocations, and transfers of partnership interests. The centralized partnership audit regime gives the IRS a more efficient procedural path to examine and adjust partnership items at the entity level.

For wealthy individuals, the IRS has stated that it intends to increase audit coverage for taxpayers with total positive income over $10 million to 16.5% by the 2026 tax year. These examinations often extend beyond the Form 1040 itself and into related entities, trusts, private investment vehicles, foreign accounts, charitable structures, real estate activities, and pass-through income reported on Schedules K-1.

The DOGE Effect: Fewer Agents, Smarter Tools

The IRS’s enforcement plans must be read together with the agency’s staffing reductions. The Treasury Inspector General for Tax Administration reported that between January 2025 and May 2025, the IRS workforce decreased from approximately 103,000 to 77,000 employees, a 25% reduction. Those employees either separated from the agency or accepted deferred resignation or other incentive offers.

Reuters reported that IRS enforcement revenue declined by 5%, or almost $5 billion, in the fiscal year, and that the agency opened more than 120,000 fewer tax audits in 2025 than in the prior year. Reuters also reported that the IRS enforcement function lost roughly 5,000 employees heading into 2026 and is projected to lose another 5,000 in the coming year. Longer term, the agency reportedly aims to employ approximately 69,000 people by fiscal year 2027, compared with a recent peak of 103,000 employees.

Despite these reductions, the IRS has not signaled an end to enforcement. Treasury officials told Reuters that enforcement revenue increased 12% in the first five months of fiscal year 2026, which began October 1. The apparent strategy is to concentrate limited resources on cases that appear more likely to produce significant adjustments.

The mechanism for that recovery is technology. IRS leadership under CEO Frank Bisignano has doubled down on artificial intelligence and data analytics to compensate for lost staffing. The agency now uses AI-powered tools to:

• Cross-match returns against third-party data (W-2s, 1099s, brokerage records, digital asset reports, and international FATCA feeds) at unprecedented scale
• Identify statistical anomalies in deductions, income characterization, and entity allocations relative to peer benchmarks
• Flag mismatches between FBAR/FATCA reporting and income tax return positions
• Prioritize audit case selection by estimated tax recovery potential

The net effect: the IRS is auditing less, but when it audits, it arrives better prepared, with more data, and with enforcement as its objective.

International Reporting Remains A Major Enforcement Risk

Cross-border compliance remains one of the IRS’s highest-priority enforcement areas in 2026. The FATCA network now spans over 110 jurisdictions, and the IRS receives automated account-level data from thousands of foreign financial institutions. Where that data does not reconcile with FBAR filings (FinCEN Form 114) or Form 8938, the IRS’s AI matching tools will surface the discrepancy.

Penalties for FBAR non-compliance are severe. Non-willful violations carry penalties up to $16,536 per annual report (following the Supreme Court’s 2023 Bittner decision, which confirmed the per-report rather than per-account penalty standard). Willful violations carry civil penalties of the greater of $165,353 or 50% of the account balance, plus potential criminal exposure. The IRS has a six-year statute of limitations for FBAR penalty assessments.

Taxpayers with unreported or inconsistently reported foreign accounts should evaluate corrective options before the IRS initiates contact. Once an examination begins, available options may become more limited and the risk profile can change quickly.

Digital Asset Reporting Is Entering A New Phase

Digital asset enforcement is also changing. Treasury and the IRS have issued final regulations requiring brokers to report certain digital asset sale and exchange transactions beginning with transactions that take place in calendar year 2025, reported on Form 1099-DA. Brokers must report gross proceeds for transactions effected on or after January 1, 2025.

The next stage begins with basis reporting. Basis reporting is required by certain brokers for transactions occurring on or after January 1, 2026. The 2026 Form 1099-DA instructions state that, for sales effected on or after January 1, 2026, brokers are not required to report basis information for digital assets that are noncovered securities, although they may voluntarily report that information and receive penalty protection if the appropriate box is checked.

This creates a new matching environment for cryptocurrency and other digital asset taxpayers. Many early digital asset filings were prepared with incomplete cost basis records, inconsistent wallet transfer tracking, exchange migration issues, staking income questions, NFT transactions, stablecoin transactions, or DeFi activity that was not reported consistently. The IRS will now have more third-party reporting to compare against Form 1040 digital asset disclosures, Schedule D, Form 8949, and other return positions.

Taxpayers should not assume that the absence of a Form 1099-DA means there is no reporting obligation. IRS guidance states that decentralized finance brokers and some foreign brokers are not required to file Form 1099-DA or furnish statements to taxpayers. The taxpayer remains responsible for accurate reporting even when no form is issued.

Pass-Through Entities Should Expect More Scrutiny

Partnerships and S corporations remain central enforcement targets because income, deductions, credits, and basis adjustments flow from the entity to the owner. A federal adjustment at the entity level can affect multiple owners, multiple tax years, and state tax reporting.

The IRS’s stated increase in audit coverage for partnerships with assets over $10 million is particularly important for partnerships with contributed property, special allocations, tiered structures, related-party transactions, debt allocations, Section 754 elections, Section 743(b) adjustments, carried interests, or significant capital account activity. The agency’s focus is not limited to whether income was reported. It also includes whether allocations have substantial economic effect, whether basis adjustments are properly calculated, whether liabilities are properly allocated, and whether transfers of partnership interests have been correctly reported.

California taxpayers should also consider state follow-on exposure. A federal partnership adjustment can create California issues involving California-source income, apportionment, withholding, composite filings, and pass-through entity tax positions. For multistate partnerships and owners, the federal audit may be only the first stage of a broader compliance review.

High-Income Individual Examinations Are Broader Than The Form 1040

For individuals with total positive income over $10 million, the IRS’s stated audit-rate increase to 16.5% means return preparation and supporting documentation are increasingly important. High-income examinations often involve more than the individual income tax return. The IRS may examine related entities, family partnerships, trusts, foundations, foreign accounts, private investment structures, aircraft or yacht expenses, real estate losses, charitable contributions, installment sale reporting, and related-party loans.

The IRS is also likely to compare reported income against third-party reporting and broader financial indicators. A taxpayer with significant assets, visible liquidity events, substantial debt service, or large lifestyle expenditures may face questions if the reported income profile does not appear consistent with available data.

For high-income taxpayers, contemporaneous documentation is essential. Large deductions, recurring business losses, nonstandard investment structures, foreign tax credit positions, treaty positions, and related-party arrangements should be supported before the return is filed. Reconstructed records are generally less persuasive than documentation prepared at the time of the transaction.

Employee Retention Credit Claims Remain High Risk

Employee Retention Credit enforcement remains a priority, particularly for claims prepared by promoters or filed late in the program. The IRS has issued FAQs addressing new ERC compliance provisions under the One Big Beautiful Bill. Those provisions affect ERC claims for the third and fourth quarters of 2021 filed after January 31, 2024.

Under Section 70605(d) of the OBBB, effective July 4, 2025, the IRS is prevented from allowing or refunding ERC claims for the third and fourth quarters of 2021 if those claims were filed after January 31, 2024, even if the employer otherwise met the eligibility requirements. The IRS guidance also states that the law strengthens compliance enforcement by imposing penalties on certain ERC promoters who fail to meet due diligence requirements when assisting with claims.

If an ERC claim is disallowed, the IRS states that the taxpayer will receive Letter 105-C, Claim Disallowed. A taxpayer may appeal to the IRS Independent Office of Appeals if the taxpayer believes the ERC claim was timely filed on or before January 31, 2024, and was improperly disallowed under Section 70605(d).

Employers with pending or previously paid ERC claims should review the quarter claimed, filing date, eligibility analysis, payroll records, government order support, gross receipts calculations, promoter involvement, and IRS correspondence. Claims based on broad supply-chain arguments, general economic disruption, or boilerplate shutdown narratives remain especially vulnerable.

Abusive Transactions Remain on the IRS Radar

Syndicated conservation easements, micro-captive insurance arrangements, monetized installment sale structures, and other listed or high-risk transactions remain enforcement priorities. Taxpayers who participated in these arrangements should not assume that the passage of time eliminates risk. Listed transaction reporting failures, promoter investigations, extended statutes, and penalty assertions can significantly increase exposure.

In many of these cases, the IRS may examine not only the claimed tax benefit, but also the taxpayer’s reporting obligations, reliance on professional advice, valuation support, transaction documents, and communications with promoters or advisors. Privilege and document production issues should be considered early, not after the examination is underway.

What Taxpayers Should Expect If Examined

The character of IRS examinations has changed. Audits that once began as broad information-gathering inquiries are now more likely to begin with a defined enforcement objective. Examiners may have already reviewed third-party reporting, foreign account information, digital asset records, K-1 reporting, and peer comparisons before contacting the taxpayer.

Initial Information Document Requests may therefore be more specific and more demanding. Taxpayers should expect requests for original records, contemporaneous workpapers, transaction documents, account statements, basis schedules, foreign reporting support, and communications relevant to the return position. For cross-border taxpayers, an income tax issue can quickly become an information reporting issue, and an information reporting issue can lead to broader questions about unreported income, foreign tax credits, GILTI, Subpart F, PFICs, treaty positions, or FBAR compliance.

Taxpayers should also consider privilege before responding to an IRS notice. Communications with a CPA are generally not protected in the same way as communications with legal counsel. Sensitive matters involving offshore reporting, promoter transactions, digital assets, high-dollar partnership positions, or potential penalties should be reviewed carefully before documents are produced.

