The IRS understands that its intense focus concerning offshore enforcement efforts along with related disclosure programs has gotten the attention of many U.S. citizens in regard to filing their taxes and information reporting duties. Due to these concerns the IRS created several documents to help explain the requirements in detail. The two documents are the ‘U.S. Citizens & Resident Aliens Abroad’ page at IRS.gov, and ‘FS-2011-13’. The compliance issues involved with taxpayer situations with offshore compliance vary greatly due to the complexity of this particular area of tax laws. The IRS strives to remind taxpayers who have only recently learned of these types of tax requirements, that they do have plenty of options available to them that are outside the normal filing process, and that will help them to get current on their tax obligations. Several of the most common situations along with some potential solutions are laid out below.
The IRS wants to remind taxpayers to enter into consultation with their professional tax advisers to determine which of the options is the most appropriate one for addressing their facts and specific circumstances.
Situation One – This is a situation where taxpayers have properly reported the total of their taxable income, but have only recently learned about the fact they should have been continuously filing FBARS in years prior to now for reporting personal foreign bank accounts as well as reporting signature authority over those bank accounts that are owned by any employer.
Compliance One – Taxpayers who paid tax on and reported all taxable income on prior years, but did not happen to file the FBARs, need to file those delinquent FBAR reports in accordance with the instructions (mail to Dept. of Treasury, P.O. Box 32621, Detroit, Michigan 48232-0621). A statement explaining the reason the reports were filed late should be attached.
Situation Two – This one involves a taxpayer who has only certain delinquent information returns without any tax due.
Compliance Two – Any taxpayer failing to file tax information returns, like Form 5471 for CFCs (controlled foreign corporations) or Form 3520 dealing with foreign trusts, but who has, however, paid tax on and reported all taxable income in respect to all transactions that are related to the foreign trusts or CFCs, needs to file delinquent information returns at the appropriate service center in accordance with the instruction for the specific form, and also attach a statement of explanation as to why the returns were filed late. (Form 5471 needs to be submitted along with an amended return that shows no change in tax liability or income.)
The IRS in turn WILL NOT impose any penalty for failure to file delinquent Forms 3250 and 5471 as long as no under-reported tax liabilities exist, and no previous contact has been made regarding any income tax examination, nor a request been made in regard to delinquent returns.
Situation Three – This addresses all U.S. non-resident taxpayers who have delinquent returns and low risk factors (owed less than $1500 a year in taxes).
Compliance Three – Filing Compliance procedure regarding U.S. Non-Resident Taxpayers – U.S. Non-Resident taxpayers need to file delinquent tax returns that include delinquent information returns, over the last 3 years; and delinquent FBARs over the last 6 years, along with additional required information in regard to compliance risk. The payment for any federal tax as well as interest due must be sent with the submission.
Situation Four – This addresses any taxpayer with an undisclosed foreign account as well as unreported income. A taxpayer who is seeking protection to avoid criminal prosecution.
Compliance Four – OVDP (offshore voluntary disclosure program) – This program offers taxpayers a civil settlement structure that includes paying an offshore penalty to cover several other penalties that might be assessed in a case of offshore noncompliance. The OVDP delivers protection from being criminally prosecuted. To participate in an OVDP a taxpayer first has to request to be accepted into the program. After being preliminarily accepted, the taxpayer then must submit specific information, that includes 8 years worth of amended tax returns, also FBARs, and additional information returns including information regarding their offshore accounts. Additionally, a taxpayer needs to submit total payment of tax and interest due as well as specific penalty amounts.
A taxpayer who has entered into an OVDP who disagrees with the IRS applying the offshore penalty with the given facts and circumstances of the case, can elect to opt out in regard to the civil settlement structure of this program. In these cases, the IRS determines if any penalty mitigation is deemed appropriate.
Pasadena residents can contact former IRS tax lawyer Vic Abajian, who provides legal representation for Pasadena businesses. He is a highly skilled tax attorney Pasadena and delivers professional quality help in these matters.