Many Americans who live abroad don’t realise that retaining their American citizenship means retaining their tax-filing responsibility – forever. The IRS offers various amnesty programs to help unwitting taxpayers become tax compliant without getting ensnared in penalties and charges that apply to those evading taxes with criminal intent. However, last year, the IRS terminated the OVDP (Offshore Voluntary Disclosure Program). So, many expats have been left wondering which programs they can still take advantage of, and how long those programs will be available.
What are the amnesty programs, and why were they initiated?
The two main options for expats who were behind on their taxes were the Streamlined Filing Procedures and the OVDP. The OVDP was designed for individuals who were intentionally hiding assets overseas and not reporting them to the IRS; the intent being to give them a way to come into compliance, pay some stiff penalties, but avoid criminal prosecution.
The main difference between the OVDP and the Streamlined Filing Program was based on intent. Did you intend to hide or not report your accounts to the IRS or was the omission unintentional?
The Streamlined Filing Procedures, on the other hand, are intended for individuals who did not know they were required to file US taxes while living abroad, so they are able to become compliant while also avoiding the vast penalties under the OVDP. If you are several years behind on your taxes and were unaware of the filing requirements, this program is likely the right choice. Expats who use this program have all late-filing and FBAR penalties waived.
To use the Streamlined Filing Procedures to become compliant, expats are required to include a signed statement (Form 14653) certifying the fact that they did not know about the tax-filing requirements, that they are eligible to use the amnesty program, and that the requisite FBAR forms have also been filed. Also, expats will need to file FBAR for all required years, even if they didn’t meet the $10,000 threshold that triggers the requirement.
Recently, the IRS unveiled a new amnesty program called the Updated Voluntary Disclosure Program (UVDP). This program is still new, and though the details are being sorted out, the general idea is the same as the OVDP. The new program can be used for domestic or international disclosures, but taxpayers must receive pre-clearance to use this program, and the penalties have increased quite a bit. However, the UVDP offers the same protection from prosecution as did the OVDP, and that protection is not provided to taxpayers who use the Streamlined Filing Procedures.
As a last resort, taxpayers who do not reach an agreement with the IRS through the updated voluntary disclosure program have the right to use the appeals process through the IRS Office of Appeals. The downside to this option is that it is unclear if those who use the appeals process will still be protected from criminal charges through the disclosure program.
What does the future hold for the amnesty programs?
As of now, there are no indications that any change to the Streamlined Program will happen or that it will end in the near future. But, the amnesty programs that the IRS offers are typically for a limited time, and the fact remains that the program could be close at any time. The closure of the OVDP could signal the IRS’ intent to close the program at some point. For those not in compliance with US tax filings, the best option is to become compliant now to avoid a much more difficult time with the IRS in the future.
Hopefully, should the Streamlined Filing Procedures ever be terminated, the IRS will also give a significant amount of advance notice – six months or more. Finding all the records needed to file a tax return accurately and to become compliant using Streamlined Filing Procedures can be very difficult, as it requires three years of delinquent Federal Tax Return filings and up to six years of Foreign Bank Account Reporting (FBAR).
What are the other implications?
In 2015, Congress passed the Fixing America’s Surface Transportation Act (the FAST Act), which allows the State Department to deny new passport applications and revoke existing passports in certain situations where the taxpayer is behind on their taxes.
In a worst-case scenario, the IRS, the Treasury, and the State Department could begin targeting individuals who are behind on their taxes or not reporting foreign bank accounts via FATCA and then deny or revoke their US passport.
The knock-on impact for US expats could be huge – if your host country Visa is linked to a US passport and that passport gets revoked that could lead to deportation!
What are the 2019 deadlines?
Taxpayers behind on their reporting should understand the deadlines.
The US tax deadline and the deadline for FBAR is April 15th (unless Tax Day falls on a weekend or holiday). However, expats living abroad on the due date receive an automatic extension to June 15th for the Federal Tax Returns (June 17th in 2019), and an automatic extension to October 15th for the FBARs. If expats file for an additional extension, the final deadline for the tax returns is October 15th. Keep in mind that interest will accrue on any taxes owed beginning April 15th.
Though those are the deadlines, if you are behind, you are in good company. Many expats who did not realise they were obligated to file are several years late on their tax returns. There’s no reason to panic – simply work with an accountant who specializes in expat taxes, and you will be caught up in no time.
What should expats do?
The government has undergone many changes since the original OVDP was launched in 2009 and the Streamlined Program in 2012. With both programs being revised, this could indicate that the IRS is moving away from a more lenient amnesty phase.
It's more important than ever to become compliant or truly understand the risks if you don’t. If you plan to take advantage of the amnesty programs, do it before they go away.
What about tax reform?
With the sweeping changes that came with tax reform, many expats are wondering how their taxes will be affected. In fact, a recent survey showed that 54 percent of expats did not know if they would owe more or less tax after the passage of the Tax Cuts and Jobs Act. Further, 58 percent were not confident in their understanding of how tax reform impacts them. Though business owners and expats in specific financial situations have experienced some changes, for the most part, the tax reform left expat taxation alone.
Do you have specific questions about your expat taxes?
This article was produced by The Local Client Studio and sponsored by Greenback Expat Tax Services.