Practical Preparation For 2026

The most effective risk management is proactive. Taxpayers in the IRS’s priority categories should review open tax years before receiving an IRS notice. That review should focus on material filing positions, missing or inconsistent information returns, foreign account reporting gaps, digital asset reporting issues, partnership basis matters, large deductions, related-party transactions, ERC claims, and state follow-on exposure.

Taxpayers should also reconcile returns against information the IRS is likely to receive independently. This includes Forms W-2, Forms 1099, Schedules K-1, brokerage statements, Form 1099-DA, FATCA data, mortgage interest reporting, charitable contribution acknowledgments, payroll tax filings, and state tax filings. Because the IRS is using statistical and machine-learning techniques in audit selection, mismatches and outlier positions are more likely to be identified.

International taxpayers should maintain organized workpapers for FBAR filings, Form 8938, Form 5471, Form 8865, Form 3520, Form 3520-A, PFIC reporting, foreign tax credit calculations, GILTI, Subpart F, Section 962 elections, treaty-based return positions, foreign pensions, and foreign trust analysis. The IRS’s active LB&I campaigns show continued attention to FATCA reporting, offshore private banking, foreign earned income exclusion claims, and Forms 5471.

Digital asset taxpayers should review exchange histories, wallet transfers, cost basis records, staking income, airdrops, NFTs, stablecoin transactions, DeFi activity, lost wallets, and prior-year reporting consistency. Gross proceeds reporting began with 2025 transactions, and basis reporting for certain covered digital asset transactions begins with transactions occurring on or after January 1, 2026.

Taxpayers with ERC claims should separately review eligibility and timing. Section 70605(d) prevents the IRS from allowing or refunding ERC claims for the third and fourth quarters of 2021 after July 4, 2025, if the claims were filed after January 31, 2024. Employers should retain payroll records, gross receipts calculations, government order analysis, copies of amended payroll tax returns, IRS correspondence, and any promoter engagement materials.

Final Thoughts

The 2026 enforcement environment is not defined by audit volume alone. The IRS is smaller than it was at the start of 2025, but it is relying more heavily on data matching, artificial intelligence, third-party reporting, and targeted case selection.

Taxpayers with clean records, consistent reporting, and contemporaneous documentation are in a stronger position if selected for examination. Taxpayers with foreign reporting gaps, digital asset reporting issues, unsupported pass-through positions, high-income return anomalies, or promoter-driven ERC claims should evaluate those risks before the IRS contacts them.

Introduction

Divorce is among the most financially complex events in a person’s life. When international borders are involved, that complexity multiplies. A couple may have built their financial life across two or more countries, holding bank accounts, superannuation or pension funds, real estate, and investment portfolios in multiple jurisdictions, and they are now separating under family law regimes that may be fundamentally incompatible with one another and with U.S. federal and state tax law.

This article addresses the principal U.S. tax issues that arise when families with international ties divorce: the treatment of child and spousal support, the allocation of child-related tax benefits, the transfer of foreign and domestic assets between spouses, the division of foreign retirement plans, and the compliance obligations that follow each party across borders. 

A recurring theme is the gap between what the family court orders and what the tax code permits. Family law practitioners, mediators, and financial advisors focused solely on domestic law frequently produce agreements that are unenforceable or tax-inefficient from a U.S. perspective. Early coordination between international tax counsel and family law counsel, ideally before a settlement agreement is drafted, is essential.

I. Alimony And Spousal Support: The Post-TCJA Landscape

A. The Domestic Baseline: How The TCJA Changed Everything

Prior to 2019, spousal support payments were deductible by the payor and includible in income by the recipient under IRC §§ 71 and 215. The Tax Cuts and Jobs Act of 2017 reversed this treatment for divorce or separation agreements executed after December 31, 2018. Under current law, alimony payments made pursuant to a post-2018 agreement are neither deductible by the payor nor includible in the recipient’s gross income. 

Agreements executed before January 1, 2019, remain subject to the pre-TCJA rules unless the parties affirmatively modify the agreement and elect new-law treatment. This grandfathering rule requires careful attention in modification proceedings since a seemingly minor amendment can inadvertently trigger new-law treatment if not carefully drafted.

B. Cross-Border Complications: Treaty Override And Source Rules

The TCJA change matters in cross-border cases because U.S. income tax treaties were negotiated on the assumption that alimony would be treated consistently with pre-TCJA domestic law. Most U.S. income tax treaties (including those with Australia, the U.K., and France) contain specific provisions governing alimony and support payments.

U.S. – Australia Treaty (Article 18)

Article 18(6) of the U.S.–Australia treaty provides that alimony or other maintenance payments, including child support, arising in one state and paid to a resident of the other state are taxable only in the first-mentioned state.

U.S. – France Treaty (Article 18 — Pensions And Annuities)

The U.S.–France treaty’s pension article should not be treated as a straightforward alimony provision; alimony requires separate treaty and domestic-law analysis. 

U.S. – U.K. Treaty (Article 17)

Under Article 17(5) of the U.S.–U.K. treaty, periodic divorce/support payments are generally exempt in both states unless the payer is entitled to a deduction in the payer’s state of residence, in which case the payments are taxable only in the recipient’s state of residence.

C. Qualified Payments: What The Statute Still Requires

For pre-2019 agreements still subject to the old rules, the requirements of former IRC § 71 continue to govern: payments must be in cash or cash equivalent, pursuant to a written divorce or separation instrument, with no obligation to continue after the payee’s death, and the parties must not be members of the same household. These requirements can be difficult to satisfy in cross-border cases where payments are denominated in foreign currency or routed through foreign accounts.

IRC § 988 foreign currency gain or loss may arise where the payor makes payments in a non-dollar currency. If the obligation is denominated in Australian dollars and the payor uses dollars to acquire Australian dollars for transfer, a § 988 transaction arises on the currency exchange. Whether any § 988 gain or loss is recognized depends on whether the transaction is treated as a personal transaction under Treas. Reg. § 1.988-1(a)(7), which provides a limited exclusion for personal transactions, but only up to $200 of gain per transaction. For recurring support payments, this exclusion is easily exceeded, and currency gain or loss must be tracked.

II. Child-Related Tax Benefits In Cross-Border Divorces

A. Dependency Exemption, Child Tax Credit, And Head Of Household

The child tax credit (up to $2,200 per qualifying child under age 17 for 2025, subject to income phaseouts for tax year 2025), the additional child tax credit, the child and dependent care credit, and the earned income tax credit (EITC) are tied to the concept of a qualifying child. For divorced parents, the allocation of these benefits turns on which parent has primary physical custody, the custodial parent, and whether the custodial parent has executed a Form 8332 release to the noncustodial parent.

The custodial parent is generally the parent with whom the child resided for the greater number of nights during the year. In a cross-border arrangement, counting nights can become genuinely complicated: What if the child spends 180 nights in Australia and 185 nights in the United States, split between two parents? What if the child is enrolled in boarding school in a third country?

The IRS tie-breaker rules for qualifying child status under IRC § 152 are determined by nights spent. The release mechanism under IRC § 152(e). Form 8332 allows the custodial parent to release the dependency and child tax credit to the noncustodial parent for one or more tax years. Critically, the EITC and the head-of-household filing status cannot be transferred via Form 8332. Only the custodial parent qualifies for these benefits, regardless of Form 8332 release.

B. Cross-Border Issues: Non-Resident Alien Spouses And Qualifying Children

Where one parent is a nonresident alien (NRA), and the other is a U.S. citizen or resident, the U.S.-resident parent’s claim for child-related credits depends on whether the child is a U.S. citizen, national, or resident. A child’s U.S. citizenship can satisfy one eligibility element for certain U.S. child-related tax benefits, but qualifying-child status still depends on the applicable residency/custody rules, including the greater-number-of-nights test for divorced parents. A child who is neither a U.S. citizen nor a resident cannot be a qualifying child for most credit purposes.

This creates an acute problem in situations where, following divorce, a U.S.-citizen parent retains physical custody of minor children in the United States, and the NRA parent seeks credit or exemption benefits. Conversely, if the U.S.-citizen parent moves abroad with the children and becomes a bona fide resident of a foreign country, the children may remain qualifying children for U.S. tax purposes (being U.S. citizens), but the parent may face additional foreign tax obligations under local law on the same economic benefits.

C. Dependency and Support Under Foreign Law

In Australian, U.K., and French tax practice, the treatment of child support is generally income-tax neutral, as payments are neither deductible by the payor nor includible in the recipient’s income. This aligns with current U.S. domestic law for child support (which has never been deductible/includible) but creates a clean tax baseline that can simplify negotiations in some respects.

III. Division of Marital Assets: The IRC § 1041 Framework and Its International Limits

A. The § 1041 Nonrecognition Rule

Under IRC § 1041, no gain or loss is recognized on a transfer of property between spouses or incident to a divorce. The transferee spouse takes a carryover basis equal to the transferor’s adjusted basis, regardless of the property’s fair market value at the time of transfer. This rule applies to U.S. property and, as a general matter, to foreign property held by U.S. persons.

The phrase “incident to a divorce” has a specific statutory definition: a transfer occurring within one year after the date the marriage ceases, or a transfer that is related to the cessation of the marriage (i.e., required by the divorce or separation instrument and occurring within six years after the date the marriage ceases). In cross-border cases, it is essential to verify that international asset transfers satisfy this timing requirement before relying on § 1041 nonrecognition.

