The Options For US Taxpayers with Undisclosed Foreign Assets

The Options For US Taxpayers with Undisclosed Foreign Assets

US Taxpayers with Undisclosed Foreign Assets

For the past several years, the Internal Revenue Service has significantly increased enforcement of international tax reporting and compliance. There are many different international information reporting forms that a U.S. taxpayer may have to file each year depending on the specific type of foreign accounts, assets, and investments that they maintain overseas. Some of the more common forms include:

• • • FBAR

    • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 8621

    • Form 8865

    • Form 8938

Some of these forms are relatively straightforward while other forms can be much more complicated — such as Form 5471 which became much more complicated and time-intensive due to the introduction of Section 965, GILTI, and FDII under the TCJA. In order to remain in IRS tax compliance with filing these forms, taxpayers must file these forms timely each year — and ensure that when they are filed, they are filed ‘substantially correct.’ Over the past several years, our Board-Certified Tax Law Specialist Team has written several articles on the different programs that are available and how they have changed over the years.  As we approach 2024, let’s look at some of the programs that still remain and which program may be right for you. It is also important to note, that the IRS reserves the right to cancel or modify these programs at any time.

*A new update to our prior article about penalty relief procedures. 

Voluntary Disclosure (VDP/OVDP)

The Voluntary Disclosure Program (VDP) has been around for many years. Back in 2009, the Internal Revenue Service had developed an offshoot of the program referred to as OVDP for offshore matters. The OVDP version of these procedures became more strict over the years before being terminated in 2018.

Since 2018, taxpayers who have unreported foreign accounts, assets, investments, and/or income and want to submit to VDP are required to submit to the traditional VDP ‘program.’

• • • IRS Voluntary Disclosure Program

Streamlined Procedures (SFCP/SDOP/SFOP)

In 2014, the Internal Revenue Service developed the stand-alone streamlined procedures that were developed out of OVDP. These procedures are designed to reduce the requirements for taxpayers who are non-willful. Depending on whether a taxpayer qualifies for the offshore program for U.S. residents SDOP or the offshore program for foreign residents (SFOP) will dictate the specific requirements, but taxpayers must be non-willful. These programs are much more complicated than meets the eye.

We have represented thousands of taxpayers in over 80 countries on matters involving offshore disclosure. Recently, unfortunately, there has been an uptick in sloppy submissions by attorneys who claim to be experts (aka ‘self-purported experts’) but are nowhere as experienced as they claim to be. And, while mistakes do happen (and can usually be fixed), depending on whether it is a serious tax error or not can significantly impact the success of the submission and the chance of an audit.

• • • Streamlined Filing Compliance Procedures

    • Streamlined Domestic Offshore Procedures (SDOP for U.S. Residents)

    • Streamlined Foreign Offshore Procedures (SFOP for Foreign Residents)

IRS Delinquency Procedures

There are some alternatives to making a streamlined submission, especially for taxpayers who do not qualify for the offshore penalty waiver under the streamlined foreign version of the program. Alternatively, some taxpayers may qualify for the delinquency procedures.

Delinquent FBAR Submission Procedures (DFSP)

There are two versions of the delinquency procedures: the first version of the program is for taxpayers who only have delinquent FBAR and no substantive changes to their tax returns. This is referred to as the Delinquent FBAR Submission Procedures.

Currently, the IRS still offers a penalty waiver for taxpayers who qualify for this program.

• Delinquent FBAR Submission Procedures

Delinquent International Information Return Submission Procedures (DIIRSP)

Taxpayers who have to file or amend other forms beyond just the FBAR do not qualify for DFSP. Instead, they qualify for the Delinquent International Information Return Submission Procedures. Prior to November 2020, the IRS all but guaranteed a penalty waiver for taxpayers who met the requirements of the program. Unfortunately, after November 2020, the IRS no longer offers an automatic penalty waiver. As a result, many taxpayers have found themselves penalized for failure to file certain forms such as Form 3520. If a taxpayer is penalized, they still have the opportunity to dispute the penalty, but it can be an uphill battle depending on the specific facts and circumstances as well as which agent or examiner is reviewing the case.

• Delinquent International Information Return Submission Procedures

Reasonable Cause

For taxpayers who can show their non-compliance was a result of reasonable cause and not willful neglect may qualify for the reasonable cause alternative to offshore disclosure. For taxpayers who qualify for reasonable cause come with they are not penalized because when a taxpayer can show reasonable cause, the IRS does not have the right to penalize them for their non-compliance.

There is no specific ‘reasonable cause form’ and Taxpayers should consult with a specialist before making any submission to the IRS.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.

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. 

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.