US ex-pats need to get a move on to take advantage of the “last best chance” for voluntary disclosure which closes in August 2011. Working as an ex-pat has its benefits and also brings its challenges. Today this is particularly true for US citizens living abroad with respect to their tax compliance and reporting obligations that are both becoming more and more complex on an almost daily basis. Nowadays it is all too easy to become non-compliant with the evolving US laws and unwittingly become open to penalties and prosecution.
IRS targets 6 million overseas taxpayers
The US Government, through the Internal Revenue Service (IRS), the Treasury Department, and the Department of Justice, is aggressively looking for the estimated 6 million US overseas taxpayers who have not complied with their US income tax obligations.
Mandatory disclosure of accounts
Beginning in 2013 non-US financial institutions, including banks, trust companies, hedge funds and other investment vehicles will be required to inform the IRS of all of their US account holders or face severe financial penalties. Non-US corporations with substantial US owners will also have to provide information about such US persons as well.
These statutory requirements combined with whistleblowers, disgruntled bank employees and tax treaty information exchanges are expected to bring to light a substantial number of those US taxpayers who have not complied with their tax and financial disclosure obligations. These taxpayers have no option but to bring themselves up to date. The only question is the manner in which they choose to do this.
Getting compliant with the least pain - Offshore Voluntary Disclosure Initiative (OVDI)
To encourage voluntary compliance before the full impact of these efforts take place, and as a means to avoid what may be substantial penalties, on 8 February 2011 the IRS announced a voluntary disclosure initiative, the 2011 Offshore Voluntary Disclosure Initiative (OVDI). This follows a similar program offered by the IRS in 2009.
The IRS has stated that the OVDI is the non-compliant taxpayer’s “last best chance” to come forward with an element of “certainty” on the amount they will owe to the US government. After this, the implications are that the IRS will use its full arsenal of penalties, and the possibility of criminal prosecution, to aggressively find—and “punish” the non-compliant taxpayer.
Taxpayers participating in the 2011 program must file all delinquent or amended tax returns (covering tax years from 2003) and include payment for taxes and penalties by August 31 of this year. This is an extremely tight deadline, and will be hard to meet for those who must redo up to 8 years’ of tax returns.
The “fixed” penalties under this program will include regular penalties (a 20% accuracy-related penalty plus failure to file and failure to pay penalties) and in lieu of all other penalties that may apply (which can be substantial), a penalty equal to 25% of the highest aggregate balance in foreign financial accounts will be imposed.
Alternatives to OVDI? “Noisy” and “quiet” filings
Those that do not wish to participate in the official IRS program may nevertheless bring themselves up to date through two other options.
Firstly, the taxpayer can follow the IRS historic practice of accepting non-program voluntary disclosures which will also most likely avoid criminal prosecution. Both this option, as well as the current OVDI, are often referred to as “noisy” filings, and require an agreement by the taxpayer to pay all taxes and applicable penalties and to fully cooperate with the IRS.
Alternatively, the taxpayer can file back returns outside of the OVDI or the IRS’ general voluntary disclosure procedures (called a “quiet filing”). Under this approach there is now a reasonable possibility that the returns will be subject to audit and that all applicable penalties will be assessed, or as stated by IRS “[T]hose taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.” Whether penalties can be reduced or eliminated under a showing of non-wilfulness and on a “reasonable cause” basis will depend on the taxpayer’s individual facts, the negotiating status of the IRS, and possibly the ability to pay legal fees to challenge the IRS in court.
Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.