B. The Critical Exception: Transfers To Or From A Nonresident Alien

Section 1041(d) provides an important and often overlooked exception: the nonrecognition rule does not apply to transfers to or from a nonresident alien spouse. Where the transferor is a U.S. person, and the transferee spouse is a nonresident alien (or vice versa), the transfer is a fully taxable event to the transferor under normal gain recognition rules. This means the transfer is treated as a taxable event, and the transferor must report any gain or loss on their U.S. tax return. The basis of the property for the nonresident alien spouse will be its fair market value at the time of transfer. This provision ensures that the U.S. tax system captures any built-in gain on property transferred to a nonresident alien, who may not be subject to U.S. tax on future dispositions of the property.

This exception has dramatic consequences in cross-border divorces. Consider a U.S. citizen transferring highly appreciated stock, real estate, or cryptocurrency to an NRA spouse as part of a divorce settlement. The transfer is immediately taxable to the transferring spouse at the time of transfer, with gain measured by the difference between fair market value and adjusted basis. 

C. Foreign Property: Additional Complications

In many cross-border divorces, the marital estate includes foreign real estate, foreign bank and investment accounts, and interests in foreign entities. Several additional issues arise:

• FIRPTA And Foreign Real Property – A divorce-related transfer of U.S. real property that qualifies for §1041 nonrecognition is generally exempt from FIRPTA withholding, but FIRPTA can become a problem if §1041 does not apply, for example, because the transferee spouse is a nonresident alien under §1041(d).
• Foreign Real Property – Transfers of foreign real estate between spouses incident to a divorce generally qualify for § 1041 nonrecognition if both parties are U.S. persons. But the foreign jurisdiction’s transfer taxes, stamp duties (Australia’s stamp duty, U.K. Stamp Duty Land Tax, France’s droits de mutation) apply independently and can be substantial.
• Australian Real Property – Australian CGT applies to dispositions of taxable Australian property (TAP), even by non-residents. A divorce transfer of Australian real property may trigger Australian CGT notwithstanding § 1041 U.S. nonrecognition. 
• Foreign Currency Accounts – The division of foreign currency bank accounts between spouses may trigger § 988 gain or loss to the extent the value of the foreign currency has changed from the date the account was opened (or from the date of a § 988 election). Each lot or tranche of currency acquisition has its own basis for § 988 purposes.

IV. Foreign Retirement Plan Division: A Category Without Domestic Analogue

A. The Fundamental Problem: QDROs Don’t Travel

In a domestic U.S. divorce, the division of a qualified retirement plan (401(k), defined benefit pension) is accomplished through a Qualified Domestic Relations Order (QDRO), which allows a tax-free transfer of a retirement benefit to an alternate payee spouse without triggering premature distribution penalties. The QDRO mechanism has no counterpart in most foreign jurisdictions, and foreign retirement orders have no effect under U.S. qualified plan rules.

Conversely, when a U.S. resident spouse is awarded a share of a foreign retirement plan, an Australian superannuation fund, a U.K. SIPP or occupational pension, a French plan d’épargne retraite (PER), or a Singapore CPF account, neither a QDRO nor any domestic mechanism exists to effect the division. The parties must look to the foreign pension law, the applicable bilateral totalization agreement (if any), and U.S. treaty provisions to understand what, if anything, can be transferred and what the U.S. tax consequences are.

B. Australian Superannuation

Australia allows splitting of superannuation accounts upon divorce under the Family Law Act 1975 via a superannuation splitting order or agreement. The split creates a new interest for the non-member spouse in the same (or a different) fund. 

For U.S. tax purposes, Australian superannuation funds held by U.S. persons may be subject to the onerous PFIC rules if the fund invests in pooled foreign mutual fund structures (which most do). 

Distributions from an Australian superannuation fund to a U.S. person may be taxable in the United States. The U.S.–Australia treaty does not expressly exempt superannuation distributions from U.S. tax, as the U.K. treaty does for U.K. pensions. 

C. U.K. Pensions (SIPP And Occupational)

The Revenue Procedure 2020-17 exempts certain tax-favored foreign non-employer retirement plans (including U.K. SIPPs that meet the relevant criteria) from the otherwise onerous annual Form 3520 foreign trust reporting requirements, provided the individual meets the applicable $600,000 value threshold and contribution requirements. This is a compliance simplification, not a substantive tax exemption.

Upon divorce, a U.K. pension sharing order may transfer a percentage of the SIPP or occupational pension to the former spouse. If the recipient is a U.S. person, the transferred interest remains within the U.K. pension wrapper and retains its U.K. tax-deferred status, but the U.S. tax treatment depends entirely on whether the fund continues to qualify for treaty protection under Article 17 of the U.S.–U.K. treaty.

Article 17(1)(a) is the general residence-state rule, and Article 17(1)(b) is a separate exemption carveout for certain scheme-based amounts.

D. French Pensions And Retirement Plans

France’s plan d’épargne retraite (PER) and mandatory occupational pension regimes (ARRCO/AGIRC) present particular difficulty in divorce planning. France’s mandatory pension system does not permit the type of capital transfer contemplated by U.S. QDRO law, retirement benefits are typically accrued as annuity rights, not as a segregated account balance, and the family court may award a compensatory share (prestation compensatoire) rather than a direct pension interest.

U.S.–France treaty. Under Article 18(1) of the U.S.–France treaty, as amended by the 2009 Protocol, pensions and similar remuneration are generally taxable only in the first-mentioned State, meaning the state where the pension arises / source state, not the recipient’s state of residence. For a U.S. citizen, however, the saving clause in Article 29(2) must still be considered unless an Article 29(3) exception applies. 

V. Tax Implications of Cross-Border Custodial Relocations

A. When A Parent Relocates Internationally With Children

International relocation by a custodial parent raises a distinct set of U.S. tax issues. Once a parent establishes residency abroad, that parent may be subject to foreign income tax on U.S.-source income, including support payments, investment income, and wages. The interaction between the U.S. foreign earned income exclusion (IRC § 911), the foreign tax credit (FTCs under IRC §§ 901–908), and the child-related tax benefits requires careful modeling.

A U.S.-citizen parent living abroad may elect the IRC § 911 foreign earned income exclusion, which for 2025 is $130,000. If the parent’s only U.S.-source income is child or spousal support (which is non-includible for post-2018 support), the § 911 exclusion may have limited practical relevance. However, if the parent earns wages abroad, the § 911 exclusion interacts with the child tax credit in a non-obvious way: the additional child tax credit computation under IRC § 24(d) uses earned income, but § 911 excluded earned income does not count for this purpose. The net result is often a reduced or eliminated refundable child tax credit for U.S.-citizen parents living abroad.

B. Exit Tax Considerations

An NRA parent who relinquishes U.S. long-term resident (green card) status in connection with or following a divorce may be subject to the mark-to-market exit tax under IRC § 877A if they are a covered expatriate. The thresholds for covered expatriate status include: (1) net income tax liability exceeding $206,000 (for 2025 expatriations) for five years before expatriation; (2) net worth of $2,000,000 or more on the date of expatriation; or (3) failure to certify compliance with U.S. tax laws for the five prior years.

In divorce planning, the timing of green card surrender by the NRA spouse can dramatically affect the economic outcome. If the marital estate includes deferred income assets (unvested stock options, partnership interests with embedded gain, retirement accounts), the exit tax treatment of those assets as deemed sold on the date of expatriation may be triggered at the same time as the divorce-related property transfers. Coordinating § 1041, the § 877A exit tax, and the NRA exception of § 1041(d) requires careful sequencing of the transaction steps.

C. Hague Convention Abductions And Tax: An Overlooked Intersection

Where one parent unilaterally removes a child from the United States to a foreign country in violation of a custody order, the non-relocating parent faces not only a family law crisis but potentially complex tax issues. During periods of wrongful retention, the non-relocating parent may continue to qualify as the custodial parent under U.S. tax law based on the pre-relocation custody arrangement, but proving the factual predicate for that position and navigating foreign jurisdiction tax treatments simultaneously creates significant practical difficulty.

VI. Foreign Account Reporting Post-Divorce: FBAR, FATCA, And The Aftermath

A. Individual Liability Following Joint Account Division

During marriage, U.S. persons holding foreign financial accounts typically file joint FinCEN Form 114 (FBAR) reporting for jointly held accounts. Upon divorce, each spouse’s individual FBAR obligation depends on their continuing financial interest in or signatory authority over foreign accounts. The division of joint foreign accounts requires not only the actual transfer of funds, but the removal of each party from accounts they no longer beneficially own — failure to do so creates continuing FBAR filing obligations and potential liability for accounts the party no longer controls.

Similarly, FATCA reporting on Form 8938 follows the individual taxpayer after divorce. If the divorce agreement assigns foreign accounts to one spouse, the other spouse’s Form 8938 filing obligation terminates only when the accounts are actually removed, not when the decree is entered. Practitioners should include explicit provisions in the settlement agreement requiring account transfers to be completed within a specified period and conditioning the settlement on confirmation of the account changes.

B. Foreign Entity Interests And Information Returns

Where the marital estate includes interests in foreign entities, such as foreign corporations, foreign partnerships, foreign trusts, or PFICs, the divorce may create or eliminate the threshold ownership requirements that trigger U.S. information return obligations (Forms 5471, 8865, 3520, 8621). For example, if the marital community owned 51% of a foreign corporation and the divorce results in each party receiving 25.5%, the 10% ownership threshold for Form 5471 Category 5 filing may still be met by each party, but the 50% constructive ownership requirement for Category 4 filing is no longer met by either party individually. This reorganization of filing obligations must be mapped in the post-divorce compliance calendar.

Inherited PFIC interests in Australian managed funds or French OPCVM are particularly problematic. The PFIC regime’s annual disclosure and election requirements continue for each holder independently post-divorce, and the new holder is subject to the same rules as the original holder for prior holding period QEF and MTM elections (or lack thereof). If the original holder did not make a QEF election, the new holder may face the harsh excess distribution rules on the entire holding period’s accumulated income.

