Unfiled Tax Returns – IRS Amnesty | FBAR & FATCA Penalty Waivers
- 1 Unfiled Tax Returns
- 2 Why do you have Unfiled Tax Returns?
- 3 Unintentional Non-Filing of U.S. Tax Returns
- 4 Reckless or Intentional Non-Filing of U.S. Tax Returns
- 5 Unfiled Tax/Information Returns and Penalties
- 6 Civil Penalties
- 6.1 A Penalty for failing to file FBARs
- 6.2 A Penalty for failing to file Form 3520
- 6.3 A Penalty for failing to file Form 3520-A
- 6.4 A Penalty for failing to file Form 5471
- 6.5 A Penalty for failing to file Form 5472
- 6.6 A Penalty for failing to file Form 926
- 6.7 A Penalty for failing to file Form 8865
- 6.8 Fraud Penalties imposed under IRC §§ 6651(f) or 6663
- 6.9 A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
- 6.10 A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
- 6.11 An accuracy-related Penalty on underpayments imposed under IRC § 6662.
- 7 Criminal Penalties
- 8 Offshore Disclosure
Unfiled Tax Returns – IRS Amnesty | FBAR & FATCA Penalty Waivers
If you have unfiled Tax Returns, can you still qualify for OVDP, Streamlined Filing Compliance Procedures, or a Reasonable Cause submission to disclose unreported/undisclosed foreign income, assets, accounts, investments, etc.? The answer is, maybe.
Unfiled Tax Returns
As an international tax law firm that focuses exclusively on IRS Offshore Voluntary Disclosure, one the main questions we receive daily is how to get back into compliance when you have unfiled tax returns and foreign money.
In this article, we will summarize the options for getting into US tax compliance when you have foreign/offshore money.
Why do you have Unfiled Tax Returns?
For one reason or another, you have foreign assets, income, investments, accounts or retirement funds, and have not filed US tax Returns with the IRS. It could be due to one of a number of different reasons, but the main question is still the same — once you are out of US tax compliance, what are your options for offshore reporting and getting back into US tax compliance…before it’s too late.
The following are a few examples of common scenarios we see the people who have unfiled returns:
*These are just examples. You cannot rely upon them in making your own independent determination of whether you were willful or non-willful.
**You should speak with an Attorney before making any affirmative representation to the IRS or entering any of the IRS Offshore Voluntary Disclosure Programs.
Unintentional Non-Filing of U.S. Tax Returns
Non-Willful (Example 1)
Michelle currently resides in the United States and is 70 years old. She collects U.S. Social Security but has no other U.S.-based income, and therefore she mistakenly believes that she was not required to file a tax return — because she thought she would have no tax liability. What Michelle did not realize was that the $120,000 a year she earns in foreign interest income from Hong Kong (which is not taxed in Hong Kong) is reportable taxable on her U.S. tax return – thereby requiring Michelle to file a US tax return. Moreover, it also results in a U.S. tax liability on her social security income.
Non-Willful (Example 2)
Many years ago, David’s wanderlust whisked him to a far-off land. It is the type of country in which taxes are not necessarily required (or enforced) by the local government. David earns all is money abroad, and has no other connections to the United States — aside from the fact that he was born and raised in California. David Earns less than $100,000 a year, and therefore would qualify under the Foreign Earned Income Exclusion (Physical Presence Test) in which all of his income would be excluded from U.S. tax. Nevertheless, David must still file a U.S. tax return.
Non-Willful (Example 3)
Danielle currently lives abroad in Australia and has been residing there for the better part of the last 20 years. When she first arrived in Australia, Danielle had attended an expat event in which she met an individual who told her that she was not required to report her Australian income to the United States, but was required to report and pay tax in Australia.
