Each year, the Internal Revenue Service develops and publishes various international compliance campaigns. These are tax and reporting campaigns designed to promote certain specific aspects of offshore tax reporting and compliance. For example, there have been IRS compliance campaigns for matters involving offshore voluntary disclosure, post-offshore voluntary disclosure, Puerto Rico Act 60, and many others. Now that the IRS will soon be flushed with cash, they will again begin pursuing these compliance campaigns more aggressively — and one of the campaigns that they have recently been pursuing is the campaign directed at high-income earners who do not file tax returns. For high-income earners that do not file tax returns, there are very potential consequences for not filing. This may include fines and penalties as well as tax liens, levies, and seizures against property. Here are a few tips to keep in mind for taxpayers who are considered high-income and non-filers.
Failure-to-File and Failure-to-Pay Penalties
Two of the easiest penalties that the Internal Revenue Service can issue against taxpayers are the failure-to-file and failure-to-pay penalties. These are penalties assessed against taxpayers who have failed to file their tax returns and/or not paid their tax liability. These penalties top off at 25% — although interest on the amount due can still accrue. For taxpayers who have a significant tax liability over multiple years, they may find themselves at the receiving end of a six or seven-figure penalty.
Offshore Reporting Forms
Many high-income nonfilers may have assets, accounts, income, and investments located abroad. It is important to know that the US requires taxpayers who have assets abroad to report information about these assets on various international information reporting forms such as FBAR and FATCA. The penalties for not properly filing these forms can be significant — and upwards of 50% maximum value of the unreported accounts and assets if the IRS believes the non-filing was willful.
When a person has a significant amount of income and has not paid tax and they will begin to incur seriously delinquent tax debt. Taxpayers who have seriously delinquent tax debts may become subject to passport revocation or denial which can seriously impair a taxpayer’s ability to travel the world, visit relatives — and conduct business. Taxpayers who use their passports often must be especially careful.
Tax Fraud and Evasion
If the IRS believes a non-filer acted fraudulently, they may become subject to tax fraud penalties. There is no statute of limitation for civil tax fraud, which means the IRS can go back as far as they need. In addition, it could potentially cross over into criminal liability which could result in significant penalties — and even incarceration as a taxpayer is prosecuted and convicted for tax fraud and/or tax evasion.
Expats and Expatriates Beware
For expats who live overseas, it is important to keep in mind that the United States follows a worldwide income model –– which means that taxpayers are subject to US tax on their worldwide income — no matter where they reside in no matter where the income is sourced. Taxpayers may qualify for the Foreign Earned Income Exclusion or certain Foreign Tax Credits — but that does not eliminate the reporting requirement. For expatriates, the IRS has its own compliance initiative for expatriation and taxpayers who have either formally relinquished their Long-Term Lawful Permanent Resident status or renounced their US citizenship and did not file proper protocols or file the necessary forms, such as Form 8854.
Offshore Disclosure and Compliance
For high-income non-filers, they will qualify for various offshore disclosure programs which will allow them to get into compliance and minimize (or avoid) taxes and penalties. Recently, the Internal Revenue Service released Notice 2022-36 which allows for certain delinquent filing for tax years 2019 and 2020 in which penalties will be waived or avoided.
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