VII. California-Specific Considerations

A. Community Property And International Assets

California is a community property state, and the community property rules significantly affect the characterization of foreign assets in divorce. Earnings and acquisitions during the marriage are generally community property regardless of where they are located or in which currency they are denominated. However, the community property treatment of assets located in common law foreign jurisdictions (the U.K., Australia, France) is not always mirrored by those jurisdictions’ domestic law; a foreign jurisdiction may treat an asset as solely owned by the titled spouse even if California law would characterize it as community property.

California’s transmutation rules (Family Code § 852) require that transfers of property between spouses be in writing and expressly declared to be a transmutation. In the context of cross-border asset transfers, oral representations or conduct that might suffice to establish a transfer in some foreign jurisdictions are ineffective under California law to change community property characterization. This has practical significance when analyzing the basis for § 1041 nonrecognition, as the writing requirement must be satisfied for the transfer to qualify.

B. California’s Non-Conformity To TCJA Alimony Treatment

For California returns for instruments executed from January 1, 2019 through December 31, 2025, California did not conform to the federal TCJA alimony change. Beginning January 1, 2026, California generally conforms for new instruments and certain modified instruments that elect in.

C. Nonresident Withholding And Support Payments

If a California-resident payor makes support payments to a nonresident of California, California nonresident withholding requirements (R&TC §§ 18662–18668) may apply to California-source income of the payee. However, because spousal support is generally not California-source income to the payee (it is sourced to the payor’s residence), the withholding requirement typically does not apply to routine support payments. Practitioners should nonetheless confirm the sourcing analysis where the payor has complex California-source income that is being paid through a trust or entity structure.

Conclusion

Cross-border divorce tax planning is a discipline that demands expertise in U.S. federal international tax, applicable treaty law, U.S. and foreign retirement plan rules, and sometimes state community property law.

The most important practical advice: involve international tax counsel in the drafting process, not in the review process. Reviewing a final settlement agreement for tax implications is dramatically more difficult and less effective than participating in the drafting of the agreement from the outset. The tax structure of a settlement is not a secondary concern; it is a primary determinant of economic outcome.

When Australian business owners talk to me about entering the US, the conversation usually starts where it should – growth. 

A bigger market, deeper capital, more customers, stronger partnerships.

The opportunity is real. What is often underestimated, though, is how quickly momentum can slow due to tax and reporting issues that were never properly mapped at the start. In the US, you are rarely dealing with one simple compliance system. Federal rules are only part of the picture. State tax, registration and sales tax obligations can arrive much earlier than many businesses expect.

One of the first things I usually encourage clients to think through carefully is the entity itself. 

Too often, the structure is treated as something that can be tidied up later. In practice, that can be an expensive mistake. A C corporation files Form 1120 and is taxed separately. A partnership files Form 1065 and pushes tax items out to the owners through Schedule K-1. A single-member LLC is generally disregarded for US income tax purposes unless it elects to be taxed as a corporation. On paper that may sound technical, but commercially it matters a great deal, because the wrong structure can create complexity long before the business has properly found its feet.

If an Australian group is looking at a US LLC, I would be especially careful. Where a foreign-owned US disregarded entity has reportable related-party transactions, Form 5472 can come into play, and it is filed with a pro forma Form 1120. The penalty for missing that filing starts at $25,000. That is exactly the kind of issue that catches decent businesses off guard—not because they are doing anything aggressive, but because nobody warned them early enough that the reporting obligation existed in the first place.

The state-tax piece is where many founders realise that the US is less one market and more fifty overlapping systems. Sales tax, state income tax, franchise tax and registration obligations can arise in different ways and at different times. Even the “business-friendly state” conversation needs a bit of nuance. Texas has franchise tax, Florida has corporate income/franchise tax, and many states now apply economic nexus rules that can pull remote sellers into registration and collection once thresholds are met.

Financial reporting deserves a little more attention than it usually gets at the start as well. In a public company context, SEC reporting can mean ongoing Form 10-K and Form 10-Q filings. More broadly, US financial reporting still revolves around GAAP. In practice, the challenge is often not understanding the theory, but ensuring the US numbers can be reported cleanly and consistently within the wider group without constant rework.

Hiring in the US is another area where practical business decisions and compliance meet very quickly. Employers generally need to withhold federal income tax and Social Security and Medicare taxes from wages, and most employers also need to deal with unemployment taxes at both federal and state levels. On top of that, worker classification matters. The IRS looks at the full relationship and the degree of control, not just what the contract happens to call someone. That is why I always say that calling a person a contractor is not the same thing as them actually being one.

Once the US business starts moving money across borders, the international rules need to be treated seriously. US persons with foreign financial accounts may have an FBAR filing obligation once aggregate balances exceed $10,000, and intercompany charges between an Australian parent and a US operation need to satisfy the arm’s-length standard. The best time to think about that is before the structure goes live, not halfway through an audit trail reconstruction exercise.

The good news is that none of this is unmanageable. 

But it does reward businesses that treat tax and financial reporting as part of commercial strategy, rather than as admin to be cleaned up later. 

The businesses that usually do well in the US are not always the ones that move fastest. They are often the ones that enter with the clearest structure, the best discipline and the fewest surprises. In my experience, that is where good advice still pays for itself.

CHECKLIST: Australia – US Market Entry Checklist

A Practical Analysis Of Treaty Interpretation And The Quid Pro Quo Test

Spoiler Alert: If you have a boss, get performance reviews, and can be fired for poor work, you probably have a job and not a grant.

The recent Tax Court decision in Baturin v. Commissioner (T.C. Memo. 2026-12) provides valuable guidance on distinguishing between tax-exempt grants and taxable compensation under international tax treaties. After a Fourth Circuit remand, the Tax Court granted summary judgment to the IRS, clarifying when payments to researchers qualify for treaty exemptions.

This case offers important lessons for nonresident researchers working in the United States and the institutions that employ them.

Background And Treaty Provision

Dr. Baturin, a Russian citizen, worked at Jefferson Lab (a Department of Energy facility in Virginia) from 2007 to 2015. During tax years 2010-2011, he received approximately $76,000-$79,000 annually for his work on the 12 GeV Upgrade Project involving particle detector systems.

Article 18 of the U.S.-Russia Tax Treaty provides an exemption from U.S. taxation for individuals “studying or doing research as a recipient of a grant, allowance, or other similar payment from a governmental, religious, charitable, scientific, literary, or educational organization.”

Dr. Baturin claimed this exemption, arguing that his compensation qualified as a tax-exempt grant. The IRS disagreed, asserting that the payments constituted taxable wages for services rendered.

Procedural History and the Fourth Circuit Remand

The Tax Court initially ruled in Dr. Baturin’s favor in 2019 (Baturin I, 153 T.C. 231), finding that his compensation qualified as a tax-exempt grant under the treaty.

The Fourth Circuit reversed and remanded in 2022 (Baturin II, 31 F.4th 170). The appellate court instructed the Tax Court to apply the analytical framework set forth in IRC Section 117 and its implementing regulations, which distinguish between “Disinterested, no-strings educational grants” (tax-exempt) and “Work done as part of a substantial quid pro quo” (taxable compensation). 

The Fourth Circuit provided specific factors for the Tax Court to consider on remand, such as (1) would Jefferson Lab have hired someone else if Dr. Baturin were unavailable? (2) Did the projects pre-date and post-date his tenure? (3) Who retained the intellectual property rights? (4) How much discretion did Dr. Baturin have over his day-to-day work? (5) Was there a substantial quid pro quo?

Summary Judgment Analysis

On remand, the Commissioner moved for summary judgment, arguing that the undisputed facts established Dr. Baturin’s payments were compensation rather than grants. Dr. Baturin, proceeding pro se, raised several procedural arguments but failed to present specific facts creating a genuine dispute of material fact.

The Court analyzed the Fourth Circuit’s factors:

1. Replaceability

Jefferson Lab confirmed through Dr. Burkert’s declaration that the institution would have hired another qualified individual if Dr. Baturin had not been available. This indicated the position was not dependent on Dr. Baturin’s unique contributions but rather required any qualified scientist to perform specified duties.

2. Project Independence

The 12 GeV Upgrade Project commenced before Dr. Baturin’s employment in 2007 and continued after his departure in 2015. As of December 2024, the CTOF detector remains operational. This demonstrated that the research project existed independently of Dr. Baturin’s participation.

3. Intellectual Property Rights 

As a condition of employment, Dr. Baturin signed an agreement assigning all intellectual property rights from his work to Jefferson Lab. This arrangement is characteristic of an employment relationship rather than an independent research grant.

4. Supervision And Performance Review

Dr. Baturin worked under the supervision of Dr. Burkert (his direct supervisor) and Dr. Eloaudrhiri (project manager). His performance was evaluated annually, and his continued employment was contingent upon satisfactory performance reviews. These elements are consistent with an employer-employee relationship.

5. Substantial Quid Pro Quo

Jefferson Lab provided bi-weekly compensation in exchange for Dr. Baturin’s services on assigned projects. The Court found that “Jefferson Lab’s bi-weekly payments to Dr. Baturin were not disinterested, no-strings grants, but rather were a quid pro quo in exchange for his assigned work on the 12 GeV Upgrade Project.”

Legal Framework: Section 117 And Revenue Ruling 80-36

The Fourth Circuit directed the Tax Court to apply principles from IRC Section 117 (qualified scholarships) to interpret the treaty language. Under this framework, courts distinguish between payments that support independent study or research, and compensation for services rendered under supervision that primarily benefit the payor.

