In this final installment of our international tax compliance series, we discuss several options available to a taxpayer who discovers that required international tax forms weren’t filed. The good news is that huge penalties are not necessarily automatic. However, disclosure strategies to avoid penalties are highly fact specific and will depend on the circumstances of the taxpayer.
Offshore Voluntary Disclosure Program
The current Offshore Voluntary Disclosure Program (OVDP) evolved from a “limited period” program started in 2009. The IRS saw a strong interest in the program and extended and revised it several times. The current voluntary disclosure period includes the taxpayer’s most recent eight years and requires the taxpayer to pay penalties, including an “offshore penalty” of generally 27.5%. The program was designed for taxpayers who are at risk of substantial civil penalties and/or potential criminal liability due to willful failure to disclose assets and pay all tax due relating to those assets.
Streamlined Filing Compliance Procedure
In 2012, the IRS introduced streamlined procedures intended to make voluntary disclosure easier. The streamlined procedure has evolved and differs significantly from the OVDP in two primary areas. First, the taxpayer’s failure to report foreign financial assets and pay all tax due with respect to those assets must not have been willful. Second, the streamlined procedure applies to individual taxpayers and their estates only. The filing requirements are different for individuals residing in the US and for those residing outside the US. The streamlined procedure is not available if the IRS has initiated a civil examination of the taxpayer’s returns.
With a streamlined disclosure, the taxpayer agrees to amend the three most recent tax returns for which the due date has passed and to file foreign bank account reports (FBARs) for the most recent six years. The taxpayer also must certify that the failure to disclose assets and report the income associated with those assets was nonwillful. If the taxpayer resides in the US, all tax due, plus interest and a penalty of 5% of the highest aggregate balance or value of the undisclosed foreign assets during the reporting years, must be paid. If the taxpayer resides outside the US, the IRS waives the 5% penalty.
Delinquent FBAR submission procedure
The procedures are simpler still in a situation where a taxpayer has reported all income associated with foreign accounts but has failed to disclose the accounts on Form 114 (FBAR). As long as the taxpayer is not under IRS examination and has not been contacted by the IRS about the delinquent FBARs, the taxpayer can file delinquent Forms 114 without penalty. The forms must be prepared under IRS guidelines, must include a statement explaining why the forms are late, and must be electronically filed.
Delinquent international information return submission procedure
Similar to the delinquent FBAR procedure, taxpayers who (1) have no unreported income, but have failed to file one or more international information returns, (2) have reasonable cause for not filing the returns, and (3) have not been contacted by the IRS, can file delinquent returns without penalty. Specific filing procedures must be followed, and a reasonable cause statement must be included with the filing.
The IRS provides a number of options for taxpayers to catch up with their international disclosure obligations. Depending on the specific facts, these procedures can be useful in minimizing or even eliminating penalty risk. If you are concerned about delinquent filings, please talk to your tax advisor. We would be happy to discuss the options available to you.