Foreign Resident IRS Tax Return Filing Penalties – FBAR & FATCA Penalty Waiver
If you are a “U.S. Person” who resides overseas, and were required to – but did not – file U.S. tax returns in prior years, the IRS may waive all fines and penalties against you for the failure to file tax returns in years past and/or report Foreign Accounts.
The program is called the Streamlined Foreign Offshore Procedures.
While we have already authored multiple articles previously on this issue, we have been receiving numerous inquiries from clients overseas regarding this specific program (which has a very strict residency requirement) — so we want to provide a brief summary of how the process works, and common questions we receive about Streamlined Foreign Offshore
Tax Returns Filed From Overseas
The United States taxes individuals on their worldwide income. It does not matter if you reside in the United States or abroad in a foreign country – if you meet the threshold requirement for filing a tax return, you must file a U.S. Tax Return, report your worldwide income, and disclose certain foreign accounts, assets, investments, etc.
The mere fact that you reside overseas does not exempt from filing a U.S. Tax Return. Rather, when you do file your tax return, you receive an automatic two-month extension to file — from April to June, and possibly another extension through December. You may also receive a Foreign Tax Credit and/or qualify for the Foreign Earned Income Exclusion.
For many individuals (and often serves as the catalyst that begins the non-compliance) a major deterrent to getting into IRS tax compliance is that under U.S. Tax law, all worldwide income is considered taxable – unless a specific exemption/exclusion applies. It does not matter if you reside in the U.S. or abroad, because the U.S. adheres to the concept is CBT (Citizenship Based Taxation) and not RBT (Residence Based Taxation). And, just because the income is tax-free abroad does not mean it will receive tax-free treatment in the U.S. (even if it is similar to a 401K).
Please keep in mind that even though you have to report and pay tax on the foreign income on your US tax return, you may qualify for a Foreign Tax Credit in order to receive credit for taxes you already paid in a foreign country.
Streamlined Foreign Offshore Procedures
It is very important that U.S. Citizens, Legal Permanent Residents, former Long-Term Legal Permanent Residents who did not properly relinquish their green card under Form 8854, and individuals who meet the Substantial Presence Test stay in U.S. Tax compliance.
So much so, that when the U.S. Government created the Streamlined Program, they created an offshoot called Streamlined Foreign Program. This is a very special program, because if you happen to qualify as a foreign resident and were non-willful in your failure to report the income or accounts/assets on your US tax return — you can get into compliance safely without having to pay any penalty to the IRS.
How do Offshore Income & Asset Penalties Work?
If a person is audited, they are at the mercy of the IRS. Depending on whether the person was willful or non-willful, the penalties can range from a Warning Letter in Lieu of Penalties (3800 Letter), all the way up to 100% penalty and a multiyear audit situation in which the IRS believes you are willful.
OVDP (Offshore Voluntary Disclosure Program)
Generally, if a person knew he or she was required to file a US tax return or FBAR but failed to do so, they may be subject to extremely high fines and penalties — upwards of 100% value of the foreign accounts or assets. Instead of risking the penalty, they could enter OVDP (Offshore Voluntary Disclosure Program) and voluntarily agree to pay reduced – but hefty – penalties, with the worst penalty usually being the FBAR/FATCA Form 8938 Penalty — which is either 27.5% or 50% of the highest unreported account/asset max value. There are some additional penalties on the annual tax liability that was due, as well as potential failure-to-file and failure-to-pay penalties.
Streamlined Domestic Offshore Procedures
Alternatively, if the person was non-willful but does not qualify as a “foreign resident,” they may qualify for the Streamlined Domestic Program (still involves Foreign Accounts but the Applicant resides in the U.S.) The penalties are drastically reduced to 5%. Moreover, the penalty computation is based on the highest December 31st value of the unreported accounts – which is historically lower than the max value of the account throughout the year. Moreover, there is no penalty on the annual tax liability.
Streamlined Foreign Offshore Procedures
When a person qualifies as non-willful and a foreign resident, they may qualify for a complete penalty waiver. Qualifying as a foreign resident is tough under this program (there are two different tests depending on whether a person is a US Citizen/Legal Permanent Resident or Foreign Person subject to US tax because they meet the Substantial Presence Test).
If a person is a U.S. Citizen/Legal Permanent Resident, he or she person must have resided outside the United States for at least 330 days in any tax year within the last three tax years. Otherwise, a foreign resident who met the Substantial Presence test in some, but not all years — must show they did not meet the substantial presence test within one of the last three tax years.
By doing so, all penalties are waived although there is still a tax liability (but the applicant may qualify for a Foreign Tax Credit or the Foreign Earned Income Exclusion).
Golding & Golding, Board-Certified Tax Law Specialist Team
Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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