Clock is Ticking on “Get out of Jail Free Card”

For taxpayers living and working abroad, it can be quite complicated trying to determine how to file taxes in not one but two or more tax jurisdictions.  The penalties for failing to comply in the U.S. are astronomical.  But the clock is ticking on getting into compliance. Not only does the IRS have additional funding and has recently hired 4,000 more agents (not the 87,000 that some unscrupulous outlets have been reporting) but Janet Yellen has named Douglas O’Donnell as acting IRS commissioner to replace Charles Rettig’s term on November 12. IRS Commissioner O’Donnell is a loyal career IRS employee with a history in the services and enforcement division.

While the 4,000 additional IRS agents are expected to man the phones and respond to notices, we do not fully understand the impact of the additional $80 billion funding or the impact of the new commissioner. It’s possible that the new commissioner will change the voluntary disclosure programs that are currently in place for taxpayers who have failed to fully report their foreign income or foreign assets. Many U.S. citizens are unaware that when they leave the U.S. to live abroad that they are still required to file income tax returns in the U.S.  And not only are they required to file tax returns, but they must report their worldwide income in the U.S.  Additionally, they must file foreign bank account reports, Form 8938 for specified foreign financial accounts, Form 3520 to report certain gifts and bequests from foreign persons and estates, along with numerous other foreign disclosures.  The penalties for failing to file each one of these forms typically start at $10,000 per form per year but can be much higher.

Fortunately, there are several mechanisms that the IRS has in place to help taxpayers voluntarily come forward and come into compliance.  Many of these programs apply not just to taxpayers living abroad but taxpayers living in the U.S. as well businesses and other entities.  These programs help taxpayers that have failed to report all income or all foreign assets while minimizing or in many cases completely eliminating all penalties and interest.  The key to resolving the issue is that taxpayers need to voluntarily come forward before the IRS begins a criminal or civil investigation or have been contacted regarding a delinquent FBAR investigation.

As of the date this article is published, the IRS has the following remedies available:

·         IRS Criminal Investigation Voluntary Disclosure Practice,

·         Streamlined Filing Compliance Procedures,

·         Delinquent FBAR submission procedures, and

·         Delinquent international information return submission procedures.

Each one of these has different requirements to qualify.  There are nuances to each program.  And each program has its own positives and negatives that need to be evaluated based on your unique circumstances.  One critical item to note is that there is no end date to each one of these programs.  Over the years, we have represented clients through each one of these programs as well as previous programs that have existed well over 200 times.  Here are three recent case studies that illustrate how we have assisted clients:

1.       Due to lack of knowledge of tax filing requirements, Husband & Wife failed to report gifts received from foreign family members on Form 3520, foreign assets on Form 8938, and foreign bank accounts on Form 114.  The taxpayers’ potential penalty exposure was seven-figures in penalties.  Our firm submitted a streamlined filing and the taxpayers paid $0 penalties.

2.       Corporation initially had to pay a six-figure penalty for delinquent forms 5472.  The previous accountant was unable to resolve the matter.  Our firm submitted a reasonable cause appeal and received a refund of the ENTIRE six-figure penalty within 3 months.

3.       Corporation submitted various late foreign disclosures through the delinquent international information return submission procedures.  The company was facing exposure of seven-figures in penalties and was able to mitigate the risk entirely.

There have been times when the IRS suddenly ends one of these programs or creates a new program with either better or worse terms.  If you are considering one of these programs, the time to act is now, not tomorrow.  Schedule a call today to discuss coming into compliance.  Trust me, you will sleep better at night.

For additional information concerning this alert, please contact:

Melody C. Horton at (864) 502-8311.

The information contained herein is of a general nature and should not be construed as professional advice. The reader should also be cautioned that the alert may not be specific to the reader’s exact circumstances and needs and may require additional information.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.