Important Factors for Taxpayer Offshore Disclosure Compliance

5 Essential Compliance Factors for a Successful Offshore Disclosure

5 Essential Compliance Factors for a Successful Offshore Disclosure

The Internal Revenue Service has significantly increased enforcement for offshore disclosure and foreign account filing non-compliance penalties. In years past, the IRS did not routinely penalize U.S. Taxpayers for failing to report their foreign accounts — and oftentimes, the IRS was amenable to issuing a warning letter instead of a penalty if it was a Taxpayer’s first go-around. But, with the introduction of automatically assessed penalties, many Taxpayers are now getting hit with penalties instead of a warning letter. To assist Taxpayers who are out of compliance and not under audit or examination, the IRS has developed various international tax and offshore compliance initiatives to facilitate Taxpayers with getting into compliance and disclosing prior year unreported foreign accounts, assets, investments, trusts, and entities while avoiding or minimizing penalties. Unfortunately, many less experienced attorneys are providing Taxpayers with false information about how to get into compliance, how to assess willfulness and non-willfulness, and which offshore program is best for them. Let’s look at five tax challenges of foreign asset voluntary disclosures.

Willful vs Non-Willful

The first issue Taxpayers should consider is whether they qualify as willful or non-willful. While the IRS does not provide a definitive roadmap to determine willfulness and non-willfulness — there are various regulations, cases, memoranda, and other resources for Taxpayers to properly evaluate their facts and circumstances to determine whether they believe they are willful or non-willful. The reason why the distinction between willfulness and non-willfulness is so important is that to be eligible for many of the IRS offshore tax amnesty programs, Taxpayers must certify under penalty of perjury whether they are willful or non-willful. And, willful taxpayers do not want to certify under penalty of perjury that they are non-willful — especially if they are submitting a streamlined procedure — because it may lead to more penalties and even a criminal investigation.

Which Offshore Disclosure Program is Right for You?

When a Taxpayer is willful, they generally only have one option available — which is the IRS Voluntary Disclosure Program (VDP). Previously, there was a specific offshoot of the program referred to as Offshore Voluntary Disclosure (OVDP), but that program was terminated in late 2018 and now Taxpayers follow the same general procedures whether they are submitting a domestic or foreign voluntary disclosure. For Taxpayers who are non-willful, there are several options available to them such as the Streamlined Procedures and Delinquency Procedures.

Timing the Foreign Account Disclosure

A very important issue for Taxpayers submitting an offshore disclosure is timing the disclosure. For Taxpayers to be eligible to submit to one of the offshore disclosure programs, they must not be under audit or examination. Therefore, Taxpayers must make sure that they submit their disclosure to the IRS before they are contacted by the IRS, or else they may lose eligibility. In addition, the IRS reserves the right to modify the program at any time or even eliminate the disclosure programs, so Taxpayers are also running against the clock — because the IRS does not always provide notice that they are terminating or modifying the program. For example, while the IRS did provide notice back in 2018 when they terminated OVDP, they did not provide notice before they modified the Delinquent International Information Return Submission Procedures (DIIRSP) in late 2020.

Understanding the Complexity of Offshore Reporting

Another important aspect of getting it to compliance is understanding the complexity of reporting. Oftentimes, Taxpayers will reach out to us to let us know that they were working with a less experienced firm that touted that they could handle the disclosure (and for an artificially low fee) only to find that the submission is missing several key forms such as forms 8621 or 3520/3520-A – and now the firm is charging additional fees. While different firms may have varying strategies on how to make a disclosure, there are baseline requirements for certain forms to be submitted, and the failure to submit forms that are required can lead to other issues in the disclosure. For example, if the Taxpayer has excess distributions from foreign mutual funds and the submission does not include Form 8621s — along with the required attachments when preparing excess distribution calculations — it can put the Taxpayer in a precarious position with the IRS.

Joint Accounts with Non-Disclosing Taxpayers

Finally, it is important to keep in mind that while a Taxpayer may want to voluntarily disclose their foreign accounts and assets, that does not mean other Taxpayers will want to do the same. It is not uncommon for a Taxpayer to have a joint account with another individual who is also a U.S. person who has not properly reported their foreign accounts and assets but does not want to proactively get into compliance. Taxpayers should understand that the IRS will now have the information of the third party because joint accounts require the file or to include the information of the joint holder, even if that joint holder does not want to be listed on the reporting forms.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.