The IRS has announced that it will close the 2014 OVDP effective September 28, 2018. For taxpayers that have failed to disclose foreign financial assets and income, this limits avenues to coming into compliant with the U.S. tax requirements.
Clients with foreign holdings, financial assets and business holdings are often unaware of the stringent disclosure requirements in the US and it is very common for taxpayers to be entering into the various programs with the IRS to properly disclose financial assets.
Under certain circumstances and where a taxpayer was completely unaware of their disclosure and reporting requirements, this leaves the following options to get into compliance with IRS requirements:
c. Filing under the streamlined procedures; or
d. filing of delinquent FBARs and amended tax returns.
Streamlined procedures
The streamlined procedures include the streamlined domestic offshore procedures(SDOP) and streamlined foreign offshore procedures(SFOP). The streamlined domestic offshore procedure is available where a U.S. taxpayer does not meet the non-residency requirement contained in section 911 of the Internal Revenue Code (IRC) and is designed for U.S. taxpayers primarily residing in the U.S. The streamlined foreign offshore procedure is available where a U.S. taxpayer meets the non-residency requirement contained in section 911 of the IRC and is designed for U.S. taxpayers not living in the U.S.
The streamlined procedures require amending the last 3 years of tax returns to report undisclosed income from foreign assets, and filing FBAR disclosures for the last 6 years. The program also requires that a taxpayer files a statement to the satisfaction of the IRS that their noncompliance was non-willful. This is of particular importance as the taxpayer will do so under the penalty of perjury which can have criminal penalties. Making a fraudulent statement can carry substantial penalties and carry criminal charges.
In addition to payment of back-taxes, a miscellaneous offshore penalty of 5% is due under the SDOP. There is no miscellaneous penalty under the SFOP. The 5% penalty is on the highest aggregate balance of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the 3-year tax return period and the 6-year FBAR period. For this purpose, the highest aggregate balance is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the covered years and selecting the highest aggregate balance from among those years.
As you can see, the streamlined procedures were designed for U.S. taxpayers that have non-willfully failed to disclose their foreign financial assets and foreign income.
Delinquent and amended filings
In certain circumstances, it can make more sense to file amended tax returns and delinquent FBARs outside of the streamlined procedures. This will generally be the case where you have foreign financial accounts that have not been disclosed, and where there is no additional income and therefore no further US tax liability.
In our experience, this may be the case where you have failed to disclose your superannuation on an FBAR, and you may need to include rental income from a foreign property in your U.S. tax return, however the property is generating losses.
Taxpayers should file delinquent FBARs if they do not need to use either the OVDP or the streamlined procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
- have not filed an FBAR,
- are not under a civil examination or a criminal investigation by the IRS, and
- have not already been contacted by the IRS about the delinquent FBARs
The IRS will not impose a penalty for the failure to file the delinquent FBARs if you have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
The key requirement of filing delinquent FBARs is including a statement explaining why you are filing the FBARs late and that your failure to report is non-wilful. Willfulness has been defined by courts as “an intentional violation of a known legal duty”.
The IRS recommends that amended returns should be filed where a taxpayer has claimed the wrong filing status and has to change income, deductions or credits. This method is advisable where no further tax is due as you are able to disclose the correct income and information without penalties, tax and interest. To the extent further tax should be due upon amending the prior tax returns due to undisclosed income, you may not be able to file amended returns without penalties in which case the streamline process is advisable.