A 12-Step Offshore Tax Analysis to Fix, File or Amend IRS Returns

A 12-Step Offshore Tax Analysis to Amend or File IRS Returns

A 12-Step Offshore Tax Analysis to Amend/File IRS Returns

When a U.S. taxpayer is out of IRS compliance for failing to properly file their U.S. tax returns to report their foreign income, accounts, assets, etc., it can become very overwhelming for them to even just take the first step and decipher what they must do to get themselves back into compliance. Making matters worse is all the rampant fear-mongering that taxpayers will find online from tax professionals who purport to be offshore experts (but are not) and attorneys who falsely claim to be board-certified as a tax law specialist (but are not board-certified). In fact, most of the time, taxpayers have various safe and effective avenues to get them back into compliance when they have unreported income, foreign accounts, assets, investments, etc. Let’s look at 12 important factors of an offshore tax analysis.

Is the Taxpayer a U.S. Person or NRA?

The first issue is to determine whether the taxpayer was considered a U.S. person or a non-resident alien for the tax years at issue. Depending on their U.S. person status will determine whether they are taxed on their worldwide income or only taxed on their U.S.-sourced income.

Did the Taxpayer ever file U.S. Taxes?

Is this the taxpayer’s first time filing a tax return, or did they previously file tax returns and then stop filing? Even if they previously filed but stopped filing, there may be legitimate reasons for not continuing to file, such as being under the misunderstanding that if they live overseas, they are not required to file — or misunderstood that foreign income is still taxable in the U.S. (and all their income was foreign).

Why did the Taxpayer Stop Filing U.S. Taxes?

If the taxpayer stopped filing returns, it is important to determine whether they intentionally failed to file returns or report income they knew should have been reported, or it was a mistake. This will help determine whether the taxpayer is willful or non-willful and which offshore amnesty program they may qualify for.

Did the Taxpayer Know They Were Required to File but Didn’t?

If the taxpayer knew they were required to file returns or knew they were required to file tax returns but only included certain income while intentionally failing to include other income and foreign accounts/asset reporting, this may indicate that the taxpayer was willful, and this may disqualify them from certain offshore disclosure programs.

*This is a very important part of the analysis.

When was the last Time the Taxpayer Filed Taxes?

If the taxpayer previously filed returns but stopped filing returns, how long has it been since they stopped filing returns? In other words, when was the last time they filed the tax return, and why? This will impact how many prior years’ returns the taxpayer should file, noting that even if the taxpayer hasn’t filed for many years, depending on which program the taxpayer is eligible for, they may not necessarily go all the way back 30 years; it is based on each taxpayer’s facts and circumstances.

What Type of Income Does the Taxpayer Have?

Does the taxpayer only have earned income and no unreported accounts or assets, or does the taxpayer have a significant offshore portfolio with different categories of investment income? This will impact which type of tax reduction strategies the taxpayer may qualify for, such as will they qualify for the foreign earned income exclusion or will be limited to the foreign tax credit (presuming that they paid foreign taxes).

Does the Taxpayer Have Foreign Accounts and Assets?

If the taxpayer has foreign accounts and assets, what type of accounts and assets do they have? For example, does the taxpayer only have a bank account, or does the taxpayer have several investment accounts, foreign trusts, mutual funds, etc? The type of foreign accounts and assets the taxpayer owns determines how complicated their delinquent tax return may become.

Did the Taxpayer Ever File the FBAR, Form 8938, Etc?

If the taxpayer owns foreign accounts and assets and owned them in previous years, did the taxpayer file international information reporting forms in prior years, such as the FBAR or Form 8938? If taxpayers filed these forms in the past and still have assets, why did they stop filing them?

The Internal Revenue Service has taken an aggressive stance against taxpayers who fail to file foreign accounts and assets, so it was important to determine if they have ever reported these accounts and assets, and if so, why they stopped doing so.

Is the Taxpayer Willful or Non-Willful?

One of the most important components of getting into compliance and filing amended or original pass returns is to determine whether the taxpayer was willful or non-willful. When the taxpayer is non-willful, there are various amnesty programs available, but if the taxpayer is willful, then they typically will only qualify for VDP (voluntary disclosure program)

Does the Taxpayer Live in the U.S. or Abroad?

If the taxpayer lived abroad and did not file returns in prior years, they may qualify for a treaty election if they meet the requirements that they lived outside of the United States — presuming that they are living/lived in a treaty country. While many of the treaties are similar, they may differ in meeting the eligibility requirements.

Is the Taxpayer Already Under Audit or Investigation?

If the taxpayer is already under IRS audit or investigation, they generally do not qualify for any of the offshore amnesty programs. They should instead hire counsel to assist them with complying with the audit or investigation.

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.

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.