IRS Enforcement Priorities for 2025: What Hong Kong-Based US Taxpayers Need to Know

For the 2025 tax year, the US Internal Revenue Service (IRS) has signalled a decisive shift in enforcement resources that directly impacts the estimated 60,000 to 80,000 US citizens and Green Card holders residing in Hong Kong. Following the Inflation Reduction Act’s USD 80 billion funding injection—of which USD 60 billion was specifically allocated for enforcement—the agency is now deploying its expanded workforce and advanced data analytics to target offshore financial accounts and complex cross-border structures. For Hong Kong-based US taxpayers, who operate under a territorial tax system (Inland Revenue Ordinance Cap. 112) that does not automatically align with US worldwide taxation, this means the historical compliance gap is narrowing. The IRS’s 2025 Priority Guidance Plan explicitly lists “digital asset transactions, foreign trusts, and controlled foreign corporations” as key audit triggers. With Hong Kong’s role as a global financial hub and its absence of a US-Hong Kong double tax treaty (only a Tax Information Exchange Agreement, TIEA, signed in 2014), the jurisdiction presents a high-risk, high-reward enforcement target. This article dissects the specific enforcement priorities, the relevant IRC sections, and the practical compliance steps that US taxpayers in Hong Kong must take before the 2025 filing season.

The Expanded IRS Audit Framework for 2025

The IRS’s renewed focus on high-net-worth individuals and complex international tax structures is not a generalised threat but a targeted operational strategy. The agency’s Large Business & International (LB&I) division has increased its specialised examiners for cross-border issues by 35% since 2023, according to the IRS’s 2024 annual report. For Hong Kong residents, the key change is the deployment of the “Global High-Wealth Industry” practice group, which uses machine learning to identify patterns indicative of unreported foreign financial accounts (FBAR) or undisclosed Specified Foreign Financial Assets (Form 8938).

The FBAR and Form 8938 Compliance Gap

The most immediate enforcement priority for Hong Kong-based US taxpayers remains the Report of Foreign Bank and Financial Accounts (FBAR, FinCEN Form 114). The statutory threshold is clear: any US person with a financial interest in or signature authority over foreign financial accounts aggregating to more than USD 10,000 at any time during the calendar year must file. In Hong Kong, where multi-currency accounts, securities accounts, and insurance wrappers are common, this threshold is easily crossed. The IRS’s 2025 audit cycle is specifically targeting filers who report a single account but whose financial profile suggests multiple accounts across different Hong Kong banks. The penalty for a non-willful FBAR violation can be up to USD 12,921 per violation (indexed for inflation in 2024), while willful violations carry a penalty of the greater of USD 129,210 or 50% of the account balance per violation.

For Form 8938, which applies to unmarried filers living abroad with specified foreign financial assets exceeding USD 200,000 on the last day of the tax year or USD 300,000 at any time during the year, the IRS is cross-referencing data received under the US-HK TIEA. Hong Kong banks, including HSBC, Standard Chartered, and Bank of China (Hong Kong), have been increasingly responsive to IRS requests for account information, with the number of TIEA requests rising by 22% in 2023 compared to 2022 (IRS Data Book, 2023). A failure to file Form 8938 carries a penalty of USD 10,000, with an additional USD 10,000 for each 30-day period of non-filing after IRS notice, up to a maximum of USD 60,000.

The Passive Foreign Investment Company (PFIC) Trap

For US taxpayers in Hong Kong who invest in local or Asian mutual funds, unit trusts, or exchange-traded funds (ETFs) that are not US-registered, the Passive Foreign Investment Company (PFIC) rules under IRC §§ 1291-1298 present a severe compliance burden. The IRS has identified PFIC non-compliance as a priority for 2025, with the agency’s “Digital Asset and Foreign Investment” unit specifically trained to identify Hong Kong-domiciled funds that meet the PFIC definition—any foreign corporation where 75% or more of its gross income is passive, or 50% or more of its assets produce passive income.

