Time remains for expats to get right with the IRS
More expats than ever are learning they need to file U.S. tax returns. At the same time, the IRS is receiving more and more information about U.S. account holders through the Foreign Account Tax Compliance Act (FATCA) reporting procedures. For non-filers, the chances of avoiding detection and related penalties are shrinking. However, there is still time to get right with the IRS with minimal penalty exposure by participating in one of several disclosure programs currently being offered.
FATCA & IRS Voluntary Compliance Efforts
As of 2014, the State Department estimated that approximately 7.6 million U.S. citizens lived abroad. During that year, the IRS sent more than 669,000 notices and more than 186,000 tax letters overseas. Despite these notices, the international tax gap – the difference between the amount taxpayers should pay and the amount they actually do pay – is substantial.
Congress has long been concerned that U.S. taxpayers are not fully disclosing the extent of financial assets held abroad. Prior to the implementation of FATCA, underreporting income or non-filing was difficult for the IRS to detect because no information reporting documents (e.g. Forms W-2, 1099) existed for offshore income. In 2010, Congress passed FATCA to address the lack of global information transparency.
Under FATCA and a number of related inter-governmental agreements between the US and over 100 foreign jurisdictions, foreign financial institutions (FFIs) are required to provide automatic information to the IRS regarding U.S. account holders. FFIs that do not register with the IRS and agree to report certain information about their U.S. accounts face a 30 percent withholding tax on certain U.S. sourced payments made to them. These information reporting requirements apply not only to banks, but also other financial institutions such as investment entities, brokers, mutual funds and certain insurance companies. So, while a bank may not provide a Form 1099 to report interest income, it’s likely that it may be required to report the identity and information of a taxpayer’s assets to the IRS. This additional information has dramatically lowered the cost to pursue non-filers living abroad.
Since the passage and subsequent implementation of FATCA, the IRS has focused on increasing international tax compliance. As part of this effort, the IRS has created several disclosure programs that allow expats who have overlooked their filing requirements to report their income and assets voluntarily with lesser penalties being assessed. According to the IRS, over 100,000 taxpayers have used voluntary disclosure programs to resolve their tax obligations and report undeclared assets since 2009. As of 2016, these programs had generated more than $10 billion in combined taxes, interest and penalties. Moving forward, IRS Commissioner John Koskinen has indicated the IRS will continue its efforts to track down non-filers living overseas. These disclosure programs continue to be available for non-filers seeking to come into compliance, but it is not clear how long they will last.
Non-Filer Penalties & the Streamlined Offshore Disclosure Program
Penalties for failing to report offshore income and assets can be substantial. As with onshore income, penalties can be assessed on unpaid taxes due on offshore income. In addition to these penalties, expats often face penalties relating to a number of information-reporting requirements for offshore assets (e.g. non-U.S. bank, financial or retirement accounts, offshore trusts and offshore businesses). Unfortunately, potential penalties relating to these offshore assets often exceed $10,000 per form and do not depend on whether any tax was actually avoided. Moreover, until these delinquent forms are filed, the statute of limitations on penalty assessments does not begin to run.
While many non-filers have substantial penalty exposure relating to their delinquent returns, the IRS is currently offering several disclosure programs for expats that eliminate or reduce these penalties. One such program, the Streamlined Foreign Offshore Procedures (“Streamlined Procedures”), helps expats who live outside of the U.S. and who have overlooked their filing requirement file back tax returns and information disclosures without being subject to failure-to-file or failure-to-pay penalties. Participants in this program would need to file up to three years of delinquent tax returns, as many as six years of delinquent FBARs, and a narrative statement describing their circumstances. The Streamlined Procedures remain an attractive option for expats but as FATCA reporting procedures continue to provide more information to the IRS, it’s not clear how much longer the program will remain in effect.
Expats who are ready to get started on their late tax returns and FBARs can get help from H&R Block Expat Tax Services.
Learn what to do if you received one of the more than 4 million CP14 balance due notices the IRS is sending this summer.
Penalties for not filing a tax return or not paying taxes are well-known, but there are many more tax penalties. Knowing how to avoid them when possible, and minimize them when unavoidable, is key.