The Court also cited Revenue Ruling 80-36 (addressing researchers under the U.S.-Japan Income Tax Convention), which provides that payments are taxable when a researcher is “performing valuable research services under the supervision of the grantor that are primarily for the benefit of the grantor.”

Applying these principles, the Court concluded that Dr. Baturin’s payments constituted taxable compensation rather than tax-exempt grants.

Key Procedural Issues

Dr. Baturin’s pro se representation led to several procedural difficulties:

Confusion Between Withholding and Liability.

Dr. Baturin argued that withholding exemptions under Section 1441 established tax exemption. The Court clarified that withholding requirements imposed on payers are distinct from the taxpayer’s underlying tax liability.

Impermissible New Arguments On Remand

The Court applied the mandate rule, noting that Dr. Baturin raised arguments on remand that were not presented to the Fourth Circuit. Under the law of the case doctrine, remand proceedings are not appropriate for introducing new legal theories.

Failure To Create Genuine Factual Disputes

When opposing summary judgment, Rule 121(d) requires the non-moving party to present specific facts supported by appropriate evidence. Dr. Baturin’s responses were largely speculative (e.g., “this may be a subject to the genuine dispute”) rather than presenting concrete evidence disputing the Commissioner’s factual assertions.

Practical Implications For Research Institutions And Foreign Nationals

This decision provides important guidance for determining when payments to researchers qualify for tax treaty exemptions. The “Baturin factors” establish a framework for analysis. 

Would the institution hire an alternative candidate if the individual were unavailable? Does the research project exist independently of the individual’s participation? Who retains ownership of the intellectual property? Does the individual work under supervision with performance evaluations? Is there a substantial quid pro quo relationship?

When these factors indicate an employment relationship—characterized by assigned work, supervision, performance reviews, and institutional control over work product—payments constitute taxable compensation regardless of the research nature of the work.

The distinction is not based on the importance or value of the research, but rather on the structural relationship between the payor and payee.

Conclusion

The Tax Court granted summary judgment to the Commissioner, finding that Dr. Baturin’s payments from Jefferson Lab constituted taxable compensation rather than tax-exempt grants under Article 18 of the U.S.-Russia Tax Treaty.

The decision emphasizes that treaty interpretation requires careful analysis of the actual relationship between parties rather than reliance on labels. Employment relationships characterized by supervision, performance reviews, assigned duties, and institutional ownership of work product result in taxable compensation, regardless of whether the work involves research or advances scientific knowledge.

Key Takeaways

Treaty language must be interpreted in context: The terms “grant, allowance, or other similar payment” require analysis of the underlying relationship, not merely the characterization of payments.

The Quid Pro Quo Test Is Determinative –  When payments represent compensation for services that primarily benefit the payor, they constitute wages rather than grants.

Proper Legal Representation Matters – Complex tax treaty issues benefit from professional guidance, particularly when procedural requirements demand specific evidence and timely presentation of arguments.

Note On Treaty Status -The U.S.-Russia Tax Treaty was suspended effective August 16, 2024. However, the analytical framework established in Baturin—particularly the quid pro quo test and the application of Section 117 principles to treaty interpretation—remains applicable to similar provisions in other U.S. tax treaties.

Final thought: The Tax Court has now definitively confirmed that calling your paycheck a “grant” doesn’t make it one. No matter how impressive the research. 

If you live internationally, run an online business, invest across borders, or use platforms like Wise to manage multiple currencies, you may be wondering:

Do I need to report my Wise account to the IRS?

The answer depends on one key factor:
Where the account is legally held, and not the currency and not the routing number.

Let’s break this down clearly.

The Two Reporting Regimes: FBAR And FATCA

U.S. taxpayers may need to report foreign accounts under:

1. FBAR (FinCEN Form 114)

You must file an FBAR if:

• You are a U.S. person (citizen, green card holder, or U.S. tax resident), and
  
• The total value of all your foreign financial accounts exceeds $10,000 at any time during the year.

2. FATCA (Form 8938)

This form is filed with your tax return and applies if your foreign financial assets exceed higher thresholds (which vary based on where you live and your filing status).

Both rules focus on whether an account is foreign.

What Actually Makes An Account “Foreign”?

This is where confusion happens.

An account is considered foreign if it is maintained by a financial institution located outside the United States.

That’s it.

Not:

• The currency
• The interface language
• The debit card logo
• The routing number format

What matters is which legal entity holds your account and where that entity is regulated.

Common Misconceptions About Wise Accounts

Wise operates through multiple regulated entities around the world, including in the U.S., UK, Belgium, and elsewhere.

Depending on your residency and how you opened the account, your Wise account may be held by:

• A U.S. entity (domestic), or
• A non-U.S. entity (foreign)

Important Clarifications

• Just because your Wise account holds USD does NOT mean it is domestic.
• Just because your account holds EUR does NOT mean it is foreign.
• Just because your account uses U.S. payment rails (like an ABA routing number) does NOT mean it is domestic.

Payment rails are not the legal location of the financial institution.

An account can:

• Hold U.S. dollars,
• Have an ABA routing number,
• Send ACH payments,

and still be legally maintained by a foreign financial institution.

Simple Examples

Example 1: USD Account That Is Foreign

You live abroad and open a Wise account. It holds only U.S. dollars. It has an ABA routing number.

However, your account is maintained by Wise’s UK or EU entity.

That account is considered foreign for FBAR and FATCA purposes.

If your total foreign accounts exceed $10,000 at any point during the year, it must be reported.

Example 2: EUR Account That Is Not Foreign

You live in the United States and open a Wise account issued by Wise’s U.S. entity. You hold euros in it.

Even though the balance is in EUR, the account is maintained in the United States.

That account is generally not foreign for FBAR purposes.

Currency does not determine reporting — location does.

Why This Matters

Many internationally mobile professionals and online entrepreneurs:

• Hold multiple currency balances
• Move funds across borders frequently
• Use fintech platforms instead of traditional banks
• Assume “digital” means “not foreign”

That assumption can create compliance risk.

FBAR penalties can be severe — even for non-willful violations.

How to Determine If Your Wise Account Is Foreign

Here’s what you should check:

1. Review your account terms and conditions.
   
2. Look at your statements — they usually identify the regulated entity.
   
3. Confirm which Wise legal entity services your account.
   
4. Identify where that entity is regulated.

If the account is maintained by a non-U.S. entity, it is generally considered a foreign financial account.

Aggregation Rule (Often Overlooked)

For FBAR purposes:

You must combine the maximum balances of all your foreign accounts.

If the total exceeds $10,000 at any point during the year, you must report all of them — even if each individual account is small.

Wise accounts count toward that total if they are foreign.

Bottom Line

When it comes to FBAR and FATCA:

• USD does not mean domestic.
  
• EUR does not mean foreign.
  
• An ABA routing number does not make an account U.S.-based.
  
• Digital platforms are not automatically exempt.
  
• The legal location of the institution controls.
  

If you operate internationally and use modern fintech tools, it’s critical to analyze your accounts properly rather than relying on assumptions based on currency or payment systems.

When in doubt, verify the entity and not the interface.

International divorce frequently triggers a foreign-asset reporting cascade: accounts that were previously “handled by the other spouse,” jointly titled assets that get split, and new single-filer thresholds can turn a historically quiet situation into an immediate U.S. compliance problem, often with large civil penalties and, in willful cases, criminal exposure. The enforcement environment is also more aggressive, with enhanced IRS enforcement funding and more sophisticated analytics, increasing the likelihood that previously missed foreign reporting gets detected.

Foreign Asset Reporting: The “Big Three” Regimes (Quick Comparison)

Regime	What It Reports	Where Filed	Core Trigger	Due Date (for 2025 calendar year)	Key Penalty Framework
FBAR (FinCEN Form 114)	Foreign financial accounts (including bank, securities, some insurance/annuity accounts)	Separately from the tax return (FinCEN e-filing)	Aggregate foreign account value > $10,000 at any time during the year (all foreign accounts combined)	April 15, 2026 with automatic extension to October 15, 2026	For 2025 (inflation-adjusted): non-willful up to $16,536 per report; willful greater of $165,353 or 50% of the account balance per violation; criminal possible
FATCA (Form 8938)	Specified foreign financial assets (broader than FBAR: accounts plus many non-account assets like foreign stock/partnership interests, foreign pensions, etc.)	Attached to annual income tax return	Filing-status/residency thresholds (often $50,000/$75,000 for U.S. residents who are single/MFS)	Due with Form 1040 (generally April 15; expats often June deadline)	$10,000 failure-to-file plus $10,000 per 30 days after IRS notice up to $50,000
Foreign trust reporting (Forms 3520 / 3520-A)	Foreign trust transfers, distributions, ownership, gifts and annual foreign trust reporting	IRS (information returns)	Triggered by foreign trust transactions/ownership (common in international family wealth and divorce settlements)[1]	Form 3520-A due 15th day of 3rd month after trust year-end (calendar-year trust: March 15; 6‑month extension available via Form 7004)	Form 3520: often greater of $10,000 or 35% of reportable amount (depending on part); Form 3520‑A: generally greater of $10,000 or 5% of gross reportable amount

Critical Overlap Point: Filing Form 8938 does not replace FBAR. If you meet both sets of rules, you generally file both.

FBAR (FinCEN Form 114): What Divorce Changes (And Why It Gets Missed)

The Filing Trigger (The “$10,000 Aggregate” Test)

FBAR is required when the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the year, a low threshold that is easy to cross when accounts exist in multiple countries or when a spouse holds several accounts.