The practical consequence for a Hong Kong-based US taxpayer holding a simple Hong Kong-domiciled ETF, such as the Tracker Fund of Hong Kong (2800.HK), is that without filing a Qualified Electing Fund (QEF) election under IRC § 1295, any gain on sale is treated as an excess distribution. This gain is then allocated ratably over the taxpayer’s holding period, taxed at the highest ordinary income rate in each year, and subjected to an interest charge on the deferred tax. The IRS’s 2025 audit program is specifically using broker data to identify taxpayers who have not made the QEF election for foreign funds. The IRS has also issued a practice unit (LB&I Practice Unit 2024-01) detailing how to identify PFIC investments from foreign brokerage statements, making this a high-probability audit trigger for Hong Kong filers.

The Exit Tax and Cross-Border Migration Risks

For US citizens or Green Card holders who are considering relinquishing their status, the IRS’s 2025 enforcement priorities include a renewed focus on the expatriation tax under IRC § 877A. This section applies to “covered expatriates”—individuals who have a net worth of USD 2 million or more on the date of expatriation, or who have an average annual net income tax liability for the five years ending before expatriation exceeding USD 201,000 (2024 threshold, adjusted for inflation). For Hong Kong residents, the calculation of net worth includes all worldwide assets, including Hong Kong property, BVI holding company shares, and retirement accounts.

The Mark-to-Market Tax on Expatriation

Under IRC § 877A, a covered expatriate is deemed to have sold all their worldwide property at fair market value on the day before expatriation. This mark-to-market tax applies to unrealised gains, meaning a Hong Kong property that has appreciated significantly over a 10-year holding period would trigger a capital gains tax liability even if the property is not sold. The IRS’s 2025 enforcement plan specifically targets expatriates who fail to file Form 8854 (Initial and Annual Expatriation Statement) or who underreport the value of their foreign assets. The penalty for failing to file Form 8854 is USD 10,000, and the statute of limitations for assessing the exit tax does not begin until the form is properly filed.

For US Green Card holders who have lived in Hong Kong for an extended period, the “long-term resident” test under IRC § 877(e) is critical. A long-term resident is a Green Card holder who has held the card for at least 8 of the last 15 tax years. For such individuals, the exit tax applies to all worldwide assets, regardless of where the assets are located. The IRS has indicated that it will use travel records and immigration data to verify the residency period, making it difficult for Hong Kong-based Green Card holders to argue for a shorter period.

The Substantial Presence Test and the Closer Connection Exception

For US citizens living in Hong Kong, the physical presence test for the Foreign Earned Income Exclusion (FEIE, IRC § 911) is well-understood: 330 full days outside the US in any 12 consecutive months. However, the IRS’s 2025 audit focus is shifting to the “tax home” requirement. A US citizen living in Hong Kong must have a tax home in a foreign country—defined as the taxpayer’s regular or principal place of business—and must establish a closer connection to that foreign country than to the US. The IRS is now scrutinising cases where a US citizen works for a US-based employer remotely from Hong Kong, arguing that the tax home remains in the US if the employer’s business is conducted from the US.

The closer connection test under IRC § 911(d)(1)(B) requires the taxpayer to file Form 2555 and demonstrate that their “abode” is in the foreign country. The IRS’s 2025 enforcement guidelines specifically list “remote workers with US-based employers” as a target population. For Hong Kong residents, this means maintaining a Hong Kong driver’s license, Hong Kong tax returns, a Hong Kong address for all correspondence, and a clear pattern of daily life in Hong Kong. Simply holding a Hong Kong work visa is not sufficient if the taxpayer’s family, bank accounts, and social ties remain in the US.

Digital Assets, Offshore Trusts, and the New Reporting Regime

The IRS’s 2025 enforcement priorities place a heavy emphasis on digital assets and foreign trusts, two areas where Hong Kong-based US taxpayers are particularly exposed. Hong Kong’s status as a global hub for cryptocurrency trading and trust formation makes it a natural focus for the IRS’s expanded data analytics capabilities.