Danielle pays significant taxes in Australia, and therefore even when she goes back and reports all of the income to the IRS, by time she factors in the Foreign Earned Income Exclusion along with the additional Foreign Tax Credits she is entitled, she should have little to no U.S. tax liability. While Danielle must still file U.S. tax returns, her Australia taxes paid should offset her U.S. Tax Liability (subject to whether she received any franking credits or related tax benefits that may not cross-over into the United States).
*In the above referenced scenarios, there is a good chance that the individuals will qualify as reasonable or non-willful and avoid significant fines and penalties if they decide to voluntarily disclose (which will be discussed below).
Reckless or Intentional Non-Filing of U.S. Tax Returns
The reason we grouped together reckless and intentional is because in recent cases (2017), the threshold requirement to prove willful has been eased — for the benefit of the IRS. In other words, it is much easier for the IRS to show a person was willful without having to show they were willful or intentional, but instead only has to show reckless disregard, or willful blindness.
The following are a few examples of common scenarios we see the people who have unfiled returns:
Harry is originally from the United States but moved to Vietnam and later the Philippines to start his own businesses. Harry did not earn much money during the first few years, and therefore Harry did not file any tax returns in the United States. Up until the time that Harry relocated to the Philippines, and thereafter Vietnam, Harry was aware that he had a reporting requirement in the United States. In speaking with a couple different CPAs, they had informed Harry about having to report his worldwide income, along with forms 5471 as the owner of a foreign corporation.
The fees the CPAs were going to charge were well beyond what Harry could afford, and therefore Harry did not file U.S. Tax Returns. Fast-forward 10 years later and the businesses are flourishing. Harry is getting ready to sell the businesses and return to the United States with his wife and two children. This is an example of reckless disregard to the extent that Harry knew he had a reporting requirement (and even though he had no unreported income) he did not file his returns and information returns.
Peter resides in the United States, and earned significant income abroad in Singapore. Each year, Peter visits a CPA and they discuss whether there have been any new life events or other issues that would impact his reporting requirement in the United States. Early in their relationship, the CPA had sent Peter and extensive questionnaire. Within the questionnaire, there were some questions involving whether Peter was a US person and if so whether Peter had any foreign accounts.
Peter did not complete this portion of the questionnaire (or several other portions of the questionnaire which did not have any bearing on Peter). Thereafter, when Peter was sitting in a meeting with the CPA, the CPA went through the questionnaire with Peter and Peter made no mention of the foreign accounts. In addition, since Peter did not have much in the way of passive income, there was no requirement for Peter to file schedule B (absent part seven, involving foreign accounts), in which the CPA was never made aware.
In this scenario, Peter was probably willfully blind to the extent that while the CPA never explained the ramifications or importance of the foreign accounts to Peter, Peter intentionally omitted that section of the questionnaire and therefore the CPA may not thought there was any reason to explain the Peter foreign accounts (since he was charging hourly) since it would appear by Peter’s questionnaire responses that it had no relation with Peter.
Randy lives in Vietnam and started a business that currently earns significant money. Randy is a US green card holder and just can’t stand the idea of having to pay significant US taxes for income that he earns abroad — especially when he is not receiving any benefit of being a Legal Permanent Resident, coupled by the fact that he did not pay tax on his income in Vietnam.
Randy intends on relinquishing his green card and never stepping foot in the United States ever again. Unfortunately, Randy’s situation is very common, and while we understand not wanting to pay US tax when you are receiving literally no benefit for having a Green-Card, technically Randy committed tax fraud and tax evasion. If the IRS was to catch Randy and uncover the facts and circumstances regarding his failure to comply, the penalties can be severe.
Unfiled Tax/Information Returns and Penalties
The failure to file a U.S. Tax Return, informational returns such as a form 5471, and/or report Income can result in significant fines and penalties.
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud Penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Tax Fraud and Tax Evasion
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
While many facts scenarios of the same, each person situation’s is different. In any situation, the safest way for getting into compliance is usually through one of the IRS approved disclosure programs.
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
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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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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