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Tax situations can be tricky enough when you’re just dealing with income earned in the United States. But if you earned income in a foreign jurisdiction, including on investments, your tax situation is far more complex.
Even if you are not an American citizen, but you meet the substantial presence test as far as spending time in the United States during the fiscal year, you owe taxes to the IRS on income you’ve earned throughout the year, both inside and outside the United States.
Offshore income tax and information reporting obligations are extremely confusing for taxpayers. You have the following options for dealing with offshore noncompliance.
- Take no action: where you hope the IRS will ignore or not discover your noncompliance. This is not a realistic solution, as it could lead to criminal tax and information reporting prosecution.
- Comply going forward: where you begin complying with the FBAR, foreign information and income tax reporting requirements going forward. This is not a good solution, as the IRS is likely to discover the past omissions, potentially leading to criminal tax and information reporting prosecution.
- Quiet disclosure: where you amend your past returns to report the previously unreported foreign taxable income and omit foreign information reporting to attempt to avoid strict liability reporting penalties. This can result in draconian penalties eventually being assessed anyways, high risk audits and or the potential for criminal tax and information reporting prosecution.
- Delinquent foreign information reporting: where you file the delinquent foreign information returns and supply a penalty abatement letter explaining your reasonable cause to attempt to excuse your failure to file. This is only available where absolutely no taxable offshore income was omitted from the original tax returns.
- Streamlined voluntary disclosure: where the taxpayer that acted negligently and without criminal intent amends three years of income tax returns to pick up previously unreported offshore taxable income and pay the additional tax and interest due. They are required to supply six years of delinquent foreign information returns. They pay up to a 5% penalty on the tax year with the highest fair market value of previously unreported offshore financial accounts and income generating assets.
- Voluntary Disclosure Practice (VDP): where the taxpayer that originally acted with criminal intent earns a pass on criminal prosecution by strictly complying with the VDP program terms. They are required to amend six years of income tax returns to pick up previously evaded offshore taxable income and pay the additional tax and interest due. They are required to supply six years of delinquent foreign information returns. They pay a mandatory 75% fraud penalty on the tax year that generates the highest amount of amended additional income tax and a 50% penalty on the tax year with the highest combined fair market value of previously unreported offshore financial accounts and evaded taxable income generating assets.
If you find yourself in a situation like this, it must be handled properly, or you could become subject to draconian penalties and or face criminal tax and information reporting prosecution. To schedule a 10-minute call with an experienced international tax attorney to confidentially discuss your offshore noncompliance, contact the Tax Law Offices of David W. Klasing. We have easily handled over 800 cases involving offshore compliance issues in the past decade alone and at times this has been up to 80% of our book of ongoing business.
