DISCLOSURES + NON-COMPLIANT U.S. PERSONS
U.S. Persons have to report their worldwide income no matter where they live in the world, and thus have to file annual income tax returns, as well as other tax information returns and FBARs (Report of Foreign Bank and Financial Accounts).
The IRS is now able to identify U.S. persons living outside the U.S. and the Foreign Account Tax Compliance Act (FATCA) has started to facilitate this in 2014. FATCA requires foreign financial institutions as bank, stock brokers, hedge funds, etc. to report their U.S. clients directly to the IRS. It is therefore very important for non-compliant U.S. people to regularize their situations with the IRS as fast as possible.
There are four options for non-compliant U.S. persons to regularize their U.S. tax situation. Each option depends on the U.S. person’s situation. However the source of the funds cannot be illegal.
IRS Offshore Voluntary Disclosure Program (a/k/a “Noisy” Disclosure or OVDP)
According to the IRS, the OVDP is principally intended for U.S. persons with undisclosed bank accounts and unreported income who seek protection from criminal prosecution and is available for taxpayers residing in the U.S. and outside the U.S.
With this program the taxpayers have to go back eight years and therefore file or amend (update) their tax returns (and other forms such as FBARs) to include all undeclared income for the past eight years.
The taxpayer will have to pay taxes on their undeclared income as well as interest and a penalty of 20% or 25%. An additional penalty, the Offshore Penalty, of 27.5% or possibly 50% of the maximum aggregated value of all undeclared accounts for the past eight years, will have to be paid after the IRS has reviewed all the documents in order to close the procedure.
“Streamlined” Filing Compliance Procedures:
This program is for U.S. persons that can certify that their non-compliance was due to non-willful conduct in exchange for a reduced, or no penalty. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
With this program the taxpayer only has to file or amend tax returns for the past three years, FBARs for the past 6 years and certify non-willful conduct.
For people residing outside the U.S. there are no penalties and the taxpayer will only have to pay the taxes for the past three tax years.
For taxpayers residing in the U.S., there is a penalty of 5% of the maximum aggregated end of year value of all undeclared accounts to be paid in addition to the taxes for the past three years.
Delinquent Report Filing
This program is open to U.S. persons that reported all income for U.S. tax purposes but did not file one or more information returns such as:
- the form disclosing non-U.S. bank and financial accounts (commonly called the “FBAR”),
- the form disclosing a receipt of a distribution from a non-U.S. trust or gift from a non-U.S. person, or
- the form disclosing an interest in a non-U.S. company or investment.
Failing to file those forms will carry significant penalties even if no tax is due. If a taxpayer is qualified and files delinquent FBARs and/or other information returns as provided under the delinquent report filing procedures, the IRS will not assert penalties for late filing.
Service Center Filing (a/k/a “Quiet” Disclosures)
When U.S. persons have not previously filed tax returns or not previously declared all their worldwide income to the IRS, they can file tax returns for the first time or amend their old tax returns “quietly” with the IRS. For this procedure, taxpayers will have to prepare and file three to six years of returns and FBARs, pay the taxes and interest owed for each year, and may be required to provide a written or verbal statement to the IRS.
Upon notice from the IRS, the taxpayer could be required to pay additional late filing and other penalties after the tax returns have been evaluated. If the taxpayer chooses, they could then start another procedure to try to cancel or lower those penalties.
This type of disclosure will not provide the same protection as the IRS approved Offshore Voluntary Disclosure Programs and the IRS discourages taxpayers from making quiet disclosures.
Compliance for US Taxpayers Residing Outside the United States
The purpose of this primer is to briefly outline key considerations for participation in the US Internal Revenue Service (‘’IRS’’) Streamlined Foreign Offshore Procedures, a compliance program available to U.S. taxpayers residing outside the United States. Many US taxpayers living abroad have been unaware of their US tax filing obligations and for many of these, the Streamlined Foreign Offshore Procedures is the best way of resolving outstanding tax non-compliance.
In considering whether to participate in the Streamlined Foreign Offshore Procedures (or other means of resolving outstanding tax non-compliance), US persons should be mindful of the US “Foreign Account Tax Compliance Act” or FATCA. Under FATCA, non-US financial institutions that either have entered into an agreement with the IRS or are subject to an agreement between the US and a foreign government are required to report information relating to accounts held by US persons. This information will be reported directly to the IRS or indirectly through a foreign government intermediary. Accordingly, FATCA will expose US persons with undeclared non-US accounts and assets, whether or not they voluntarily choose to disclose.
We urge US taxpayers in a non-complaint situation to consult with a US tax attorney to understand their various options. We strongly recommend that you consult first with a US attorney to ensure confidentiality of the information under the attorney-client privilege, which does not apply to non-attorneys. We have prepared this primer as an aid to understanding the Streamlined Foreign Offshore Procedures. But please note that this primer does not constitute legal or tax advice and may not be relied upon except for discussion purposes.
The Streamlined Foreign Offshore Procedures offers a waiver of most penalties for late filings and late payments of tax in exchange for filing three years of late US tax and information returns, six years of Foreign Bank Account Reports (widely known as “FBARs”), payment of late tax and interest, and a statement by the taxpayer, certifying that his or her non-compliance was non-willful.
What particularly distinguishes the Streamlined Foreign Offshore Procedures from other prior IRS compliance initiatives (besides its more generous terms) is this requirement of non-willfulness. Non-willfulness is defined here as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
 Belying the apparent simplicity of this definition is nearly one hundred years of tax jurisprudence deciding what is “willful conduct” and what is not. Because willfulness is a question of fact and dependent upon the taxpayer’s motivations, determining willfulness or its absence does not lend itself to formulaic approaches. A qualified lawyer can assist a US taxpayer in this regard.
In addressing US tax compliance issues, many US citizens are prompted to take stock of their relationship with the US in a broader context. Some dual nationals decide that renouncing US citizenship is for them. If you are considering renouncing your US citizenship, you should be aware that the US has an exit tax regime applicable to former citizens and certain other individuals. The rules of the exit tax regime are beyond the scope of this primer, but for some individuals the exit tax regime can be avoided if the person has been US tax compliant for the past five years (in addition to meeting other requirements). One common strategy is to file five years of tax returns under the Streamlined Foreign Offshore Procedures (instead of the three years of tax returns required by this program) and then to renounce US citizenship.
 IRS Form 14653, “Certification by U.S. Person Residing Outside the United States for Streamlined Foreign Offshore Procedures” .
ATAS assists Non-U.S. citizens (a/k/a “non-resident aliens”), U.S. citizens and permanent residents (a/k/a “green-card” holders), to prepare and file their required U.S. tax and other informational returns.