NEW YORK (Reuters) - If you have foreign assets - whether or not you live abroad - the deadline to file with the Internal Revenue Service is June 30. But for those who have not filed the forms previously and are trying to come back into the system, some new rules from the IRS are going to help distinguish between true tax cheats and American citizens abroad who feared the massive penalties required by voluntary disclosure amid the recent IRS crackdown.
The IRS announced that it would help U.S. citizens overseas who are considered low compliance risks - including dual citizens (many Canadians), and those with foreign retirement plans - square their tax obligations through the voluntary disclosure program without facing penalties or additional enforcement actions, starting September 1.
To qualify, these people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years. IRS Commissioner Doug Shulman called the announcement “a series of common-sense steps to help U.S. citizens get current with their tax obligations and resolve pension issues.”
There are between 5 million and 6 million Americans living abroad. The FBAR (Report of Foreign Bank and Financial Accounts) form is required of any U.S. person who has a financial interest or signature authority over foreign financial accounts whose value topped $10,000 at any time during the calendar year. The forms are complicated, and compliance was so low, that the government started a crackdown in 2009.
Since then, the IRS has brought in more than $5 billion in back taxes, interest and penalties from 33,000 disclosures made under the first two IRS programs. An additional 1,500 disclosures have been made under the latest program for an unspecified amount. How many more billions of dollars remain to come in - whether through voluntary disclosure or negotiated agreements with foreign banks - is anybody’s guess, but it’s likely to still be quite high.
Through all of this, American expats and dual citizens have complained about being unfairly lumped in with high-net-worth tax cheats. (See previous Reuters story link.reuters.com/rad29s) The new move clearly distinguishes the two groups.
“I think this is a tremendous development,” says Scott Michel, president of Caplin & Drysdale in Washington, who focuses on tax controversies and has dealt with hundreds of voluntary disclosures. “What the IRS has done here represents a sound and appropriate exercise of discretion in carving out a very large group of people — American citizens who have lived outside of the U.S. for years and who owe little or no tax.”
The voluntary disclosure programs - the current one opened in January and does not have a scheduled end - offer lower penalties than would be assessed in an audit, plus amnesty from criminal prosecution. But the penalties remain steep - currently 27.5 percent of the highest account balance. This is especially so for those who failed to file the FBAR form, but owed no or minimal U.S. tax.
The new streamlined rules will also allay fears over the fate of foreign retirement plans, such as the Canadian Registered Retirement Savings Plans. Tax treaties often allow for income deferral, but taxpayers are supposed to elect to do this on what tax lingo calls, “a timely basis.” Expats or dual citizens who weren’t up-to-date on their U.S. tax filings obviously missed that timing. The streamlined procedures for low-risk Americans abroad will allow those who have foreign retirement accounts to make a late election, thus allowing them to get back into the tax system without fear of losing their retirement nest eggs to back taxes, interest and penalties.
“For the school teacher or vet in Canada, it means their retirement savings are safe,” Michel says.
At the same time as the IRS announced the easing of requirements for low-risk American expats, it’s tightening the noose on taxpayers with offshore accounts who have attempted to evade the requirements.
Under existing law, if a taxpayer challenges disclosure of tax information by a foreign government in a foreign court - say Switzerland - that taxpayer is required to notify the Justice Department of the appeal, but the rule had been without teeth.
“By my own fairly broad, but anecdotal, experience, I am convinced there are many Americans who have tried to prevent disclosure of foreign accounts by going to court in Switzerland or wherever,” Michel says. “Now there’s a process where if someone initiates a voluntary disclosure only after losing in Switzerland, they become ineligible for the program.”
While the foreign legal proceedings may be secret, he says, all the IRS has to do is incorporate a simple question into the disclosure process - and if you lie, you could not only be kicked out of the program, but prosecuted for perjury.
“I think this will prevent a lot of what’s been going on behind closed doors when Americans have been challenging disclosures abroad, and if they lose running to the IRS before their name gets turned over,” Michel says.
The IRS also put taxpayers on notice that while the current voluntary disclosure program is open-ended, it could cut off certain taxpayers’ eligibility once the U.S. government had taken action against their financial institution. As the U.S. government pursues foreign banks to turn over details of their American clients’ accounts, this could flush out more assets stashed abroad in advance of any deals reached with those banks.
Editing by Lauren Young and Phil Berlowitz