Divorce-Specific Trap: People often assume FBAR only applies if they own the account. In divorce situations, the risk is that a taxpayer had signature authority or another filing obligation over accounts tied to the other spouse (for example, family business accounts or accounts in the spouse’s name).

Deadline And Extension (For 2025 Accounts)

For the 2025 calendar year, the FBAR is due on April 15, 2026, with an automatic extension to October 15, 2026 (no separate extension form required).

Recordkeeping Expectation (Practical Audit Defense)

FBAR filers should retain supporting documentation with their tax records for at least five years.

In a divorce context, that retention period matters because spouses may lose access to account statements during or after separation; proactively preserving statements and proof of balances is often essential.

Penalties (Inflation-Adjusted Amounts For 2025)

• Non-Willful FBAR Penalty (Civil) – up to $16,536 per report
• Willful FBAR Penalty (Civil) – the greater of $165,353 or 50% of the account balance per violation

Criminal exposure is possible (especially in willful scenarios).

These numbers underscore why “we didn’t know” is not a strategy, particularly when divorce discovery, bank files, and cross-border information flows can surface old accounts.

Statute Of Limitations (Why Old Years Can Still Be In Play)

Standard audit limitation periods may not protect taxpayers when foreign reporting is missing. FBAR has a six-year period, and for certain failures (and fraud) older years may remain examinable.

FATCA Form 8938: “Specified Foreign Financial Assets” And Why Filing Status Changes Matter

What Form 8938 Covers (Broader Than Bank Accounts)

Form 8938 is required for certain U.S. taxpayers who hold specified foreign financial assets exceeding applicable thresholds. The IRS describes the basic rule as reporting when aggregate value exceeds $50,000 (with thresholds varying by taxpayer circumstances).

Form 8938 reaches beyond bank accounts and can include:

• foreign securities,
• foreign partnership/corporate interests,
• trusts, and
• foreign pensions.

This breadth is exactly why divorce restructurings (splitting entities, transferring shares, receiving pension rights) can suddenly trigger reporting even if “no foreign bank account” exists.

The Thresholds (Treas. Reg. §1.6038D-2): U.S. Residents vs. Living Abroad

The filing requirement turns on aggregate value exceeding a threshold that depends on residency and filing status.

Below are the thresholds expressly stated in the Form 8938 regulations:

Taxpayers Living In The U.S.

• Unmarried / Married Filing Separately – file if aggregate value exceeds $50,000 on the last day of the year or $75,000 at any time during the year.
• Married Filing Jointly – file if aggregate value exceeds $100,000 on the last day of the year or $150,000 at any time during the year.

Taxpayers Living Abroad (Qualified Individuals Under §911(d)(1))

• Unmarried (Or Not Filing Jointly) –  file if aggregate value exceeds $200,000 on the last day of the year or $300,000 at any time during the year.
• Married Filing Jointly (Living Abroad) –  file if aggregate value exceeds $400,000 on the last day of the year or $600,000 at any time during the year.

Divorce-Specific Trap: filing status changes (e.g., moving from married filing jointly to single or married filing separately) can materially lower the applicable threshold and create a new Form 8938 requirement even when the assets did not change. The regulation thresholds above show why: the U.S.-resident MFJ threshold is $100,000/$150,000, but single/MFS is $50,000/$75,000.

Deadline (Tied To The Income Tax Return)

Form 8938 is filed with the annual income tax return (as an attachment), not separately like FBAR. This creates a common divorce-year failure mode: the return gets filed on time, but the foreign asset schedule is omitted, even when FBAR was filed (or vice versa).

Penalties (And Why They Can Snowball)

• Initial Failure-To-File Penalty –  $10,000
• Continuation Penalty After IRS Notice – $10,000 for every 30 days of continued noncompliance after notice, up to $50,000 maximum (per year)

Statute Of Limitations Risk

Missing Form 8938 can keep the statute of limitations open, which means taxpayers may find that very old years are still exposed once the IRS identifies an unreported foreign asset footprint.

Foreign Trust Reporting (Forms 3520 And 3520-A): The Divorce Settlement Danger Zone

International divorces frequently involve structures that are “trust-like” (even when they aren’t labeled as such), offshore family arrangements, or wealth vehicles that make distributions or transfers as part of a settlement. 

Form 3520 – when penalties can be a percentage of the transfer/distribution.

The Internal Revenue Manual section provided includes detailed penalty computations that are especially important in divorce cases because transfers/distributions are exactly what settlements do.

For late-filed Form 3520, the IRS penalty computation depends on what is being reported:

If Form 3520 Part I (generally, certain foreign trust transactions such as transfers) is triggered, assess a penalty equal to the greater of $10,000 or 35% of the total amount reported (with specific line references in the IRM guidance). The IRM also provides that the aggregate penalty for Part I cannot exceed the gross reportable amount.

If Form 3520 Part III (generally, certain foreign trust distributions) is triggered, assess a penalty equal to the greater of $10,000 or 35% of the amount reported (again with detailed line references). The IRM similarly limits the aggregate penalty so it cannot exceed the gross reportable amount.

Form 3520-A: Annual Return For Foreign Trusts With A U.S. Owner

A foreign trust must file Form 3520-A annually when a U.S. person is treated as an owner of any portion of the foreign trust under the grantor trust rules (sections 671–679), and Form 3520-A includes required owner and beneficiary statements.

To avoid penalties for failure to timely file Form 3520-A, the U.S. owner must ensure the foreign trust timely files it, or the U.S. owner must file a substitute Form 3520-A with a timely-filed Form 3520.

Due Date

Form 3520-A is due the 15th day of the 3rd month following the end of the trust’s tax year (e.g., for a calendar-year trust, March 15), with a 6-month extended due date if the trust files an extension (Form 7004).

Penalty Framework (Form 3520-A)

The IRM states: the initial penalty for failure to file Form 3520-A generally is the greater of $10,000 or 5% of the gross reportable amount, where the gross reportable amount is the gross value of the portion of the trust’s assets treated as owned by each U.S. owner at year-end.

A Key Practical Point: “FBAR vs. Form 8938” Is Not Either/Or

A recurring compliance failure in international divorce matters is assuming that one form “covers” the other. It does not.

Form 8938 is filed with the IRS as part of the income tax return and covers “specified foreign financial assets.”

FBAR is a separate filing with its own threshold and due date mechanics (including automatic extension).

Filing Form 8938 does not relieve the taxpayer from filing FBAR when the FBAR rules are triggered.

Divorce Implication: You can be “compliant” on the tax return and still have FBAR exposure, or you can have FBAR filed and still have Form 8938 exposure, especially after filing status changes lower the 8938 threshold.

Common International Divorce Reporting Triggers That Deserve Special Attention

“I Never Benefited From The Account” (But Had An Obligation)

Divorce can reveal unrecognized historical obligations tied to a spouse’s accounts or business (including signatory authority). This matters because the FBAR regime is driven by account access/relationship and aggregate balances, not just whether you considered it “your money.”

Filing Status Shift Can Turn “No Form 8938” Into “Form 8938 Required”

The reporting thresholds change significantly when filing status changes (MFJ to single/MFS), creating new reporting requirements. The regulation thresholds show exactly how large the shift can be for U.S. residents: $100,000/$150,000 (MFJ) versus $50,000/$75,000 (single/MFS).

Trust Structures Embedded In Settlements (Or Foreign “Pensions” That Behave Like Trusts)

If a settlement causes a transfer to a foreign trust or a distribution from one, the IRM penalty computations show why the exposure can be economically severe (35% regimes for certain Form 3520 failures; 5% asset-value penalty for certain Form 3520-A failures).

Deadlines And “Hidden” Annual Compliance Calendars

FBAR – April 15 with automatic extension to October 15 (for 2025, due April 15, 2026 / Oct 15, 2026).

Form 8938 –  with the tax return.

Form 3520-A – March 15 for calendar-year trusts (15th day of the 3rd month), extension possible via Form 7004.

International divorce clients often focus on the divorce timeline (court deadlines, settlement deadlines) and miss that these compliance calendars run independently.

Old-Year Exposure Can Persist When Foreign Reporting Is Missing

For most tax issues, the IRS has three years to audit (six years if the income understatement exceeds 25%). But foreign reporting failures have different rules:

• No Form 8938 File – Statute never begins to run on the entire return
• No FBAR Filed – Six-year statute of limitations under Bank Secrecy Act
• Fraudulent Return –  No statute of limitations ever

Real-World Impact: The IRS can audit a 2015 return in 2026 if foreign asset reporting was required but not filed.

Conclusion: International Divorce Turns “Foreign Assets” Into An Active Compliance Event

The foreign reporting rules are deliberately complex. The IRS uses this complexity as a weapon, assuming that confusion equals willful violation. In international divorce cases, the complexity multiplies because you’re dealing with:

• Changing filing statuses mid-year
• Assets you may not have known existed
• Reporting obligations that weren’t yours during marriage but became yours after divorce
• Settlement agreements that don’t account for international tax issues

When divorce changes ownership, access, filing status, and documentation availability all at once, the safest posture is to treat foreign-asset reporting as its own workstream—with clear form-by-form mapping, threshold testing, deadline management, and record retention aligned to the regimes above.

A Practical Checklist For Australians Moving To The United States

Moving from Australia to the United States is exciting, but the first U.S. tax season can feel like stepping into a maze. The U.S. tax system is far more document-driven and globally focused than Australia’s, and many new arrivals are caught off guard by what the IRS expects.

