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 a person has unfiled tax returns, there are multiple concerns involving: 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.
Let’s take a look at how someone can safely get into compliance when they have unfiled tax returns and have to file back taxes.
Michelle, a Permanent Resident with US & Foreign Money
We will review Michelle’s noncompliance and evaluate why she has unfiled tax returns.
From Visa-to-Resident: F-1/H-1B/LPR
Michelle 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. Michelle misunderstood the US tax and reporting requirements for her US and foreign income.
Unreported US & Foreign Income
Michelle’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, Michelle also has $50,000 a year in dividends generated from a Taiwanese investment account — but that income is not taxable in Taiwan.
Therefore, Michelle was unaware that the income was taxable in the United States.
Unreported Accounts & Assets
In addition, Michelle also has unreported accounts and assets from Taiwan. When she first arrived in the US and spoke with a tax professional, Michelle had received incorrect advice about the reporting requirements.
In fact, looking at the types and values of Michelle’s foreign assets and accounts — Michelle has had FBAR, FATCA, and PFIC Form 8621 reporting requirements for several years now.
Options for Filing Back Taxes & Unfiled Tax Returns
Since Michelle has not properly filed tax returns in the prior years, it is important that she gets into compliance before the IRS finds her and hits her with possible penalties. Michelle 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.
Michelle 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, so she would not qualify for the Streamlined Foreign Offshore Procedures of the program.
In addition, since Michelle was clearly non-willful, making a submission under the voluntary disclosure program (VDP) — would be overkill.
Finally, Michelle should avoid making a quiet disclosure. A quiet disclosure is when Michelle either begins filing from this point forward without resolving the prior year tax filings and information reporting, or resolving the prior year reporting but not doing it with a reasonable cause statement. Rather, Michelle 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, and specifically IRS offshore disclosure and unfiled tax returns.
Contact our firm today for assistance.