The Digital Asset Reporting Framework

For the 2025 tax year, the IRS has finalised regulations under IRC § 6045 requiring brokers—including cryptocurrency exchanges—to report gross proceeds and adjusted cost basis for digital asset transactions. While this rule primarily targets US-based brokers, the IRS has also expanded its data-sharing agreements with foreign jurisdictions, including Hong Kong. The Hong Kong Securities and Futures Commission (SFC) has implemented a licensing regime for virtual asset trading platforms since June 2023, and the SFC has indicated its willingness to cooperate with foreign tax authorities under the US-HK TIEA.

For a Hong Kong-based US taxpayer who trades cryptocurrencies on a local platform like OSL or HashKey, the IRS now has a direct pathway to obtain transaction data. The reporting threshold for digital assets under Form 8938 is the same as for other specified foreign financial assets: USD 200,000 for unmarried filers living abroad. However, the IRS’s 2025 audit program is using a “low-threshold” trigger for digital assets, meaning any taxpayer who reports digital asset holdings on their Form 8938 is at increased risk of a full audit. The IRS has also issued Notice 2024-57, clarifying that staking rewards, airdrops, and hard forks are taxable upon receipt, not upon sale.

The Foreign Trust Reporting Requirement

Hong Kong is a common law jurisdiction with a well-established trust industry, and many US taxpayers use Hong Kong trusts for estate planning or asset protection. However, the reporting requirements under IRC §§ 6048 and 6677 are among the most complex in the US tax code. Any US person who is a grantor, beneficiary, or owner of a foreign trust must file Form 3520 (Annual Return to Report Transactions with Foreign Trusts) and Form 3520-A (Annual Information Return of Foreign Trust with a US Owner).

The IRS’s 2025 enforcement plan specifically targets “offshore trust structures used to conceal beneficial ownership.” The penalty for failing to file Form 3520 is 35% of the gross value of any property transferred to the trust, and for Form 3520-A, the penalty is 5% of the gross value of the trust’s assets held by the US owner. For a Hong Kong trust holding a BVI company that owns a Hong Kong apartment, the aggregate penalty exposure can be substantial. The IRS has also issued a practice unit (LB&I Practice Unit 2024-03) detailing how to identify undisclosed foreign trusts from bank account statements and wire transfer records, making this a high-priority audit area for 2025.

Actionable Takeaways for Hong Kong-Based US Taxpayers

1. File the FBAR and Form 8938 by the statutory deadlines: The FBAR (FinCEN Form 114) must be filed electronically by April 15, 2025, with an automatic extension to October 15, 2025. Form 8938 must be filed with your 2024 tax return (due April 15, 2025, with an extension to October 15, 2025). Late or incomplete filings carry significant penalties.

2. Review all Hong Kong investment holdings for PFIC status: Any mutual fund, unit trust, or ETF that is not US-registered is likely a PFIC. Consider making a QEF election or, if the fund is not QEF-compliant, selling the holding before the end of the tax year to avoid the excess distribution regime.

3. Document your closer connection to Hong Kong if claiming the FEIE: Maintain a file with your Hong Kong tax returns, driver’s license, utility bills, lease agreement, and employer contract. The IRS is scrutinising remote workers who claim the FEIE while maintaining a US residence.

4. Disclose all foreign trusts and digital asset holdings: If you are a grantor, beneficiary, or owner of a Hong Kong trust, file Form 3520 and Form 3520-A. For digital assets, ensure that all transactions, including staking rewards and airdrops, are reported on your Form 8938 and your 1040.

5. Consult a US-licensed CPA with Hong Kong cross-border expertise before making any changes to your residency or asset structure: The IRS’s 2025 enforcement priorities are specific and data-driven. A qualified advisor can help you navigate the complex interplay between Hong Kong’s territorial tax system and the US’s worldwide taxation regime.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.