The good news? With the right preparation before you move, your first tax season can be far less stressful. Here’s a checklist of items every Australian should gather and understand before relocating to the U.S.

1. Clear Records Of Your Move Date (This Matters More Than You Think)

Your exact date of arrival in the U.S. is critical. U.S. tax residency is not based on intention—it’s based on days physically present. You also need to have records of any dates you’ve left (even for temporary travel) the U.S. once you’ve moved.

Have on hand:

• Flight itineraries and entry stamps
• Visa start date
• Lease agreements or housing contracts
• Any travel dates after your move to the U.S.

These dates determine whether you’re treated as:

• A nonresident,
• A dual-status taxpayer, or
• A U.S. tax resident for that year

This classification drives everything that follows.

2. Copies Of Your Most Recent Australian Tax Returns

Bring at least the last two years of:

• Australian individual tax returns
• Notices of assessment
• PAYG summaries or income statements

These help:

• Establish income earned before U.S. residency
• Support treaty positions
• Substantiate foreign tax credits later

Even income that won’t be taxed again in the U.S. often needs to be reported.

3. A Full Snapshot Of Your Worldwide Income (Not Just Salary)

The U.S. taxes based on citizenship and residency, not source. Once you’re a U.S. tax resident, the IRS wants to see everything.

Prepare documentation for:

• Australian employment income
• Bonuses paid after you leave (even if earned before)
• Rental income
• Dividends and interest
• Trust or partnership distributions

If it earned money anywhere in the world, assume the U.S. cares.

4. Details Of All Australian Bank Accounts

Many Australians are surprised to learn that foreign bank accounts are a major U.S. compliance issue, not a minor one.

You’ll want:

• Bank names and addresses
• Account numbers
• Maximum balances during the year

Why this matters:

• Accounts may trigger FBAR and FATCA reporting
• Penalties for missing these forms can be severe even when no tax is owed

This includes everyday savings and transaction accounts. 

5. Information On Your Superannuation Accounts

Australian superannuation is one of the most misunderstood areas in U.S.–Australia tax planning.

Before moving, gather:

• Super fund statements
• Employer vs personal contribution history
• Withdrawal restrictions

The U.S. does not treat super the same way Australia does. In some cases:

• Earnings may be taxable annually
• Reporting obligations may apply even if funds are locked until retirement

This is an area where advance planning pays off.

6. Investment And Asset Purchase Records

If you own assets, documentation is essential to avoid double taxation later.

Bring records for:

• Australian shares or ETFs
• Property purchase contracts
• Cost base and acquisition dates
• Crypto transaction history

The U.S. uses different rules for:

• Capital gains
• Depreciation
• Currency conversion

Without records, you may pay more tax than necessary.

7. Visa And Immigration Documents

Your visa type can affect how the IRS views you.

Have copies of:

• Visa approval notices
• I-94 arrival records
• Employment authorization documents

Certain visas may qualify for:

• Treaty benefits
• Temporary exemptions from residency tests

But these benefits are time-limited and documentation-dependent.

8. Awareness Of The U.S.–Australia Tax Treaty

The tax treaty can:

• Prevent double taxation
• Modify how certain income is taxed
• Provide tie-breaker rules for residency

But treaties are not automatic. You must claim them correctly on your return.

Knowing this ahead of time helps avoid missed opportunities.

9. A Cross-Border Tax Advisor (Before You Need One)

Perhaps the most important item on this list isn’t a document—it’s expert guidance.

The U.S. tax system:

• Penalizes late or incorrect filings harshly (penalties for a single missing form can amount to tens of thousands of dollars)
• Requires proactive reporting
• Treats foreign assets with heightened scrutiny

Working with someone who understands both Australian and U.S. tax systems can save you time, money, and stress in your first year.

Final Thought

Your first U.S. tax season doesn’t start in April—it starts before you board the plane. A little preparation now can prevent expensive mistakes later and help you start your new chapter in the U.S. with confidence.

“All happy families are alike; each unhappy family is unhappy in its own way.”

Leo Tolstoy’s Anna Karenina (1878)

Anna felt trapped in her high society marriage in 19th-century Russia. The divorce was frowned upon by the Orthodox Church. Thus, she did not formally divorce Karenin and instead ran off with Vronsky. While most divorces nowadays are less dramatic, they are still unpleasant for both parties and quite complicated. International divorce adds more complications, confusion, and frustration since the divorce process is rarely “just family law.” A decree may be issued under Australian law and negotiated entirely in Australia, but U.S. tax outcomes for a U.S. citizen can still turn on U.S. rules—especially rules that hinge on status (married vs not married), tax residency (resident vs non-resident alien), and ownership/control of offshore accounts and structures.

The key difficulty is that cross-border divorce compresses multiple high-stakes determinations into one year:

• Your U.S. filing status may be determined by what is true on December 31, even if you separated long before that. 
• If your spouse is a non-resident alien for U.S. tax purposes, you generally cannot file a joint return unless a specific election applies. 
• “Divorce transfers are tax-free” is not always true in international divorces because the U.S. divorce-transfer nonrecognition rule generally does not apply when the recipient spouse is a non-resident alien. 
• Divorce often changes ownership and signatory authority over foreign accounts, which can change offshore reporting responsibilities, especially FBAR and Form 8938.

U.S. Citizens Living Abroad: The Baseline Is “Worldwide”

A persistent misconception in expat divorces is that living abroad changes who is a U.S. taxpayer. It does not. The IRS’s Internal Revenue Manual states plainly that U.S. citizens living or traveling outside the United States are generally required to file U.S. income tax returns and report worldwide income. 

That’s the baseline. Even if foreign tax credits, exclusions, or treaty positions reduce U.S. tax, the filing and reporting framework still exists, and divorce often changes what must be reported.

Your Spouse: “Resident Alien” vs “Non-Resident Alien” Drives Most Cross-Border Outcomes

For U.S. tax purposes, an “alien” is anyone who is not a U.S. citizen. IRS Publication 519 explains the core split: aliens are classified as resident aliens and non-resident aliens;

Resident Aliens – are generally taxed on worldwide income,

Non-Resident Aliens – are generally taxed only on U.S.-source income and certain income effectively connected with a U.S. trade or business. 

The IRS also summarizes the practical mechanics of classification: an alien is a resident alien if he or she meets the green card test or the substantial presence test, or makes certain elections (including an election under IRC §6013(g) or (h)). If the person does not meet those tests and does not elect, that person is a non-resident alien and must file Form 1040‑NR to report certain U.S. tax items.

In a U.S./Australia or any other foreign divorce where the non-U.S. spouse lives outside of the U.S. and does not meet U.S. residency requirements, the spouse is commonly treated as a non-resident alien for U.S. tax purposes. That single fact ripples into filing status, withholding, and property transfer consequences.

Filing Status: Why December 31 Controls Even If Your Divorce Is “Non-U.S.”

The year-end rule is statutory, not a “paperwork” detail.

U.S. tax law generally determines whether you are married as of the close of your taxable year. The joint return statute, IRC §6013(d), similarly measures marital status as of the close of the year for spouses with the same taxable year, and provides that individuals legally separated under a decree of divorce or separate maintenance are not considered married. 

Practical Meaning – A divorce finalized in early January can mean you were “married” for U.S. tax purposes for the entire prior year.

“Legally Separated” Is Meaningful In The U.S. Tax Sense

IRC §7703 states that an individual legally separated under a decree of divorce or separate maintenance is not considered married. That phrase matters because not all “separation” ideas used in foreign jurisdictions map neatly to U.S. divorce or separate maintenance decrees. When your divorce is governed by foreign law, you still need to identify whether you have a decree that the U.S. tax rules treat as ending “married” status.

Head Of Household: Possible, But Facts Matter

Many separated expat parents are interested in the Head of Household (HOH) status. IRC §7703(b) provides a “certain married individuals living apart” rule that allows a married person filing separately to be treated as not married if they maintain a household that is the principal place of abode of a qualifying child for more than half the year, provide over half the cost of maintaining the household, and the spouse is not a member of the household during the last six months of the year. 

In international divorces, HOH analysis becomes fact-intensive quickly:

• where the child actually lived,
• who paid household costs,
• whether the spouse was a member of the household during the last six months,
• and dependency entitlement mechanics.

So, while HOH can be a valuable filing status, in cross-border divorce, it should be treated as a fact pattern to prove, not a default assumption.

Married To A Non-Resident Alien Spouse: Why Married Filing Joint (MFJ) Is Often Blocked And How Elections Change The Landscape

The default rule: no joint return if either spouse is a non-resident alien.

IRC §6013(a)(1) provides a clear limitation: no joint return shall be made if either spouse at any time during the taxable year is a non-resident alien. However, non-resident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns.

This is the first major “international divorce fork”:

• If the foreign spouse remains a non-resident alien and no election is made, you may be limited to separate filing (and the spouse may file Form 1040‑NR for U.S. income items). 
• If you want MFJ, you are typically talking about a statutory election regime.

The §6013(g) election (and related rule §6013(h)): MFJ becomes a choice, not a default.

IRC §6013(g) allows spouses to elect to treat a non-resident alien spouse as a U.S. resident for (1) income tax for the entire year, and (2) wage withholding for wages paid during the year.

Regulation §1.6013-6 provides a clear summary of who can elect.  The election is made by either the husband or the wife at year-end, when one spouse is a U.S. citizen or resident, and the other is a non-resident alien. Once an election is made, each spouse is treated as a U.S. resident for various Internal Revenue Code purposes and specific filing/administrative provisions for the entire year. 

