Filing Back Taxes & Unfiled Tax Returns
Filing Back Taxes & Unfiled Tax Returns: When a US Taxpayer has not filed tax returns in one or more prior years, they are at risk for IRS fines and penalties. When there are unfiled tax returns, multiple issues may arise including the failure-to-file penalty, failure-to-pay penalty, and failure-to-report foreign accounts and assets (and possible fraud or criminal investigation depending on the facts and circumstances) multiplied by the number of years of non-filing. In general, as long as a person was non-willful and/or had no intent to defraud or evade tax, it is a relatively painless process to get back into US tax compliance by using one of the various amnesty programs or making a reasonable cause submission.
Here is a look at how someone can safely get into compliance when they have unfiled tax returns and have to file back taxes.
Lee, a Permanent Resident With US & Foreign Money
We will review Lee’s noncompliance and evaluate why she has unfiled tax returns.
From Visa-to-Resident: F-1/H-1B/LPR
Lee is originally from Taiwan and currently resides in the United States as a Legal Permanent Resident. She first came to the United States on an F-1 visa and then moved to H-1B — but is now a Legal Permanent Resident. Lee misunderstood the US tax and reporting requirements for her US and foreign income.
Unreported US & Foreign Income
Lee’s domestic/US income was only $7,000 per year, and therefore she believed she was not required to file a tax return.
In fact, Lee also has $50,000 a year in dividends generated from a Taiwanese investment account — but that income is not taxable in Taiwan.
Therefore, Lee was unaware that the income was taxable in the United States.
Unreported Accounts & Assets
In addition, Lee also has unreported accounts and assets from Taiwan. When she first arrived in the US and spoke with a tax professional, Lee had received incorrect advice about the reporting requirements.
In fact, looking at the types and values of Lee’s foreign assets and accounts, Lee has had FBAR, FATCA, and PFIC Form 8621 reporting requirements for several years now.
Options for Filing Back Taxes & Unfiled Tax Returns
Since Lee has not properly filed tax returns in the prior years, it is important that she gets into compliance before the IRS finds her and imposes possible penalties. Lee may be able to qualify for a Reasonable Cause submission, in which she submits her prior-year tax returns and international information returns in a package, with a detailed and persuasive explanation about her noncompliance.
Lee would not currently qualify for the Streamlined Domestic Offshore Procedures because she did not file her original tax returns timely and she is not a foreign resident. She also would not qualify for the Streamlined Foreign Offshore Procedures of the program since she does not meet the foreign requirements.
In addition, since Lee was clearly non-willful, making a submission under the voluntary disclosure program (VDP) would be overkill.
Finally, Lee should avoid making a quiet disclosure. A quiet disclosure is when Lee either begins filing from this point forward without resolving the prior-year tax filings and information reporting or resolving the prior-year reporting but filing them “naked” without a reasonable cause statement. Rather, Lee would quietly or “silently” submit for prior years hoping to avoid detection and (perceived) penalties.
In conclusion, when a taxpayer is out of compliance for one or several years of unfiled tax returns, there are various programs or opportunities the taxpayer can take advantage of in order to get back into compliance. It is always important to be in compliance with the IRS in order to avoid fines and penalties, which typically only get worse as time goes on — and if too many years of noncompliance occur (and depending on the facts and circumstances of this situation), this may unnecessarily turn into a bigger issue.
Meet our International Tax Law Specialist Team
Our firm specializes exclusively in international tax, specifically IRS offshore disclosure and unfiled tax returns.
Contact our firm today for assistance.