Many U.S. Citizens who move abroad remain ignorant of their U.S. tax obligations for many years after moving. For those unaware, U.S. citizens are taxed on their worldwide income, no matter where they live when they earn the income. While there are U.S. tax benefits to living abroad, such as the foreign earned income exclusion, there are also some additional filing obligations that may apply to U.S. citizens living abroad. If U.S. citizens have more than $10,000.00 in bank accounts located outside of the United States, they must report these accounts to the government.
If U.S. citizens own more than 10 percent of an overseas corporation, they may have to report this to the U.S. Internal Revenue Service as well. U.S. citizens must also disclose certain trust activities, and their ownership in certain foreign financial assets. These disclosures apply to U.S. citizens no matter where they live, but are more common among Americans living abroad.
The penalty for failing to file the bank account or corporate disclosures or for filing them late can become astronomical. In one case, a Floridian had $1.6 million in overseas accounts that he failed to disclose. The IRS penalized him for more than $2 million. This was a noteworthy case because the IRS doesn’t usually come down quite this hard, but fines can still reach tens of thousands of dollars regularly. Referral to the Department of Justice for criminal prosecution is also a possibility.
Many U.S. citizens residing abroad only realize they need to file these forms many years after the deadlines have passed. The IRS has had programs in place for the last few years to encourage taxpayers to file their disclosure forms, but these programs have often been restrictive and punitive. On July 1, 2014, the IRS updated its two main programs, offering a new way forward for taxpayers with delinquent forms.
The Offshore Voluntary Disclosure Program and its sister program, Streamlined Filing Compliance were both updated. While there are many details to both programs, the main points are this. The Offshore Voluntary Disclosure Program (OVDP) is for individuals who believe they are at serious risk of criminal prosecution. A person entering the OVDP must pay all penalties, but in return receives amnesty from a potential criminal prosecution. Streamlined Filing Compliance is for the less serious cases. The person using the Streamlined procedures receives no guarantees but is not expected to pay any penalties.
Until the new updates, the Streamlined Filing Compliance was much more restrictive. It only applied to Americans living abroad for several years, who owed less than $1,500 in tax, and who had not filed any tax returns for several years. The new updates lift these restrictions and open the program to anyone who fails to make disclosures due to “non-willful” conduct.
What does non-willful mean? According to the IRS, non-willful is “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” This describes many if not most overseas Americans who fail to make information disclosures.
To take part in the Streamlined Filing Compliance program, the taxpayer is asked to file three years worth of tax returns and six years worth of bank account reports. The taxpayer is also asked to sign a certification that the failure to file was non-willful. The catch here is that if the IRS decides the conduct was, in fact, willful, then the IRS will not accept the submission through the streamlined procedures and may refer the case for penalties or prosecution. If the failure to disclose was in fact willful, the OVDP is a safer program.
More information regarding these programs is available at the IRS website. As always, contact a professional if you need help with tax compliance.
*Randall J. Lindner is a principal in U.S. Tax International.