Especially in recent years, 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 nearly $200 billion in tax revenue a year as a result of avoidance, it’s easy to understand why. While hefty penalties are one potential fate, different IRS amnesty programs act as an incentive to help taxpayers get back on track with their compliance. In this post, we’ll outline the different amnesty programs available.
Why Disclosing is a Good Idea
Before diving into the IRS amnesty programs and what each offers, it’s helpful to first understand why it’s in your best interests to proactively disclose your foreign assets to the IRS.
For one, there are the penalties. The nominal amount of the penalty varies depending on the delinquency and taxable amounts in question, but it’s safe to assume that an initial penalty starts at $10,000 and could be even higher. A willful failure to file a 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.”
In order to take advantage of any of the IRS amnesty programs, however, you need to proactively seek it. The IRS will not grant you any amnesty if they make first contact with you about your delinquency, and you will more likely be subject to an audit instead.
It’s important here to dispel a common misconception that these IRS amnesty programs are actually 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 – and certainly the easiest – is simply 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.
The Streamlined Filing Compliance Procedure
For taxpayers who have fallen way behind on their returns and disclosures, the Streamlined Filing program is an often-used method to get back on track. With Streamlined Filing, you file 3 years of back tax returns and 6 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 of a 5% penalty that those living stateside would need to also cover.
The key here is that you can properly demonstrate that you did not willfully shirk 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 in your individual situation.
The Offshore Voluntary Disclosure Program (OVDP)
While the other two tax amnesty programs offer leniency to those who inadvertently wound up falling behind, there is even a program for those who knowingly did as well!
The OVDP is the final reprieve for delinquent taxpayers before exorbitant penalties and potential criminal charges are brought forth. The requirements are fairly strict: you will need to file tax returns for the previous eight years, FBARs for the previous six and pay a penalty of 27.5% of the peak value of your offshore assets at that time.
Like with Streamlined Filing, this is a very delicate process to navigate particularly given the stakes, so it’s best that you consult a professional for help.
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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!