- 1 Delinquent Tax Returns
- 2 Do You Have Taxable Income?
- 3 When does Not-Filing Returns Become Criminal
- 4 Have You Met the Threshold for Filing a Tax Return?
- 5 What Strategy Do You Choose?
- 6 Is Your Tax Situation More Complicated
- 7 Golding & Golding: About Our International Tax Law Firm
- 8 Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Delinquent Tax Returns
Delinquent Tax Returns: When a person meets the threshold for filing a U.S. tax return but fails to do so, the return is considered delinquent. A Delinquent Tax Return can turn into a major IRS tax and penalty headache for the taxpayer. First, the statute of limitations for tax return audits (usually 3-years). Next, it leaves the taxpayer wide-open for penalties — especially if the Taxpayer has significant unreported income and/or an offshore or foreign accounts compliance issues.
Common issues include:
- Unfiled U.S. Tax Return(s)
- Past-Due Taxes
- Penalties for Not Filing Taxes
- IRS Tax Amnesty
- Filing Bax Taxes
Do You Have Taxable Income?
Here are a few common circumstances and situations when a person has taxable income and may have to file an IRS tax return:
Employed – Are You Having Taxes Withheld?
If you are like most people and you have an employer, chances are that either weekly, bi-weekly, or semi-monthly/monthly your employer issues you a paycheck, and withholds taxes. This is important, because even if you have not filed taxes, if you have had the proper tax amount being withheld or deducted from your earnings (absent other types of additional unreported income) then once you do file a tax return — you may not owe any tax.
In addition, if you do not owe any tax then there’s a high likelihood that you will not owe any penalties (notwithstanding offshore and foreign money/self-employed related penalties, which are detailed below).
Why? Because IRS tax penalties are usually based on the amount of the outstanding tax liability.
For example, if you owed $25,000 in tax and were hit with a 20% penalty, you would owe $5000.
Likewise, if you did not owe any money to the IRS then you have a zero basis for the IRS to compute penalties — and therefore you may end up with no penalties.
Substituted Filed Return (SFR)
When a person is employed or has other reportable income, and has filed tax returns in the past, sometimes the IRS will prepare its own version of your return, which is called an SFR (Substituted Filed Return). Typically, these returns do not account for any of the potential tax savings, deductions, etc. but at least you have the return on file.
Self- Employed – Estimated Tax
If you are self-employed and have not filed the return, then it could be a much bigger problem.
That is because then you may then have significant amounts of unreported income.
But, if you are paying estimated tax throughout the year, then at the time you do decide to get into compliance, you may possibly have sufficient taxes paid on the books to avoid any substantial penalty against you for late-filing of the returns.
**If you are self-employed, there are many more potential issues to contend with, especially if you make significant amounts of income
If the only type of income you have is Investment income, then even though you haven’t filed your tax return, if you received a 1099 and notice that certain taxes were withheld, that may help you in the future when you do file return — because you may be due a refund
That is because if you are in one of the two lowest tax brackets, and the majority of your income is derived from qualified dividends and/or certain capital gains then you may potentially be able to sidestep any potential tax liability because your tax rate on the investment earnings maybe zero.
If your only income with Social Security, then you may not have any tax liability. But, if in addition to social security you also have additional income, it may be very important to file.
Here’s why: If a person’s only income is Social Security, and let’s say they earned $20,000 a year in Social Security, typically that amount of Social Security is not going to be taxed — and therefore there is no tax liability.
But, if in addition to the Social Security the person also has some investment (domestic and foreign) and other income that pushes the total income over a certain threshold, then the IRS begins to tax a portion of the Social Security.
As a result, while you may have $20,000 social Security and $30,000 a part-time income, as a result you have $50,000 of income and even after deductions, exemptions, etc. you may earned enough money for the IRS to begin taxing a portion of your Social Security.
If a person has foreign income, they still have to report that income on a US tax return. Unlike almost every other country in the world, the United States taxes individuals on their worldwide income.
Therefore, even if you have no domestic income (or your domestic income consists solely of social security) if you are also earning foreign income, then the foreign income must also be combined with your domestic income to determine how much money you earn and your tax filing requirements.
** if you reside overseas, you may qualify for the Foreign Earned Income Exclusion and/or no matter where you live if you already paid foreign taxes on the income, you may qualify for a Foreign Tax Credit.
When does Not-Filing Returns Become Criminal
Typically, it is considered criminal when a person knows they have a requirement to file and knows they have unreported income that the IRS is unaware of, but does not file the tax return. Usually, it will not appear on the IRS’ radar unless it has been 2-3 years of non-filing.
Oftentimes, clients will tell us, that they thought it was no big deal, or they thought that they had sufficient tax credits to offset any income, but unfortunately…the IRS is not that forgiving.
With that said, the IRS only pursues a very limited number of criminal cases each year, so if you like to play the odds, you can take some solace in the fact that the chances are very low that you would be on the receiving end of criminal investigation unless you had some other egregious facts.
Have You Met the Threshold for Filing a Tax Return?
If you have met the threshold for filing a tax return, and before making any affirmative representation to the IRS, it is important to understand what you may be required to do.
Namely, can you just go back and file returns — or should you submit the under the amnesty program and/or reasonable cause?
What Strategy Do You Choose?
It is important to note that each situation is different, and the path you choose depends on your specific facts and circumstances.
If you typically file tax returns, and for one reason or another are simply out of compliance and all you have is domestic income, and that income is Earned income from US employment in which taxes of been withheld, it may not be that big of a deal.
You may consider working backwards, preparing a few years worth of returns (along with a Reasonable Cause Statement) and beginning the track of getting into compliance. If you owe taxes, then you may have a failure-to-file and failure-to-pay penalty.
Is Your Tax Situation More Complicated
These situations are usually considered more complicated:
If you have unreported foreign income, and especially if the income was generated at all through foreign accounts, assets, or investments, then you typically have to enter one of the IRS Offshore Voluntary Disclosure Programs in order to get into compliance.
The programs usually consist of New OVDP or one of the Streamlined Offshore Procedures.
Undisclosed Foreign Accounts, Assets or Investments
If you have unreported Foreign accounts, assets, or investments, then you may have very significant reporting requirements on the various different international informational returns.
Many times, this will include multiple forms for the same asset or account, and the failure to file the form may result in significant fines and penalties-and in some situations, may reach 100% value of the maximum balance of the accounts (multi-year audit in which you are found willful).
This is not intended to scare you, but rather to just give you a realization of how the IRS operates especially when involves foreign money. Here is a brief list of the different international forms you may have to file, and what the penalties are.
Undisclosed U.S. Income
If a person self-employed, or otherwise has significant amounts of unreported US income that was not reported to the IRS, then they may find themselves in some serious trouble. Even if a person only has undisclosed domestic income, they can usually submit to the Domestic Voluntary Disclosure Program – presuming that the money was legally sourced.
In other words, you cannot take dirty money and launder it through the domestic voluntary disclosure program.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Foreign Accounts Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.