The IRS' focus on offshore enforcement efforts and related disclosure programs has raised awareness among many U.S. citizens about their tax filing and information reporting obligations.
Situations of taxpayers with offshore compliance issues vary widely given the complexity of this area of tax law. Taxpayers that recently learned of these tax requirements should also be advised of the many options that are available, outside of the normal filing process, to help them get current with their tax obligations.
A number of the common situations and potential solutions are outlined below.
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Situation
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Compliance Option
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Taxpayers who have properly reported all taxable income but recently learned that he/she should have been filing FBARs in prior years to report a personal foreign bank account or to report signature authority over bank accounts owned by an employer.
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Taxpayers who reported, and paid tax on, all their taxable income for prior years but did not file FBARs, should file the delinquent FBAR reports according to the instructions (send to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621) and attach a statement explaining why the reports are filed late.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.
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Taxpayers who only have certain delinquent information returns, but no tax due.
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A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported, and paid tax on, all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. (The Form 5471 should be submitted with an amended return showing no change to income or tax liability.)
The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3250 if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.
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Non-resident U.S. taxpayers with delinquent returns with low risk factors (including tax owed less than $1,500/year).
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Filing Compliance Procedures for Non-Resident U.S. TaxpayersNon-resident U.S. taxpayers should file delinquent tax returns, including delinquent information returns, for the past three years; delinquent FBARs for the past six years; and additional required information regarding compliance risk. Payment of any federal tax and interest due must accompany the submission.
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Taxpayers with undisclosed foreign accounts and unreported income. Taxpayers seeking protection from criminal prosecution.
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Offshore Voluntary Disclosure ProgramThe Offshore Voluntary Disclosure Program (OVDP) offers a civil settlement structure in which taxpayers pay an offshore penalty in lieu of a number of other penalties that may be assessed in cases of offshore noncompliance. The OVDP also offers protection from criminal prosecution. In order to participate in the OVDP, taxpayers must first request acceptance into the program. Once they have been preliminarily accepted, taxpayers must submit certain information including eight years of amended tax returns, FBARs, and information returns as well as information about their offshore accounts. In addition, taxpayers must submit full payment of the tax and interest due, and certain penalty amounts.
Taxpayers who have entered OVDP who disagree with the application of the offshore penalty given the facts and circumstances of their case may elect to opt out of the civil settlement structure of the program. In such situations, the IRS will determine if penalty mitigation is appropriate.
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The IRS reminds taxpayers to consult with their Professional Tax Advisor in determining which option is the most appropriate given their facts and circumstance.
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