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IRS Crackdown And The Future Of Tax Amnesty Programs



Ephraim Moss

With the recent heavy focus on Congress and the Trump’s administration’s tax reform proposals, it can be easy to forget that the IRS continues to proactively crackdown on offshore tax evasion.

Ensuring offshore tax disclosure via FBAR reporting (FinCEN Form 114) and FATCA reporting (Form 8938) remains a top priority of the IRS. The IRS is also reviewing extensive account information that is being provided by foreign banks in accordance with intergovernmental agreements (“IGAs”) between the U.S. and foreign jurisdictions.

Recent IRS Efforts

According to a recent Wall Street Journal article, an IRS official noted at a conference in May of this year that the agency has taken action on 100 potential criminal cases as well as 14,000 potential civil cases, based on information on Americans that has been provided by banks in Switzerland and elsewhere through FATCA efforts.

The current tax compliance climate has spurred many delinquent U.S. taxpayers, including U.S. expats, with offshore interests to catch up with the IRS using one of its still-viable tax amnesty programs.

Tax Amnesty Programs

Currently, the two main tax amnesty programs are the Streamlined Procedures and OVDP:

Streamlined Procedures – These procedures are available for U.S. expats whose failure to file was due to non-willful conduct. Under this tax amnesty program, the taxpayer is required to file the prior 3 years of tax returns, including required information returns, and 6 years of FBARs. A delinquent U.S. expat who complies with these procedures will have to pay previously unpaid taxes with interest, but will not be subject to any penalties.

Offshore Voluntary Disclosure Program (OVDP) – The OVDP is designed for U.S. expats who are concerned that their failure to report income, and failure to disclose foreign financial accounts, might be viewed by the IRS as willful and therefore seek to avoid harsh civil penalties and potential criminal penalties. Under the OVDP program, U.S. expats are required to file tax returns and FBARs for the prior 8 years.  A taxpayer who complies with the program will have to pay back taxes with interest. However, in lieu of all other penalties that may apply to the undisclosed foreign assets and entities, including the FBAR penalty, a reduced penalty of 27.5% (which can be increased up to 50% in certain cases) will be calculated based on the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.

There are several other tax amnesty programs which may be suitable for taxpayers who do not fit within the scope of the two programs mentioned above. For example, there are special programs and procedure for taxpayers who have only failed to file FBARs or have failed to include an informational return, such as the ownership of their foreign corporation.

The Future Of The Tax Amnesty Programs

Several months ago, when IRS Commissioner John Koskinen was questioned by reporters about the future of the IRS under the Trump Administration, the Commissioner addressed the tax amnesty programs specifically. The following are excerpts from a Tax Analysts Exclusive report of the Commissioner’s interview:

TA: Despite bringing back $10 billion in taxes, interest, and penalties, and more than 100,000 taxpayers coming into compliance, on several occasions — at conferences, and I think in response to a TIGTA report — the IRS has indicated or emphasized the nonpermanence of its offshore voluntary disclosure program. Why would the IRS consider terminating or unwinding the OVDP? And if such a thing was contemplated, would there be advance notice?

Koskinen: We’re not contemplating it. In fact, I just had a conversation earlier today about how to expand and modify it and improve its operation. Part of the reason people think about why don’t we wind down is because we’ve done a lot of work looking east, particularly in Switzerland and other places. People say, ‘Well, you must be running out of possibilities.’ If you just turn around and look west, we’ve got Hong Kong, Singapore, all of Asia where a lot of people have engaged in the same kind of activities they engaged in in Europe.

So we have a lot of targets of opportunity out there, and one of the questions is, how can we encourage people to become compliant? And as we start to turn our attention to gaining data and access to data in other countries and simply in Europe, I think we’re going to find a whole lot of other taxpayers, and some are going to be in the same position. So I think we’re a long ways away from moving away from the voluntary disclosure program.

One of the reasons people have talked about winding it down is trying to encourage people you’ve got to get in. At some point, it’s going to end and then you’re going to be stuck with the normal process and you don’t want people saying, ‘I’ll just wait as long as I can.’ And so the real incentive, though, is if we find out about you after we know you exist with the banks, then the penalties and the implications go up significantly. I think that’s more of an incentive for people, and so maybe the word would go out. There are other banks in the world and other areas in the world than just Europe, and people who are maybe hiding money in other places ought to take advantage of that disclosure program, because we’re coming…

…So I think it’s an important area for us to continue to pursue. But back to the earlier question, it’s important for taxpayers generally to know we care a lot about everybody paying their fair share, and anybody who is trying purposefully to avoid the tax code and their tax obligations, we’re unhappy with them. We’re going to chase as long as it takes. If you’re trying to become compliant, we’ll work with you. But if you’re trying to avoid taxes and not be compliant, then we’re going to actually keep chasing you.

Heeding The Words Of The IRS Commissioner

With the IRS hot on the trail of U.S. taxpayers with offshore interests, it is important to take action if you are behind with the IRS.  The recent words of IRS Commissioner Koskinen evidence the IRS’s preference towards leniency if you are trying to become compliant.

A number of options are currently available to you, including and in addition to the IRS tax amnesty programs.  Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances.  Our experts at Expat Tax Professionals are available to help discuss your options and guide you through each step of the disclosure process.

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Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

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