Never Filed U.S. Taxes as An Expat? What to Do Next
Never Filed U.S. Taxes as An Expat? What to Do Next
The United States tax system differs from most countries in that it taxes individuals on their worldwide income based on their U.S. person status, not just their residence. In most countries, to be taxed on worldwide income, the taxpayer must be a resident of that country for more than half of the year (aka a ‘Permanent Resident’). Meanwhile, the United States taxes individuals based on their U.S. person status — whether they live in the United States or abroad, they are still taxed on their worldwide income. This is true, even if the taxpayer lives overseas and all their income is sourced from overseas. In addition, taxpayers are required to report their foreign accounts, assets, and investments on various international reporting forms such as the FBAR and FATCA Form 8938. While the U.S. tax rules can be harsh, taxpayers may be able to safely reduce or eliminate U.S. tax liability on their foreign income through the foreign earned income exclusion or by applying foreign tax credits.
First, has the Taxpayer Received any IRS Notices?
If taxpayers received a notice from the IRS, they should respond to that notice and take any action necessary. But, before taking any action, taxpayers should consult with a tax professional to assist them with understanding what needs to be filed and what steps they should take.
Stopped Filing or Never Filed?
If the taxpayer previously filed returns and then stopped filing returns, it could put them in a more precarious position than the taxpayer who has never filed returns in the first place, such as an ‘Accidental American.’ For taxpayers who previously filed tax returns and then stopped filing returns, it is important that they get into compliance before the IRS contacts them and they lose eligibility for certain amnesty programs.
U.S. and Domestic Income
It is important to note that taxpayers are required to report both their U.S.-source income and their foreign accounts, assets, and investments on their U.S. tax returns. Even if the income is tax-exempt in the foreign country or the taxpayer has already paid taxes overseas, they should be sure to include that income on their U.S. tax return as well.
Foreign Account and Asset Reporting
In addition to having to report their global income, taxpayers are also required to report their foreign accounts, assets, and investments to the U.S. government. The U.S. government has developed several different types of international reporting forms to disclose information on foreign assets, including bank accounts, investment accounts, life insurance policies, pension plans, foreign trusts, foreign gifts, and ownership of various foreign entities and partnerships. In addition, in recent years, the IRS has increased enforcement of offshore reporting non-compliance, so delinquent taxpayers should be aware of their options.
Is the Taxpayer Seeking Amnesty?
While being out of compliance can be overwhelming and scary to many individuals, it is also important to note that the IRS has developed various safe amnesty programs to assist taxpayers with getting into compliance. Depending on their specific facts and circumstances, they may qualify for one or more different programs, and then they should assess the various options based on the amount of taxes they owe, potential penalties, and overall risk tolerance levels.
Avoid Quiet Disclosure
Finally, taxpayers should steer away from considering a quiet disclosure. With a quiet disclosure, the taxpayer does not go through one of the amnesty programs to report undisclosed foreign accounts, assets, investments, and income, but rather files without going through one of the amnesty programs or starts filing forward, hoping to go undetected. While not all taxpayers will get caught, for those who do get caught, the IRS will has made it known they will suffer significant fines and penalties. Especially in a situation in which the taxpayer qualifies for an amnesty program that waives fines and penalties, there is no benefit to making a quiet disclosure.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Late-Filing Disclosure Options
If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.
*Below please find separate links to each program with extensive details about the reporting requirements and examples.
Streamlined Filing Compliance Procedures (SFCP, Non-Willful)
The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.
Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)
Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.
Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)
Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.
Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)
Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.
Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)
Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.
IRS Voluntary Disclosure Procedures (VDP, Willful)
For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).
Quiet Disclosure
Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.