The IRS is now working on creating a path specifically for otherwise honest people who want to comply with their U.S. tax obligations, without using the hammer of steep penalties designed primarily to punish U.S. residents trying to duck their taxes. New IRS commissioner John Koskinen, acknowledged that his agency has been fixated on tax cheats, with too little regard for “non-willful” victims of its crackdown.
“Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes.”
This is good news for an untold number of Expats who continue to stay in the shadows, not filing tax returns, as required by U.S. law.
Mr. Koskinen’s motives may not be entirely altruistic. The promise to create an easier amnesty program comes just weeks before the Foreign Account Tax Compliance Act comes into effect July 1. The law is expected to create a flood of information for the IRS to sort through.
For individuals whose only transgression is a failure to file U.S. tax returns, compliance has meant years of complicated back taxes and onerous foreign account disclosures, the threat of steep penalties and up to tens of thousands of dollars in accounting fees. As a result, many people have chosen to stay in the shadows, afraid of the heavy and unpredictable financial burden of coming clean.
In summary, any Expat is subject to the following obligations in addition to file a tax return:
FATCA. If you hold assets over $50,000 in a bank account or any other kind of financial assets outside the US during the year, you need to report it. This reporting goes with your regular income tax return deadline April 15. IRS imposes a penalty of $10,000 if you fail reporting and $10,000 for each month thereafter up to a maximum of $60,000. Criminal charges may also apply.
FBAR. If you hold assets over $10,000 in a bank account or any other kind of financial assets outside the US during the year, you need to report it. This reporting requirement is in addition to FATCA. FBAR reporting goes separately of your income tax return and its deadline is June 30. It is an online filing only. IRS imposes a penalty of $10,000 if you unwillfully omit this reporting. If wilfully, you will be subject to a penalty of $100,000 or 50% of your holdings in foreign accounts, whatever is greater. Criminal charges may also apply.
If you find yourself in non-compliance with these regulations for previous years, there are some remedies that you can benefit from.
IRS streamlined Program. If you want to come up-to-date with your foreign holdings over $10,000 because you were unaware of the FBAR rules, this is the program for you: file 3 years back income tax returns and file 6 years back FBAR reports, pay taxes, pay interest but NO PENALTIES AND AVOID CRIMINAL PROSECUTION
Offshore Voluntary Disclosure Program (OVDP). If you have willfully hidden funds in foreign accounts, then this is the best way to come clean. File 8 years back of income tax returns, 8 years back of FBAR reports, pay taxes, pay interest and pay penalties for up to 27.5% AND AVOID CRIMINAL PROSECUTION.