How To Report Your Hidden Offshore Holdings To The IRS
Offshore tax methods have been used for decades by many wealthy Americans to conceal income and assets to reduce their tax burden. However, around 2007, the financial collapse increased concerns regarding federal budget shortfalls. Congress began to find ways to close the tax revenue gap. One thing Congress did was to drastically overhaul the American, and in turn, the worldwide banking system. Foreign account and asset disclosure laws were either enacted or strengthened. These laws require Americans to disclose foreign assets that exceed certain thresholds on an annual basis.
The extremely low limits that were set by Congress, however, obligated millions of Americans to file FBAR or FATCA. This included U.S. taxpayers who are doing well but are not considered wealthy. Those individuals most likely required to disclose foreign accounts include:
- Business travelers keeping foreign accounts for convenience
- Americans with family members in foreign countries that they send remittances to
- Investors seeking to avoid domestic volatility through a diverse portfolio
- Those who have recently immigrated to the U.S. but maintained foreign bank accounts
Failure to disclose this information carries harsh penalties. While never intending to break the law, many individuals failed to disclose necessary information due to a lack of knowledge or misunderstanding regarding what to disclose. Taxpayers without willfulness concerns can, however, achieve compliance while avoiding many offshore penalties imposed under standard OVDP through streamline disclosure.
What Are the Benefits of Streamlined Disclosure for U.S. Residents?
U.S. taxpayers living in the U.S., such as, U.S. citizens, legal permanent residents, resident aliens and others meeting the requirements of the substantial presence test can benefit from the Domestic Streamlined Disclosure. Through the Streamlined program, offshore penalties that are normally 27.5 or 50.0 percent can be reduced to 5 percent of the highest aggregate balance. These reductions are not only limited to the offshore penalty though. The above taxpayers may also avoid penalties concerning the following:
- Accuracy of previous findings
- Information returns
Although new penalties are not imposed, existing penalties will be undisturbed. Additional benefits related to the Streamlined program are relative to the amount of new or amended tax and FBAR filings required to be made. While OVDP requires eight years of FBAR and tax returns, the Streamlined program only requires submission of six years of FBAR and three years of income tax returns.
Who Is Eligible to Correct Offshore Non-Compliance with Domestic Streamlined Procedures?
Those considered U.S. residents for tax purposes may be eligible to use the Domestic Streamlined Procedures. This typically requires the individual to have an abode in the U.S. Certain individuals may qualify if they pass the substantial presence test. Individuals may also be required to have filed a tax return for each of the previous three years. Another requirement is that the taxpayer must have failed to report a portion of their gross income or did not file required FBARs. A final requirement is that the behavior that led to the failure to file was non-willful. Actions not taken voluntarily or intentionally to avoid a legal duty are considered non-willful.
The final requirement listed above is especially important. Those using Streamline disclosure must certify under penalty of perjury that their non-compliance resulted from a good-faith misunderstanding of the law. Due to the requirement of this certification, this filing should be reviewed by an experienced tax lawyer. Filers who attempt to use Streamlined procedures when their conduct was willful will have perjured themselves and compounded their potential liability. They may have also disclosed information leading to potential criminal tax prosecution without protection from criminal referral that comes with OVDP. Should the taxpayer identify an underlying criminal concern due to willfulness or other reasons, attorney-client privilege can maintain confidentiality of disclosures. For this reason, the disclosure should only be reviewed by an attorney.
Separated Spouses Previously Limited to OVDP Due to Joint Return Signature Problems Can Now Use Streamlined Procedures
Previously, OVDP was the only program available for spouses who had previously filed a joint tax return but were unable to obtain the signature of their former partner. But it was closed in September 2018. This is due to the requirement of signatures of both parties who signed the original tax return to amend joint tax returns. Taxpayers could overcome this requirement through a closing agreement for OVPD, but there were not any similar procedures available through Streamlined Disclosures. This forced these taxpayers into OVDP where a 27.5 or 50.0 percent offshore tax penalty was applied. Fortunately, recent guidance has changed this harsh result that is outside the taxpayer’s control.
Separated taxpayers living in the U.S. can seek guidance from FAQ #14 of the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United Sates Frequently Asked Questions and Answers regarding the completion of a Streamlined filing with one signature. This allows individual taxpayers to submit a joint amended tax return with only one signature if certain conditions are met. These procedures require the taxpayer to provide a written narrative stating the conditions under which they were unable to secure the signature of their former or separated spouse. The taxpayer should also reference “SDO FAQ 14” in red ink where the former or separated souse would sign. Even though routine processing will result in a request for the missing signature, the taxpayer should still once again reference “SDO FAQ 14”.
What Steps Must I Take to File for Streamlined Disclosure if I Live in the U.S.?
For the best result, Streamlined filings should be handled jointly with the taxpayer and an experienced international tax lawyer. However, hiring a tax lawyer does not exempt the taxpayer from understanding the Streamlined disclosure process. We will discuss the general steps required in a Streamlined disclosure filing.
The first step is to collect the three most recently filed income tax returns. Domestic procedures require these returns to be updated with accurate and comprehensive amended returns using only IRS Form 1040X. In addition, these amended returns are to be accompanied by required informational returns even if the return would normally be filed separately. Each of these amended returns needs to be marked that they are being submitted under the Streamlined Domestic Offshore procedures. The taxpayer is also required to submit all tax including offshore penalties due and owed.
In addition, the taxpayer must certify that they were not willful in their noncompliance. Taxpayers need to be forthcoming regarding their behaviors and actions since this certification is under the penalty of perjury. Additional items the taxpayer needs to certify under penalty of perjury are:
- All required and delinquent FBARs are submitted
- The offshore penalty is calculated correctly
- The individual is eligible for Streamlined Domestic Offshore Procedures
The IRS will process the filings in the standard course without any benefits of the Streamlined process if this statement is not attached to all tax and information returns.
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