US tax returns – how we can help if you are delinquent
The introduction by the U.S. of FATCA in 2010, followed more recently in 2014 by the OCED’s Automatic Exchange of Information initiative, known as the Common Reporting Standard (CRS), have had a profound effect on taxpayer behaviour. Government authorities are now exchanging taxpayer data which, not surprisingly, is starting to trigger enquiries into (suspected) undeclared funds.
The U.S. is unique (other than Eritrea!) in that it taxes individuals by reference to their citizenship rather than residence, that is to say that an individual who is a U.S. citizen is liable to U.S. tax and reporting obligations regardless of whether they are resident in the U.S. or not. This rule catches many people out, especially those that have never resided in the U.S. but happen to have been born there or have U.S. parents.
What are the sanctions?
- Individuals who become aware that they have not filed U.S. Income Tax returns (like our own Prime Minister, Boris Johnson) are liable to late filing and late tax (subject to foreign tax credits) payment penalties. Interest may also be applicable.
- An individual that has signatory authority or a financial interest in any non-U.S. bank accounts, where the aggregate balance of all of those bank accounts exceeds $10,000 in a U.S. tax year, will be required to file a Foreign Bank Account Report (FBAR) with the U.S. Department of the Treasury each year. They must take into account the highest balance of a non-U.S. bank account at any time during the tax year in determining its value for FBAR reporting purposes. The penalties for not filing an FBAR when required are $10,000 per year. A person who deliberately fails to report an account, or account identifying information, may be subject to a civil monetary penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation. Wilful violations may also be subject to criminal penalties.
- There are other penalties that the IRS can potentially impose for the failure to disclose foreign income, assets or investments. For example, individuals owning a >10% interest in a foreign (i.e. non-U.S.) company are also required to file Form 5471. A $10,000 penalty can be imposed for each annual accounting period of each foreign corporation where there is a failure to file Form 5471 by the due date, unless the taxpayer can demonstrate that there was reasonable cause for the failure to file and there was not wilful neglect.
There are three mechanisms by which individuals can become compliant with their U.S. tax filing obligations. These are outlined in very broad terms below. Individuals should seek advice on the most appropriate option for their circumstances, especially where they were aware or should have been aware of their filing obligations.
1. Streamlined Foreign Offshore Procedure
Since September 2012 certain U.S. taxpayers who are deemed to present a ‘low compliance risk’, including dual citizens and US ‘green card’ holders, have been able to become compliant under a ‘streamlined’ compliance procedure.
The main features of the Streamlined Foreign Offshore Procedure are:
- Taxpayers must file delinquent tax returns for the most recent 3 tax years along with any delinquent information returns (e.g. Forms 5471). The full amount of US tax and interest due must be submitted with the filings.
- The taxpayer must also file delinquent FBARs for the most recent 6 tax years.
- A taxpayer who is eligible to use the Streamlined Foreign Offshore Procedure and who complies with all of the instructions will generally not be subject to failure to file penalties, failure to pay penalties, accuracy-related penalties, information return penalties (i.e. Form 5471 penalties) or FBAR penalties.
- Taxpayers submitting streamlined submissions must also make a statement certifying under penalties of perjury that their failure to comply fully with their U.S. tax obligations was not due to fraud or wilful conduct. If a taxpayer previously became aware of their non-compliance and did not act immediately to rectify the position they cannot use this compliance procedure.
- It is important to note that the Streamlined program offers no closing agreement and no protection from criminal prosecution.
2. Quiet Disclosure
As an alternative to the Streamlined Foreign Offshore Procedure, a delinquent taxpayer could alternatively become U.S. tax compliant by making a “quiet disclosure” to the IRS. In this instance, the individual would file U.S. Income Tax returns, foreign information reporting forms (e.g. Forms 5471) and FBARs. Advice should be taken to determine for how many years historical tax returns needs to be filed. However, by making a quiet disclosure to the IRS there is a more significant possibility of both an audit, late filing and accuracy related penalties, and in particular the substantial penalties outlined above for the failure to file Form 5471 and an FBAR each year. A statement should accompany the tax filings explaining the facts and circumstances of the delinquency. As with the Streamlined Foreign Offshore Procedure, making a “Quiet Disclosure” does not give the taxpayer protection from criminal prosecution.
3. IRS Voluntary Disclosure
For individuals not applying for reasonable cause (i.e. they are delinquent through wilful neglect) they should consider becoming compliant with their U.S. tax filing obligations through the IRS Voluntary Disclosure Program. The purpose of the program is to provide taxpayers concerned that their conduct is wilful or fraudulent with a means to come into compliance with the law and potentially avoid criminal prosecution. The main features of the IRS Voluntary Disclosure Program are:
- The IRS will screen all voluntary disclosure requests to determine if the taxpayer is eligible. Taxpayers are required to submit a pre-clearance which, if accepted the taxpayer, is then required to submit further information including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the non-compliance.
- In general, taxpayers in the IRS Voluntary Disclosure Program are required to submit tax returns for the most recent six tax years. However, in some situations the IRS examiner can extend the scope to earlier tax years.
- In addition to the payment of any tax, penalties and interest due, the IRS may also issue a civil fraud penalty for the failure to file Income Tax returns. Generally, the civil fraud penalty will be a 75% penalty of the highest amount of tax due that arose in any year in the six year period of assessment.
- The penalties for the wilful failure to file FBARs will also be asserted. Generally, this means the penalty is $100,000 or 50% of the maximum value of the account, whichever is greater.
- However, under the IRS Voluntary Disclosure Program the IRS will not automatically issue penalties against applicants who have failed to file information reporting returns (e.g. Form 5471).
In addition to appointing a tax accountant to assist with tax filings under the IRS Voluntary Disclosure program, it is strongly recommended that any individual who seeks to become compliant under this disclosure program works with a U.S. attorney.
We can assist with the disclosure process (including written statements and preparation of the Income Tax returns, Forms 5471 and FBAR disclosures, etc).