IRS Announces Changes to International Tax Amnesty Programs
Shannon Williams, JD of H&R Block Expat Tax Services looks at changes to programs for US Taxpayers who are out of compliance with US Tax Returns
The IRS currently has multiple programs for taxpayers who are out of compliance with their US tax and financial account reporting obligations. However, as indicated with a recent announcement these programs will not be around forever, so you will want to make sure you get up to date on your US tax obligations while you can.
What is IRS non-compliance and how can it affect me?
Non-compliance is the failure to file tax returns and other required tax forms. It also includes the failure to report foreign accounts or assets abroad. If the filing requirement is met, US citizens and green card holders are required to file US tax returns regardless of where they are living and working in the world. Furthermore, the IRS requires taxpayers to file an FBAR report for each year your foreign accounts cumulatively surpass $10,000 USD. If you don’t comply with your tax obligations the IRS can assess tax penalties and sanctions on your foreign financial accounts, and if they can establish that your failure was intentional those penalties can be very steep.
For example, a taxpayer who has not filed a tax return would be required to pay not only taxes, but also interest, and failure to pay and file penalties – both of which could top out at over 20% of the amount owed. The failure to file a FBAR can be as high as the greater of $100,000 or 50% of the total balance of each financial account in violation. A more common penalty for non-willfulness is a $10,000 per violation assessment.
What’s changed with the Offshore Voluntary Disclosure Program?
The Offshore Voluntary Disclosure Program (OVDP) was designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due on those assets. Through OVDP, taxpayers could potentially receive protection from criminal liability and a resolution for their civil tax and penalties. The IRS has decided to end the program effective September 28, 2018.
The IRS advises that any US persons that would need the protection of the OVDP program apply for the program before the program’s end date. The IRS believes that the increased awareness of US taxpayers and their offshore tax reporting obligations over many years warrants the cessation of the temporary compliance program.
What are the Streamlined Filing Compliance Procedures?
The Streamlined Filing Compliance Procedure is a tax amnesty program that allows for taxpayers to get back into IRS compliance through a penalty abatement program. To qualify, the taxpayer must be able to certify that their failure to report all income, pay all taxes and submit all the required forms was due to nonwillful conduct. While the standard is not straightforward, nonwillful conduct can be conduct due to negligence, inadvertence, mistake, or a good faith misunderstanding of the law.
Through this program, a taxpayer must file their three most recent years of delinquent tax returns and six most recent years of delinquent FBARs. If any taxes are due the taxpayer is only required to pay interest on those amounts. There is no failure to pay, failure to file, FBAR or other informational reporting penalties. However, there is a 5% miscellaneous offshore penalty for taxpayers living in the US who file under this procedure.
The IRS has given no guidance on when the Streamlined Program will end. It could end at any time just as they have done with the OVDP program.
What are my options now?
If you believe you would need the OVDP program’s protection, it would be advisable to seek advice and representation immediately to get back into IRS compliance while the program is still being offered. Once OVDP is gone, the protections it offers are gone as well.
If you need to get up to date on your filings and meet the nonwillful criteria discussed above you should immediately seek to file through the Streamlined Program while it is still around. Just as with the OVDP, the IRS could bid farewell to this program at any time. There is no guidance as to what the amnesty options would be should both programs end.
H&R Block Expat Tax Services is a specialized team of tax attorneys, CPAs and enrolled agents whose singular focus is preparing taxes for Americans living abroad. Remember that U.S. tax reporting for expats is complex and specific to each person’s situation.