IRS Tax Amnesty After Trump Reform – Separating Fact From Fiction
The Tax Cuts and Jobs Act (“TCJA”) has undoubtedly brought many significant changes to the U.S. tax system – changes that will be felt by many U.S. expats starting with this year’s filing season. Because the TCJA has changed the Tax Code in so many areas, it’s important to understand how the new laws will affect U.S. expats living abroad
In this blog, we tackle this issue from the perspective of the expat looking for a viable solution after failing to file past tax returns and/or FBARs. We separate fact from fiction with respect to the IRS’s sanctioned tax amnesty programs moving forward.
Fact or Fiction – Expats are no longer subject to citizenship-based taxation under the reform.
When President Trump initially laid out his tax reform plan during his campaign for the U.S. presidency, he very broadly suggested that he would push for a shift to a system of territorial or residence-based taxation.
As enacted, the TCJA does in fact change the scope of U.S. taxation, but only for U.S. corporations – shifting to what can be described as a quasi-territorial system. However, it does not affect the overall tax and reporting obligations of U.S. individuals living abroad.
We do note that at the end of 2018, an additional bill was brought to the House of Representatives (The Tax Fairness For Americans Abroad Act of 2018 (H.R. 7358)), which would essentially end citizenship-based taxation for individuals as well, but the bill has not yet been debated, and is generally thought of having a slim chance of making it all the way to enactment.
For delinquent U.S. citizens living abroad, the IRS amnesty programs remain an essential path to coming back into compliance with the IRS, which still requires you to file even though you may be living and working abroad.
Fact or Fiction – Tax amnesty is rarely granted.
In recent years, the IRS has made it clear to taxpayers that it is more interested in disclosure than in punishing late filers or non-filers. In 2014, the IRS expanded its more lenient program, the Streamlined Procedures, allowing taxpayers to participate if they can explain in a written statement how their delinquency was not intentional.
This lenient approach has allowed many delinquent taxpayers to successfully enter its amnesty programs. Tens of thousands of taxpayers successfully use the program each year to get caught up with the IRS.
Fact or Fiction – I need to disclose my entire tax history.
One of the strongest benefits of entering a tax amnesty program is the ability to become completely compliant without having to disclose your entire past. The IRS recognized that gathering financial information about the distant past can be cumbersome, if not impossible, so in order to encourage disclosure, it limited the tax years that require filing.
Under the Streamlined Procedures, taxpayers are required to file only the prior 3 years of tax returns, including required information returns, and 6 years of FBARs.
Fact or Fiction – I’ll suffer severe penalties.
A taxpayer who qualifies for the foreign offshore Streamlined Procedures can come clean with the IRS and potentially suffer no penalties. In order to qualify, a taxpayer must fulfill a non-residency requirement and certify that that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.
Unpaid taxes and interest must be paid, if due, but in many cases, taxpayers can utilize the Foreign Earned Income Exclusion and/or foreign tax credits to reduce or eliminate taxes due.
Fact or Fiction – The Streamlined Procedures is not the only tax amnesty program available.
While the Streamlined Procedures is the main program for non-willfully delinquent taxpayers, there are a number of additional options available to delinquent taxpayers. For example, there are special programs and procedures for taxpayers who have only failed to file FBARs or have failed to include an informational form with their tax return, such as the form for ownership of a foreign corporation.
There is also a new program for willfully delinquent taxpayers, featuring heavier penalties (but avoidance of criminal prosecution), which was introduced in September of last year, after the OVDP program ended.
For this reason, if you are a delinquent taxpayer looking to catch up with the IRS, it is critical that you weigh all of the options available to you.
Fact or Fiction – The IRS tax amnesty programs may not last forever.
The IRS has given no certainty that it will maintain its tax amnesty programs on a permanent basis. In fact, with respect to the Streamlined Procedures, IRS officials have repeatedly expressed that the program will end when it feels that that there’s no way a taxpayer who would want to participate couldn’t have heard about the process (rendering the taxpayer willfully delinquent by default).
For this reason, if you are a delinquent taxpayer living abroad, it is critical that you consider coming clean sooner rather than later. A number of options are currently available to you, including and in addition to the IRS amnesty programs. Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances. Our experts at Expat Tax Professionals are available to help discuss your options and guide you through each step of the disclosure process.
By Joshua Ashman, CPA & Nathan Mintz, Esq.