The election is made by attaching a statement to a joint return for the first year; the statement must include identification (U.S. Social Security or taxpayer identification numbers) and be signed by both spouses. 

The election terminates if spouses are legally separate under a decree of divorce or separate maintenance; the regulation also provides timing for termination. 

Therefore, if you make the election, you and your spouse are treated as residents for income tax purposes for the entire year; neither spouse can claim under any treaty not to be a U.S. resident; both are taxed on worldwide income; you must file a joint return for the year you make the choice.

US Taxpayer Identification (ITIN) Mechanics

If the non-resident spouse does not have and is not eligible for a U.S. Social Security Number, he or she must apply for an ITIN. In a divorce year, this creates a practical timing issue: the ability to file as intended may depend on whether the spouse will cooperate in obtaining an ITIN.

Community Property Twist: Foreign Community Property Laws Can Matter (And The Election Can Switch Them Off)

International couples sometimes encounter community property concepts. IRC §879 addresses community income where one or both spouses are non-resident aliens and states that “community property laws” include those of a foreign country. It also provides that the §879 rules do not apply for any year in which a §6013(g) or (h) election is in effect. 

Even if Australian marital property isn’t “community property” in the U.S. sense, this section is a reminder that the Code sometimes explicitly contemplates foreign marital property regimes, and elections can change the default allocation framework.

Treaties And Dual Residents: When The Treaty Changes “How You Compute Tax”, But Not Necessarily Everything Else

Dual Resident Taxpayers: Treaty Tie-Breaker Can Require Form 1040-NR + Form 8833

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a non-resident alien in figuring your U.S. income tax; for purposes other than figuring your tax, you will be treated as a U.S. resident. In a practical sense, it means that while you are not going to pay U.S. income tax on foreign source income, you will still need to report all non-US financial assets and file applicable international disclosure forms like 3520, 3520-A, 5471, 8865, etc.

Divorce Support And Cross-Border Cash Flows: Withholding-Agent Issues That Don’t Exist In Domestic Divorces

The cross-border “support” issue is often less about whether something is deductible (U.S. law changed in recent years for many divorces), and more about:

• recipient status (foreign or not),
• income sourcing, and
• withholding and reporting responsibilities.

Withholding Agent Concept (And Why Divorce Can Create One)

The IRS defines “withholding agent” broadly as any person required to withhold income tax on U.S.-source income received by a non-resident alien and others, and states that the withholding agent is responsible for submitting withholding information on Form 1042 and providing recipient information on Form 1042‑S. 

Many divorcing taxpayers do not realize they can become a “withholding agent” simply by agreeing to pay periodic amounts to a foreign recipient out of U.S.-source FDAP streams or other U.S.-source payments.

The non-resident alien withholding baseline and why it can matter in divorce.

Treasury regulations governing non-resident alien taxation explain that a non-resident alien not engaged in a U.S. trade or business is liable for a flat tax of 30% on certain U.S.-source amounts received during the year (subject to treaty limitation). IRS Publication 519 provides the same idea in plain language: dividends, for example, are generally taxed at 30% (or lower treaty) and are generally withheld at source; if not withheld correctly, a Form 1040‑NR may be required to claim refund or pay additional tax. 

Divorce is relevant because many settlements create:

• periodic payments,
• distributions from investment accounts,
• payments funded by dividends or interest,
• and third-party payments for the benefit of the foreign spouse.

These can create withholding and reporting tail obligations that need to be planned in advance, including documentation flow and timing.

For International Marital Gifting, There Are Two Different “Spouse” Regimes

Income tax regime governed by IRC 1041 and gift tax marital deduction under IRC 2523.

Marital deduction is disallowed for transfers to a spouse who is not a U.S. citizen at the time of the transfer. Instead, if the transfer otherwise qualifies (e.g., present interest), there is a special annual exclusion amount (inflation-adjusted). For the calendar year 2025, that amount is $190,000 ($194,000 for 2026). Citizenship drives your gift tax cap, but it does not magically convert a gift into a taxable sale or a basis step‑up.

Property Division: When “Divorce Transfers Are Tax-Free” Is False In International Divorces

The General Rule: IRC 1041 Nonrecognition For Spouse Or Incident-To-Divorce Transfers

IRC 1041(a) provides that no gain or loss is recognized on a transfer of property to a spouse or to a former spouse if the transfer is incident to divorce. Section 1041(b) provides carryover basis: the transferee generally takes the transferor’s adjusted basis.  A transfer is incident to divorce if it occurs within one year after the marriage ceases or is related to the cessation of the marriage. If our analysis stopped here, we would have a familiar US domestic non-recognition outcome.

The International Exception: IRC1041(d) When Spouse Is Non-Resident Alien

Section 1041(d) is explicit; Code section 1041(a) shall not apply if the spouse (or former spouse) receiving the transfer is a non-resident alien

This is the single most important property division issue in the U.S./foreign divorces involving a U.S. citizen spouse and a foreign spouse who remains a non-resident alien for U.S. tax purposes.

As a result, transferring appreciated property to a spouse who is a non-resident alien can be a taxable event for U.S. purposes (absent another nonrecognition provision).

Carryover basis still matters (even when  IRC 1041 does apply)

Even in cases where IRC 1041 applies (e.g., transfers between two U.S. people), the carryover basis rule means that the divorce settlement often shifts built-in gain. For portfolio-heavy couples, “equal value” does not mean “equal after-tax value.”

Transfers In Trust Where Liabilities Exceed Basis

Section 1041(e) provides that IRC 1041(a) does not apply to certain transfers in trust to the extent liabilities exceed basis.  For business-owner divorces involving trusts and leveraged assets, this provision can be relevant. Trust-based settlement structures should be reviewed not only for family-law goals but also for U.S. income tax consequences, including debt and basis mechanics.

Post-Divorce Compliance Reset: FBAR, Form 8938, And Foreign Trust Reporting

Divorce changes facts. Offshore reporting rules often attach to facts like ownership, signatory authority, beneficial interests, distributions and loans, and whether you are elected into broader residency treatment.

A useful approach is to treat post-divorce compliance as a “reset” exercise rather than a continuation of pre-divorce assumptions.

FBAR

A U.S. Treasury reporting requirement that can change with signatory authority.

Every U.S. citizen or resident alien with an interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate value at any time during the calendar year must report that relationship. The report is filed electronically on FinCEN Form 114 and is separate from the tax return; failure to file may result in civil and criminal penalties. 

Divorce relevance: even if the accounts didn’t change, divorce often changes who is a signer or owner, which can change reporting requirements in the divorce year.

Form 8938 (FATCA)

A broader “specified foreign financial assets” concept.

You may have to file Form 8938 if you are a resident alien for any part of the year, or a non-resident alien who makes an election to be treated as a resident to file a joint return (among others). 

Specified foreign financial assets include foreign financial accounts and, if held for investment, foreign stock and securities, interests in foreign entities, and financial instruments/contracts with non-U.S. issuers/counterparties. 

Penalties can apply for failure to file Form 8938 and for understatement of tax related to undisclosed assets. 

Divorce relevance: if you previously filed jointly and later file separately, or if you are considering a §6013 election in the divorce year, Form 8938 scope and thresholds can change. 

Foreign Trusts And Non-U.S. Trusts

Why do business-owner divorces require special attention?

Many U.S./Australia divorces involve family structures and entities that behave like trusts for Australian purposes or are classified as non-U.S. trusts under U.S. rules. Certain types of foreign accounts or entities are classified as non-U.S. trusts (an example could be certain superannuation accounts). If a U.S. citizen or resident is considered the beneficiary, trustee, or owner, certain information reporting forms may be required, with separate deadlines and penalties for failure to file. 

Form 3520 is filed yearly by an owner of a non-U.S. trust to report ownership, and also for certain contributions/loans to, distributions/loans from, or large gifts from non-U.S. persons/entities; generally filed by the due date (including extensions) of the individual’s return. 

Form 3520‑A is filed yearly by the trustee of a foreign trust with a U.S. owner and is generally due March 15 for a calendar-year trust; a six-month extension may be requested by March 15. 

Divorce Relevance – Divorce is often the first time a U.S. spouse sees trust deeds, trustee statements, trust distributions, or intercompany loans in one place. That is precisely the moment when a controlled “cleanup” plan should be considered if past years were inconsistent or incomplete.

A Practical Checklist Specific To U.S. Citizens Divorcing Foreign Spouses

Year-end marital status: determine what is true on December 31 for U.S. purposes. 

Spouse U.S. tax status: confirm whether the Australian spouse is a non-resident alien. 

MFJ election decision: if MFJ is desired, evaluate the §6013(g) election and its consequences (worldwide income inclusion, treaty limitations, ITIN, and termination timing). 

Divorce property transfers: identify any appreciated property being transferred to a spouse who remains a non-resident alien; §1041 nonrecognition may not apply.

Withholding/FDAP awareness: identify any U.S.-source income streams being paid to a foreign recipient and treat withholding/reporting as part of the settlement administration. 

Offshore reporting reset: rebuild the offshore asset/account/entity/trust inventory after separation and again after final orders; ensure ownership and signatories match what is reported.

International Divorce Is Manageable, But It Rewards Early, Structured Planning

If your divorce is revealing previously undisclosed foreign accounts, inconsistent prior-year offshore reporting, or trust/entity structures that were never fully integrated into U.S. filings, the most effective next step is often a structured offshore disclosure cleanup plan built around the divorce timeline—so ownership changes, trust reporting, FBAR/Form 8938 posture, and any required information returns can be corrected in a controlled, consistent way before asset division and post-divorce filing positions become fixed.