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The Tax Non-Compliant American Abroad: What Are Your Choices? Part II



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:

Generally, by entering the OVDP, a taxpayer is subject to the payment of tax deficiencies and interest on the back taxes due for the OVDP Time Period, which is generally 8 years. Interest is compounded daily.

For each year in the OVDP Time Period, the taxpayer is subject to the normal failure to file and failure to pay penalties (which is basically 50% of the tax due each year) and/or the accuracy-related penalty which is 20% of the tax due.

In place of all other tax or information return penalties that may be applicable, a 27.5 percent “in lieu” penalty on the highest aggregate offshore account / asset value in any year covered by the OVDP. The offshore penalty is intended to apply to all offshore holdings that are related in any way to tax noncompliance. Thus, the value of a home purchased abroad with untaxed salary would be dragged into the penalty base; similarly the value of an overseas apartment on which rental income had not been reported by the taxpayer.

Certain taxpayers may be eligible for a reduced “in-lieu” / “FBAR” penalty. Under the general terms of the program, as mentioned, this “in lieu” penalty is assessed at 27.5% . The ability to reduce it to 12% or 5% is a huge benefit. All of the exceptions are not possible to discuss in a blog posting, and professional advice should be sought in order to obtain the best information as it applies to a particular taxpayer’s set of facts. In my practice I am using the 5% reduced penalty provision with some success. This provision has been very significant for US persons living in a country where they have been paying tax (e.g., Switzerland), or living in a country, typically in the Middle East region, where many jurisdictions have no individual income tax or have a tax asserted by withholding (e.g., on bank account interest). The ability to use this provision also means the taxpayer may be able to remove any real estate, business interests, and other assets from the penalty base.

Under the IRS announcement pertaining to OVDP, a reduced 5% penalty can apply if the individual is a non-US resident and meets all of the following requirements for all relevant years in the voluntary disclosure:

“taxpayer resides in a foreign country; taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and taxpayer has $10,000 or less of U.S. source income each year. For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.”

Part III  will discuss:  “Quiet” or “Soft” Disclosure

In accordance with Circular 230 Disclosure

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.

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