If you find yourself in need of filing a late US expat tax return and you know you need to get caught up, chances are, you’ve heard about the IRS’ steep penalties (and even criminal prosecution!) for failure to file. While this can be a very stressful situation, fortunately there is an amnesty program that may be able to help you get caught up – and with smaller penalties involved.
Getting Caught Up on Delinquent Taxes
As a US citizen, you are required to file a US expat tax return – regardless where you may be living – if your income exceeds the US filing thresholds. Generally, the thresholds are so low that most working expats will need to file a tax return. In the past, the IRS didn’t necessarily enforce the filing requirement for US expats very strongly, so it’s understandable why some Americans abroad may have either not been aware of the requirement or they didn’t think it was critical to comply.
In more recent years, however, the IRS has been very serious about uncovering tax cheats who may be hiding money abroad. In fact, they aren’t only paying attention to the tax returns of Americans abroad, they are also forcing compliance with steep penalties, possible criminal charges – and even by revoking passports.
There are officially two IRS amnesty programs in place to help US expats get caught up by filing late taxes – one is geared toward those who were unaware of their US filing requirement and the other is in place to help those who knew of their filing obligation but failed to do so. In this article, we’ll explain the latter option for getting caught up on your late US expat tax return.
How the Offshore Voluntary Disclosure Program Works
The purpose of the Offshore Voluntary Disclosure Program (OVDP) is to encourage deliberate delinquents to come clean with the IRS and avoid criminal penalties – and possibly avoid many civil penalties as well.
In order to utilize the OVDP to get caught up, taxpayers will need to file the past eight years of taxes, including all Foreign Bank Account Report (FBAR) Forms as well. A signed letter explaining the situation and why he or she failed to file must be included. Also required is a check to the US Treasury Department for any taxes owed, including interest, penalties, etc. You’ll calculate this using a computation worksheet that shows what penalties you owe based on aggregate highest account balances of your offshore accounts.
The OVDP and Penalties
If you’re using the OVDP, you’ll be required to pay a penalty based on the amount of money you’ve been hiding offshore. While this certainly will cost you a pretty penny, it’s much better than the alternative of getting caught by the IRS and facing criminal penalties.
Here’s a breakdown of penalties for filing your late US expat tax return under the OVDP. You’ll be required to pay:
- 5% of the highest balance of your account
- A 50% offshore penalty if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation (typically, Swiss banks)
Clearly, the penalties can still be staggering, financially speaking. However, the ability to avoid criminal prosecution should be seen as an advantage of using the OVDP to get caught up on delinquent taxes. With the intricacies of using this program to get caught up, it’s recommended to consult an expat tax professional to ensure this is the right option for you to use. For more information about getting caught up on your late US expat tax return, download our guide for US taxes.
Need Help Getting Caught Up on Your Late US Expat Tax Return?
Our team of dedicated CPAs and IRS Enrolled Agents are here for you. With the expertise you’re looking for in a tax professional, we can help make the process of getting caught up a more hassle-free experience. Get started with us today!