The IRS Tax Amnesty Programs – Fact or Fiction
Despite the overall success of the IRS tax amnesty programs in recent years, many expats remain hesitant to enter the programs due to a number of misunderstandings surrounding their requirements and their outcomes. In this blog, we separate fact from fiction so that you can decide intelligently whether tax amnesty is right for you.
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. The latest IRS statistics show that the IRS tax amnesty programs continue to be a popular and effective method for delinquent taxpayers to catch up with the IRS. According to the IRS, 55,800 taxpayers have used the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations, while an additional 48,000 taxpayers have used the Streamlined Procedures.
Fact or Fiction – I need to disclose my entire tax history.
One of the strongest benefits of entering an IRS tax amnesty program is the ability to become completely compliant with your expat taxes 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.
The two main amnesty programs currently offered by the IRS are the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Procedures. Under the OVDP, U.S. expats are required to file tax returns and FBARs for the prior 8 years. 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 may not pay any penalties.
A taxpayer who qualifies for the foreign offshore Streamlined Procedures can come clean with the IRS and 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.
While the OVDP is not penalty-free, it does limit the penalties that would otherwise be imposed. Under the OVDP, in lieu of all other penalties that may apply to the undisclosed foreign assets and entities, including the FBAR penalty, a reduced penalty of 27.5% (which can be increased up to 50% in certain cases) will be calculated based on the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.
Fact or Fiction – The Streamlined Procedures and OVDP are my only two options.
While the Streamlined Procedures and OVDP are the two most popular tax amnesty programs, 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.
Fact or Fiction – The IRS tax amnesty programs may not last forever.
Contrary to popular belief, the IRS has given no certainty that it will maintain its tax amnesty programs on a permanent basis. In a recent interview, IRS Commissioner did express that the IRS is a long way from moving away from the voluntary disclosure programs, but at some point, once ignorance is no longer a valid excuse, the programs will come to an end or become significantly modified.
For this reason, if you are an expat who is late on filing your U.S. tax returns or FBARs, you should consider coming clean sooner rather than later. A number of options are currently available to you, including and in addition to the IRS tax 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.
For a full picture of the IRS tax amnesty programs and for practical tips for late filers, you are welcome to download and read our Expat Tax Handbook – Solutions for Delinquent Taxpayers. For additional tax guides, please see the Tax Forms and Guides section of this website.
By Ephraim Moss, Esq. & Joshua Ashman, CPA