With over 7.6 million Americans living abroad and only about half actually filing their US expat taxes each year, there are millions of expats who are behind on their US tax obligations. In past years the IRS wasn’t cracking down on this, but things have changed. Expats have options on getting caught up, including two IRS amnesty programs or the ‘quiet disclosure’–which is simply filing back returns without using one of these IRS programs and hoping the IRS doesn’t really notice. This is highly discouraged by the IRS, which is why they created these amnesty programs. However, this case study highlights a customer who chose this option, as it was the best fit for her.
Caroline went to study in the UK and loved the experience so much that she decided to stay after graduating college. She has now been for about 10 years. While she was in school, she didn’t have any income and her parents were claiming her as a dependent on their US tax returns. When she decided to stay after college, however, she went under the UK tax system and didn’t think about filing a return in the US. She got a job in the UK, eventually married and had a child. Caroline never gave US taxes a thought until she went to renew her passport and found out she was 10 years delinquent!
She was clearly shocked and certainly did not want to go back and file 10 years of returns in order get current. However, she was considering obtaining US citizenship for her son and was concerned that her delinquent taxes could create an issue.
Consulting with Greenback
Caroline knew this wasn’t something she should tackle on her own. She contacted Greenback and spoke at length with an accountant who completely understood her situation–it is certainly more common than one would think! After fully discussing her situation, her accountant advised her that she would need to file an FBAR (Foreign Bank Account Report) for the last two years and three years of delinquent returns. Her options were to file under the Streamlined Procedures, the Offshore Voluntary Disclosure Program (OVDP) or via Quiet Disclosure. Her accountant encouraged her to file under the Streamlined Procedures, as Quiet Disclosures are frowned upon by the IRS.
Caroline’s main concern was that if she filed under the Streamlined Procedures, there was a greater risk of the IRS flagging those returns for more thorough investigation. Most people filing under the Streamlined Procedures are completely compliant when they complete the program, however, by filing under that program, the taxpayer is allowing the IRS to take an extra look at the returns. This may also lead to them examining her situation and realizing she should have been filing returns for 10 years.
The Offshore Voluntary Disclosure program did not make sense for her because she clearly wasn’t hiding assets in offshore accounts in an effort to deceive the IRS.
In this case, she felt the best choice was to file a Quiet Disclosure because she didn’t want the IRS scrutinizing her other returns, which is more likely to happen under the two amnesty programs.
First, Caroline prepared and filed her FBARs on her own, ensuring she submitted it with an explanation letter so it was clear that her lack of filing was non-willful. The rest of the process was relatively simple. Greenback prepared each return using the documentation Caroline provided, which is the same process as filing current year returns. They mailed the returns to the IRS, as e-filing is not available for late returns.
Caroline is caught up on her US expat tax returns after filing via Quiet Disclosure. The returns were processed normally and to this day, Greenback does not know if the IRS ever took additional action. But to the accountant’s knowledge, Caroline has not been contacted by the IRS about the ‘improper’ filing of her delinquent returns.
It’s hard to predict the likelihood of the IRS contacting someone after filing this way. The IRS, in general, will always contact you if you owe taxes to them. Additionally, everyone has the possibility of being examined or audited. That being said, there is general time limit of 7 years the IRS can contact you regarding a return, and the statute of limitations on collecting money owed to them is 10 years. Typically, the taxpayer hears from the IRS within 3 years if they are to be contacted.
It’s important to note that when Caroline filed this way, the Streamlined Procedures were more restrictive than they are today, and had the possibility of penalties. As of July 1, 2014, the IRS has waived all late filing and FBAR penalties, and has lifted most of the restrictions that were originally in place. This was to make it even easier for expats to get caught up, without the fear of penalties or criminal prosecution. These changes make a Quiet Disclosure an unnecessary risk. While it does alert the IRS to the fact that you haven’t been filing and thus makes it more likely your returns will be examined, if you are accurate and honest on your return, this shouldn’t be a problem.
The important thing to do after filing your delinquent returns is to continue filing every year. Once you start filing your returns with the IRS, they know you exist and sporadic filing will no longer be accepted.
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