IRS Amnesty Programs (2018) – Domestic & Foreign Offshore Disclosure
IRS Amnesty is the idea of getting into compliance with the Internal Revenue Service for previously unreported income, over-embellished expenses, or other false deductions or misrepresentations made regarding a person’s taxes.
IRS Amnesty Programs – Foreign vs. Domestic
The reality is that not everybody who owes money or otherwise defrauded the IRS is going to get caught. But, for the individuals who do get caught with having intentionally, knowingly or with reckless regard life to the IRS, they may find themselves at the receiving end excessive monetary fines and penalties, along with criminal prosecution. This could lead to:
- Passport Revocation
- IRS Criminal Investigations
Willful vs. Non-Willful
The idea of making a proactive representation to the IRS to disclose income that was previously unreported is not necessarily criminal, and a key factor will be to determine willful vs. non-willful.
For example, if David works as a consultant and simply forgot report one of his 1099s when he received income for some additional U.S. consulting he forgot about, David can go back and amended returns-usually without issue. Typically, since David is making a proactive representation to the IRS, he should use an experienced tax lawyer – but as long as David includes a properly prepared reasonable cause statement, David should be fine.
Unlike non-willful, if the person making the representation to the IRS does so in case he or she knows that they knowingly or otherwise intentionally omitted income or embellished deductions, the nurse seeking to avoid criminal investigation.
As such this is a very serious situation
Willful is a very generic term and it has a very broad spectrum. It typically includes multiple variations of the term intentional, such as:
- Intentional or Willful Omission – knowingly not including income
- Willful Blindness – Avoiding the fact you should have been aware
- Reckless Disregard – Essentially, you should have known you were doing something wrong
In a civil arena, the IRS gets a double-whammy. On the one hand, the IRS can take you to task and go after you for criminal-like penalties, such as FBAR penalties which could result in a 100% penalty against your assets in a multiyear audit. Compounding insult to injury, the IRS does not need to meet the burden it would otherwise need to meet in a criminal case.
Rather, courts have been holding that since the case being brought in a civil jurisdiction, the IRS is not required to meet a criminal standard. Thus, the IRS can go after you for criminal like penalties, while only meeting a civil burden (Read: Little evidence needed for major penalties).
Domestics vs. Foreign Income
The rules are incredibly different for different types of income. When it comes to offshore disclosure, there are very specific programs in place for individuals to get into compliance.
Ever since the Internal Revenue Service has made offshore disclosure agency enforcement priority, there’s been much publicity about these two main programs: OVDP (Offshore Voluntary Disclosure Program) and Streamlined Filing Compliance Procedures (SDOP & SFOP).
Foreign vs. Offshore
Oftentimes individuals get caught up on the difference between the terms offshore and foreign. For these purposes, there really is no difference. In other words, while most people consider offshore a scenario in which a person hides money in the Cayman Islands or British Virgin Islands – that is not how the IRS defines it. Rather, when it comes to these programs, any money located outside of the United States is considered to be offshore or foreign – the terms are interchangeable.
Therefore, whether you are a permanent resident of the United States but a citizen of Hong Kong who had accounts in Hong Kong before you ever dreamt of moving to the United States, or you are a U.S. citizen money hidden in Jersey – you would still evaluate the same programs to determine which compliance method works best for you.
Offshore or Foreign Penalty
One of the benefits of the offshore disclosure programs are that the penalties are set in stone (absent an opt out). In other words, when a person enters the Streamlined Domestic Offshore Disclosure program, they will have a 5% penalty on certain Foreign Assets and Foreign Accounts. Alternatively, if a person enters traditional OVDP, they will be subject to a 27.5% penalty or 50% penalty depending on the facts and circumstances of where the money is located.
These penalty structures are nonnegotiable. Therefore, if you enter these programs, you have to presume you will be paying these penalty amounts, unless you are in traditional OVDP and want to opt out.
**(330-Day Rule and/or Substantial Presence Test) Streamline Foreign Offshore Procedures waive the 5% penalty, but requires a 330 day foreign residence test which is very strict (more strict than the foreign earned income exclusion physical presence test). Alternatively, if a person is a non-Legal Permanent Resident and fails the Substantial Presence Test, they may still qualify as well.
When it comes to domestic income, the IRS is less forgiving. It should be noted that if a person was non-willful and submits to the streamlined program, they can also include their domestic income when getting into compliance. They can also do so with OVDP, but the domestic portion of the submission is treated different than the foreign portion.
Domestic Willful Non-Disclosure
The IRS has a Domestic Voluntary Disclosure Program. It has been around for many years, and it allows an individual to get into compliance by proactively reporting and amending their prior returns (or filing returns for the first time).
But, this comes at a cost and with a risk. Unlike the offshore voluntary disclosure programs, the domestic voluntary disclosure programs are not set in stone. In other words, under ordinary circumstances if a person was hit with domestic fraud charges, they could get hit with amongst other penalties, a 75% fraud penalty.
If you submit to the domestic program, chances are you can get that fraud penalty reduced to a 25% penalty or possibly even less, but there is no guarantee. With OVDP or Streamlined as long as your submission was truthful and prepared properly by an experienced offshore disclosure attorney you are almost guaranteed that the IRS will accept submission and the penalty will be as stated above.
With domestic voluntary disclosure, the IRS could feasibly come back penalize you more than you would otherwise penalize if you are caught and had an experienced attorney negotiate for you.
Use Experienced Tax Counsel
These days, you have many attorneys online learning experience and making false representations to try to get your business. They may have worked at the IRS (but usually not as an attorney). They do not have any advanced tax or accounting degrees, and simply regurgitate information that is already provided on the IRS website to try to increase their search engine optimization.
Moreover, in an attempt to get your business it will artificially reduce the fees, only you learn down the line that they do not know what they are doing.
It is important to pick an attorney that has an advanced degree (LL.M.), Advanced certifications (CPA or Enrolled Agent) and usually at least 15 years of Attorney experience.
Want to learn more about Offshore or Domestic Disclosure?
Below please find links to two separate articles we have written, which summarize each of the different programs.