The IRS recognizes that many taxpayers fail to timely and properly file income tax returns, information returns, and/or FBARs. Sometimes these failures are honest mistakes; but, other times such failures may be due to willful conduct.
The distinction between willful and non-willful conduct is an important one for purposes of certain programs the IRS offers to non-compliant taxpayers, i.e., the Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures (“Streamlined Procedures”). Taxpayers who have engaged in willful conduct are not permitted into the Streamlined Procedures. This is significant because the lookback period for prior years’ unpaid income tax and the amount of the penalty is generally lower under the Streamlined Procedures.
What is a T1134 information return relating to controlled and not-controlled foreign affiliates?
If a Canadian corporation or individual has an interest in a foreign affiliate, whether controlled or not, it will need to complete a T1134 information return. The T1134 information return is broken into two forms, a summary and a supplement. A separate supplement must be filed for each foreign affiliate. Read More
Often taxpayers, whether Canadian or U.S. tax filers, are self-preparing their own returns with tax preparation software packages purchased in the market place. Problems arise numerous times in that the taxpayer not being aware of tax law, has omitted to file various required annual foreign information returns. This is likely due to the fact the software is not a professional version and/or the taxpayer-preparer is not reading any of the software return’s diagnostics.
Tax Considerations When Dealing With Foreign Transactions
As a follow-up to questions, about tax considerations when dealing with foreign transactions , one of the big areas of concern is the area of foreign entities and the income effects that they have on our person tax returns. Controlled Foreign Corporations have a unique capability of delaying the paying of tax until the income is Read More
As a follow-up to my post on listening to Foreign individuals who sell investments off shore but do not know United States Tax Law, I would like to say that there are many individuals who live off shore and have never filed tax returns. The issue is that if an individual owes Federal Tax in excess of $50,000 they could lose their United States passport. Many people who say they never owed that much Read More
“High” Risk or “Low” Risk Classifications
The intensity of Internal Revenue Service review for “low” risk taxpayers will be low. For these taxpayers, the IRS will NOT assert any penalties nor will the agency pursue any follow-up actions. The skeletal information provided by IRS indicates that in order to be “low risk”, the taxpayer will have tax owing of $1500 or less for each year and his tax returns will be simple ones. To date, we do not know exactly what the IRS means by “simple” returns, but high levels of income or assets, or significant amounts of income from US-sources will render a return not “simple”. I believe that the taxpayer’s involvement in foreign entities (e.g., CFC, foreign partnership or trust) will do the same thing. Read More
Perceiving the various problems with the aforementioned options, the Internal Revenue Service announced the “Streamlined Procedure” – a friendlier and less costly approach to bring non-compliant Americans living overseas back into the tax filing system.
Here are the major points:
• Taxpayers will be required to file only 3 years of back tax returns and 6 years of FBARs, and if IRS agrees that the taxpayer is eligible for the Streamlined Procedure, no penalties will be assessed for the late filings. Read More
“Quiet” or “Soft” Disclosure
The “quiet” six year approach, while less burdensome, can still be quite expensive. Under this approach, taxpayers basically take the position that they will not go into the offshore voluntary disclosure program and instead, they “quietly” file all the late tax returns paying amounts due and interest; many also file the late FBARs. They hope the IRS will not pull any of their returns for examination. With such a “quiet” disclosure, a taxpayer runs the risk of being audited and faces the potential for criminal prosecution.
Some taxpayers have attempted to follow the IRS guidance from its December 2011 “Fact Sheet” and submitted explanatory letters with their late filings hoping to abate penalties by Read More
Continued from Part I
Voluntary Disclosure Program
Each of the IRS Offshore Voluntary Disclosure programs has required the filing of 8 years’ of back tax returns and FBARs. In addition, volumes of supporting documentation are required. Choosing this option is very time-consuming and generally is very expensive, both in terms of professional fees and penalties. These programs, however, are a welcome relief for taxpayers who face a real likelihood of criminal penalty sanctions. More information on the most recent program, the 2012 OVDP, can be accessed here. Here is a broad overview of the OVDP terms: Read More
Before you know it, tax returns will be due. Many Americans living overseas have not filed tax returns or so-called FBARs for many years, even though they were required to do so. The Internal Revenue Service’s crackdown on tax evasion through the use of foreign accounts and entities has understandably frightened many of these Americans. Many did not knowingly avoid or evade US tax, nor did they intentionally disregard their tax filing duties. They simply did not understand the tax filing requirements when living and working abroad, or they obtained incorrect tax advice. In fact, in many instances, the typical client I assist owes little, or no tax after taking into account foreign tax credits and foreign earned income and housing exclusion amounts. The problem is that when a taxpayer has a duty to file tax returns, accompanying information returns or FBARs, but does not do so, he is Read More