Each option has different pros and cons and it is important to understand the repercussions of how you choose to inform the IRS of your transgression.
Jeffrey S. Freeman, J.D., LL.M
You may have received a letter from your foreign bank requiring you to provide tax disclosure documentation that you never filed. Perhaps the recent proceedings with Swiss bank accounts and the upcoming FATCA (Foreign Account Tax Compliance Act) effective date of July 1, 2014 caught your attention and made you ponder your own predicament. If you have foreign accounts that you failed to properly report to the IRS, now is the time to come clean and remedy your mistake. You have several options, each with a different benefit or consequence, which your tax counsel can review in greater detail with you.
Often the best option is to enroll in the IRS’ Offshore Voluntary Disclosure Program (OVDP). This amnesty initiative is currently being offered by the IRS and may be the last opportunity for many U.S. taxpayers to enter into the program due to the implementation of FATCA. The influx of foreign account information that the IRS will receive under FATCA may eliminate the OVDP as a viable option for many U.S. taxpayers.
The OVDP encourages U.S. taxpayers with undisclosed foreign bank accounts and unreported income to come into compliance with U.S. tax laws and avoid criminal prosecution. If accepted into the OVDP, taxpayers must file amended tax returns for an eight year period and pay all back taxes, interest, and an accuracy related penalty of 20 percent of the taxes due, and a civil penalty equal to 27.5 percent of the highest aggregate value of the U.S. taxpayer’s foreign bank accounts during the eight-year period (subject to certain exceptions).
U.S. taxpayers who live overseas (including those with dual citizenship) and have not filed U.S. returns may qualify for the IRS’ streamlined non-resident compliance procedure. This procedure requires filing delinquent tax returns for the past three years and delinquent FBARs for the past six years. Submissions are reviewed by the IRS, but the intensity of the review varies according to the level of compliance risk presented by the submission. Those with low compliance risk will be expedited and generally will not receive penalties or follow-up from the IRS. Those submissions presenting a higher risk are not eligible for the streamlined procedure and will be subject to a more thorough review and possibly a full examination extending beyond the three years of tax returns provided. As a result of this review the IRS may impose tax, interest and penalties.
Quiet disclosures – Not a good option
A quiet disclosure is when a taxpayer tries to start disclosing foreign income without addressing the prior years of not reporting on the account. A U.S. taxpayer reports previously-excluded foreign income on a tax return and/or reports a previously undisclosed foreign bank account on an FBAR on a going-forward basis following normal reporting procedures, without attempting to address noncompliance in previous tax years. Alternatively, a U.S. taxpayer may attempt to address past noncompliance by filing amended tax returns and/or delinquent FBARs for past tax years following normal reporting procedures. Quiet disclosures can trigger IRS audits, they do not provide amnesty from criminal prosecution, and the civil penalties imposed on a taxpayer who is audited can be substantially greater than the penalties that would have been assessed if the taxpayer entered into one of the voluntary disclosure alternatives.
About Freeman Tax Law
Freeman Tax Law is equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional staff have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA) and Offshore Voluntary Disclosure Program (OVDP). In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.
Freeman Tax Law