In a prior U.S. Tax Tip, (July 2018), we had outlined 5 new, at the time, compliance programs that the IRS Large Business and International division (LB&I) introduced. On July 19, 2019 the IRS announced 6 new compliance programs, bringing the total to 59. These new programs are
- S Corporations Built in Gains Tax
- Post OVDP Compliance
- High Income Non-filer
- S. Territories – Erroneous Refundable Credits
- Section 457A Deferred Compensation Attributable to Services Performed Before January 1, 2009.
Two of these programs should be of interest to U.S. taxpayers who live outside of the United States. Those two, being Post OVDP Compliance and Expatriation
Post OVDP Compliance
The Offshore Voluntary Disclosure Program (OVDP) was first introduced in March, 2009 and ended on October 15, 2009. Additional programs were subsequently introduced or amended in February 2011, June 2012 and June 2014. The Offshore Voluntary Disclosure Program officially ended on September 28, 2018, just under one year ago.
The Offshore Voluntary Disclosure Program (OVDP) was a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP was designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
In IR-2018-52 (March 13, 2018) the IRS estimated that more than 56,000 taxpayers had used one of the programs and that these taxpayers had paid a total of US $11.1 billion in back taxes, interest and penalties. The IRS Criminal Investigation has indicated some 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indited on international criminal tax violations.
While no one can argue that US $11.1 billion is not a lot of money, it should be noted that just before the enactment of the Foreign Account Tax Compliance Act (on March 18, 2010) Senator Carl Levin (D-MI) stated “Right now, thousands of U.S. dodgers conceal billions in assets within secrecy-shrouded foreign banks dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee of Investigations…estimated that these tax-dodging schemes cost the Federal Treasury $100 billion a year.” Economist Gabriel Zucman estimated the annual tax loss to be closer to US $36 billion. As such, over the, almost, 10 years that the various OVDPs were in place, it would have been reasonable to expect that the US Treasury would have realized between $360 billion to US $ 1 trillion in taxes, let alone interest and penalties. Whether you would consider the various OVDPs to be successful, however, is another discussion.
Under this new campaign, the IRS will address tax noncompliance related to former OVDP taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements (including, for example, Form 8938 and FinCEN 114). Taxpayers who had filed under the OVDP or the still ongoing Streamline Compliance Filing Procedures need to be aware that they must continue to timely and accurately file their U.S. income tax and information returns. They can no longer plead innocence or ignorance of the law.
The IRS will address this (potential) non-compliance by performing examinations and through “soft” letters.
With the current political environment in the U.S., the inability to tax efficiently own some foreign investments and the increased compliance costs, many U.S. citizens and long-term residents (a long term resident being defined as someone who was a lawful permanent resident, or Green Card holder, for at least 8 out of the last 15 taxable years) have made the decision to either renounce their citizenship or surrender their permanent resident status. The Quarterly Publication of Individuals Who Have Chosen to Expatriate reported 5,132 names for 2017, 3,974 names in 2018 and 1,627 names for the first six months of 2019.
There are two paths to renunciation – what is done under immigration law and what is done under tax law. The Internal Revenue Code clearly defines at what point in time an individual ceases to be a United States person for U.S tax purpose and what their filing obligations are.
The IRS is concerned that taxpayers, who expatriated after June 17, 2008, may have not met all of their filing requirements or tax obligations. The current expatriation provisions became effective June 17, 2008. The current rules require a “covered expatriate” to, among other provisions, include in their last U.S. personal income tax return, capital gains arising from a deemed sale of all property on the day before the expatriation date. (There being, however, a threshold of which gains, under the threshold, may be excluded. For 2019, that threshold is US $725,000.)
The IRS will address noncompliance through a variety of treatment streams, including outreach, soft letters and examinations. Affected taxpayers may wish to consider obtaining IRS transcripts to verify that prior filings had been received and processed by the IRS (if the required returns had indeed been filed). When you renounce, your name should also appear in a Federal Register – Quarterly Publication of Individuals Who Have Chosen to Expatriate (though it cannot be guaranteed that this register is 100% accurate). Again, affected taxpayers may want to review the Register to see if their name is listed. This requirement, to list names, was brought in under HIPAA (the Health Insurance Portability and Accountability Act of 1996 – P.L. 104-191) as an amendment by Sam Gibbons (D-FL) as a means to “shame or embarrass” people who give up U.S. citizenship for tax reasons.
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On March 13, 2018 the Internal Revenue Service announced (IR-2018-52) that it will close the 2014 Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018. Acting IRS Commissioner David Kauffer states
“Taxpayers have had several years to come into compliance with US Tax Laws under this program. All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
Beginning in 2009, the IRS initiated a series of offshore voluntary disclosure (OVD) programs to settle with taxpayers who had failed to report offshore income and file any related information return such as the FBAR. According to the IRS more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers have paid a total of US $11.1 billion in back taxes, interest and penalties.
The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. With respect to U.S. persons living in Canada, the enactment of the U.S. Foreign Account Tax Compliance Act (FATCA) and the signing of the Intergovernmental Agreement (the “IGA”), between the Government of Canada and the Government of the United States of America, required Canadian financial institutions to report information about their U.S. customers to the IRS (indirectly via the Canada Revenue Agency).
The number of taxpayer disclosures has decreased substantially over the years with only 600 disclosures in 2017. Unlike Canada, the IRS does not have an on-going voluntary disclosure program. All programs have a specific beginning and end date.
The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.
“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”
Streamlined Procedures and Other Options
Effective September 1, 2012, the IRS introduced the Streamlined Filing Compliance Procedures. These procedures were introduced for taxpayers who might not have been aware of their filing obligations.
The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. Similar to OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.
Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets:
- IRS-Criminal Investigation Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
What you need to do
If you are a US person and you have not brought your past filings into compliance time is running out. If you do not file under one of the IRS programs you may be subject to significant penalties for non-compliance. Cadesky US Tax has a long history of assisting clients with bringing their past filings up to date. We can also assist with renunciation should that be an option you wish to examine.
Please do not hesitate to reach out to any member of the Cadesky US Tax team if you have any questions.