Now more than ever, the IRS has made it a priority to improve compliance with rules around the reporting of foreign assets and income. Since it’s estimated that the government misses out on billions of dollars in tax revenue a year as a result of avoidance, it’s easy to understand why. While hefty penalties or passport revocation are potential fates, different IRS amnesty programs act as incentives to help taxpayers get back on track with their compliance. In this post, we’ll outline the various amnesty programs available.
Why Disclosing Is a Good Idea
Before diving into the IRS amnesty programs and what each offers, it’s helpful first to understand why it’s in your best interests to proactively disclose your foreign assets to the IRS.
For one, there are penalties. The amount of the penalty varies depending on the delinquency and taxable amounts in question, but an initial penalty for a non-willful FBAR violation starts at $10,000 and could be even higher. A willful failure to file an FBAR form, for example, can cost you the greater amount between $100,000 or 50% of the foreign account balance.
IRS Amnesty Programs > Penalties
Thankfully, the IRS offers “carrots” in the form of forgiving amnesty programs to complement their penalty “stick.”
To take advantage of any of the IRS amnesty programs, however, you need to seek them proactively. The IRS will not grant you any amnesty if they make the first contact with you about your delinquency, and you will more likely be subject to an audit instead.
It’s important to dispel a common misconception that these IRS amnesty programs are an attempt for the agency to catch you in the act of non-compliance. Instead, the government is more interested in proper disclosure than in punishing non-filers, so you should have little to worry about.
Without further ado, here are the different IRS amnesty programs classified from easiest – and with the least penalty – to most difficult and penalty-prone.
The first option is to file the late FBAR form or return as is! If you provide a reasonable cause for the delay in your submission and don’t have any unpaid tax liability, the IRS will waive any penalties associated with late filing. The key here is that you have no unpaid tax liabilities outstanding, which itself can be difficult to ascertain. If you’re sure that you don’t owe anything, however, then this type of tax amnesty is by far the quickest and easiest way to go. If you are more than one year late, however, a quiet disclosure is going to do more harm than good.
The Streamlined Filing Compliance Procedures
For taxpayers who have fallen further behind on their returns and disclosures, the Streamlined Filing Procedures is an often-used method to get back on track. With Streamlined Filing, you file three years of back tax returns and six years of FBAR forms (including any previously reported foreign-owned income or assets). As Americans living abroad, expats need to pay their back taxes owed plus interest, but they’re spared a 5% penalty that those living stateside would also need to cover.
The key here is to adequately demonstrate that you did not willfully evade your responsibility regarding your returns and your FBARs. Unfortunately, willful can be a highly subjective determination, so it’s best to work with a professional depending on your situation. Remember: the IRS only offers amnesty programs for a limited amount of time, so using this program while available (i.e., as soon as possible!) is crucial.
Relief Procedures for Certain Former Citizens
This is a new amnesty program created by the IRS to incentivize expats who renounced their citizenship (or who may in the future) to become tax compliant without garnering the label of “covered expatriate.” When you use these procedures, the IRS waives your expatriation tax, which has historically been so expensive that it can deter expats from renouncing. Keep in mind that this program only applies to certain subsections of expats:
- Those who expatriated after March 18, 2010
- Those who have a net worth of less than $2 million at the time of expatriation and at the time of making their submission
- Those who have an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years
- Those who have no prior tax-filing history and were non-willful about failing to meet the existing requirements
The Updated Voluntary Disclosure Program
In 2018, the IRS terminated the Offshore Voluntary Disclosure Program, an amnesty program that protected willfully delinquent taxpayers from prosecution. The program was discontinued because the IRS determined that the OVDP had been around long enough for taxpayers to gain awareness and utilize it. The IRS replaced the OVDP with a less lenient Updated Voluntary Disclosure Program. This program has higher civil penalties attached to it, but those who choose to use it are allowed to go through the appeals process if they deem it necessary.
Ready to Get Caught Up On Your Late US Taxes?
Our expat-expert CPAs and IRS Enrolled Agents have particular expertise in helping US expats get caught up on delinquent taxes using the Streamlined Filing Procedures. Get started with us today and become compliant on your US expat tax obligation!
Editor’s Note: This was originally published in 2017 and updated on December 2, 2019.