5 IRS International Tax Strategies for US/American Expats

5 International Tax Strategies for American Expats Abroad

5 International Tax Strategies for American Expats Abroad

For many American expats living outside the United States, being out of sight and out of mind often means avoiding the U.S. Internal Revenue Service. The problem becomes that, as a U.S. expat who is either a U.S. citizen or a Lawful Permanent Resident, they are still subject to U.S. taxes on their worldwide income as well as required to report certain foreign accounts and assets to the U.S. government on various international information return forms. Likewise, even if the expat becomes a non-US person for tax purposes, the IRS still has several years to go after a taxpayer for prior year non-compliance with taxes or reporting. It is not uncommon for taxpayers to be abroad in countries such as Australia, China, Singapore, the UK, Japan, and Taiwan, only to receive a notice from the IRS indicating that they are out of compliance, have received a penalty notice, or are being audited. Let’s look at five (5) international tax strategies for American expats abroad.

First, Beware of Lawyers with False Tax Credentials

These days, many lawyers who purport to be experts or Board-Certified Tax Law Specialists are just making it up as they go.

It is not uncommon for taxpayers to reach out to us after they have been swindled by some of these attorneys who claimed to be ‘Board-Certified’ simply because they have an accountant on staff — but have not met the stringent requirements of becoming board-certified by any jurisdiction in the United States.

If you are considering speaking with or retaining an attorney because they claim to be an international tax law expert or Board-Certified, it is important to check their credentials beforehand.

Make Sure it is the IRS and not a Scam

Unfortunately, these days, the world is littered with scams. There are many shysters pretending to be IRS agents and sending taxpayers notices in the hopes of obtaining personal information such as a Social Security number or bank account information. Taxpayers should be cautious before dialing any number they receive in an IRS notice and should do some research to determine whether the notice is even legitimate to begin with.

Is it a Warning Letter, Penalty Notice, or Audit

Next, presuming that the IRS letter is legitimate, it is important to determine what type of notice the taxpayer received. Typically, U.S. expat taxpayers will receive three types of notices:

• • • a warning letter that they have not filed taxes or reported certain foreign accounts or assets;

    • a notice of fine or penalty, such as the failure to file Form 3520, Form 5471, or the FBAR; or

    • a notice that the taxpayer is under audit or examination.

Once the taxpayer can figure out what type of notice they received, then they can determine what action needs to be taken, if any.

Respond Timely to the Notice

Many IRS notices come with strict deadlines. When the taxpayer receives any type of IRS notice, they should take note of the due date for response so that even if the taxpayer is not prepared to provide a substantive response by that time, they can at least reach out to the IRS either themselves or through a representative to seek an extension.

Realize the IRS Can Collect on Cross-Border Assets

The IRS has various methods it can use to try to collect assets and income from outside the United States. In other words, just because an expat lives outside of the United States and has assets, accounts, and/or income outside of the United States, does not mean it is outside of the long reach of the IRS and U.S. government. Many international tax treaties between the United States and the different foreign countries facilitate cooperation between the two countries and some go either further by providing mutual collection agreements to work together to ensure taxpayers cannot hide out in a foreign country and keep their assets outside of the United states to avoid having to pay a fine, penalty, or taxes due.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures, which is typically the preferred program of the two streamlined procedures. That is because under this program, Taxpayers can file original returns, and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.