If Not Now, When? US Delinquent Taxpayers and the Streamlined Filing Compliance Procedures
The IRS announced this week the ending of the Overseas Voluntary Disclosure Program (“OVDP”) effective September 28, 2018. That leaves 6 months for US delinquent taxpayers who may have wanted to use this program to come into compliance with their foreign financial asset disclosures and the reporting of foreign income to the IRS and other departments of the US Treasury.
To be honest, our firm doesn’t work with individuals who would use this program, so this announcement is not that earthshaking to our practice and our clients or prospective clients. This program is typically for US taxpayers who knowingly underreported income or foreign information to the IRS and / or willfully did not comply with US tax law. These people, if wise, will consult with US tax attorneys well versed in navigating individuals through the US tax system when one is potentially exposed to the larger civil (and sometimes criminal) penalties due to willful non-compliance.
In the context of the delinquent US taxpayer, we work with US individuals who, more often than not, reside outside of the United States, and are resident and complying with the tax laws in the country in which they live (in our firm, these people are predominantly Canadian residents). These individuals recently would have realized that either 1) they are a US citizen by birth abroad through a US citizen parent – thanks Mom and/or Dad! or 2) they are a US Citizen or Greencard holder and even though they live outside the US they should be reporting foreign assets and filing tax returns with the IRS.
Most of these individuals qualify for the Streamlined Foreign Offshore Procedures. And it is to these individuals we often find ourselves posing the following question, which seems very relevant now that the risk of the Streamlined Procedure Programs being cancelled has increased:
With respect to your US tax and disclosures, if not now, then when do you plan to correct the errors of your ways?
Do you have a plan?
Generally, the answers we receive are the same answer one would give the scale (and her workout buddy) when she has realized the “tax season ten” has snuck up on her…”I’m very busy”….”I’ll start tomorrow”….”After vacation “…mostly these are responses to being overwhelmed, busy or honestly just having something more important (and less stressful) to do. But, like your physical health, we feel the Streamlined Procedure Program is one where you should truly abide by the old adage “USE IT OR LOSE IT”. We feel you should invest in your US compliance obligations now. First of all, we know.
We know it doesn’t seem FAIR that the US, a country with which you may not identify or utilize the services offered within its borders or call home, requires you to report not only your annual worldwide income, but ALL of the financial details of your life simply because you are a US Citizen or Greencard holder.
We know it is overwhelming to discover that you, as a delinquent US taxpayer, may sit exposed to large amounts of potential penalties for failure to file a simple bank reporting form, FinCen 114.
We know that organizing the past 3 years of tax information isn’t so difficult, but compiling a 6 year comprehensive listing of all of your non-US bank and financial account and the maximum balance of each account in each calendar year is extremely time consuming, sometimes expensive and, for long closed accounts, virtually impossible.
We know that the above is just the tip of the iceberg for some US taxpayers and the fact that you, as a US taxpayer living in, say Canada, may be extremely frustrated by the fact that you may have to:
*Provide a separate reporting to the IRS of your Canadian Registered Education Savings Plan (RESP) and report the government grants and investment income and gains / losses realized on your US return
*Calculate and report the income and gains /losses earned within your Canadian Tax Free Savings Account (TFSA) on your US return
*Provide full financial statement s (restated in USD for US tax and accounting principles) in the US return for your privately owned Canadian Corporation
*Pay US tax on the passive income earned within your Canadian Holding Company
*Pay a punitive US tax rate on the income and gains earned through investing in Canadian mutual funds
We know that, as a simple taxpaying employee with standard investments in Canada (RRSP, RESP, TFSA), for a price of $39.99, you manage quite easily to prepare your own Canadian tax return so the idea of paying a tax professional 50-100 times that cost (just an example, not a fee estimate!!!) to help you through this Streamlined process seems ludicrous (and we are back at our first point regarding “fairness”).
But we also know that the amount of time involved with preparing this package for a “do it yourself”-er can take over 100 – 150 hours for a simple submission and you may not feel comfortable with it at the end (One client with whom we consulted but ultimately prepared her own submission admitted that it was something she would NEVER do again – and she saved over $15,000 Canadian in fees!).
We know all of the above are just some of the many factors that have prevented US taxpayers who are “behind in their compliance” from taking advantage of the US Streamlined Programs. When the tax at hand is daunting, it is easy to put it off until tomorrow – just like starting back at the gym (yes, we really do get it!).
By now I’m sure we sound like “Know-it-alls”…and at the risk of sounding EXTREMELY, ahem, knowledgeable…You know what else we know?
We know the Streamlined Programs are the best offerings that the IRS has presented since 2008 for non-willful delinquent US filers to come forward without fear of excessive (or any, for offshore) penalties – especially for those living overseas. The IRS has indicated that these programs won’t stick around forever and, like the OVDP, the IRS can cancel them at any time with limited notice – at which point, you can bet that fee estimate mentioned above will rise suddenly as tax advisors become overwhelmed with submission requests.
We know the IRS has indicated it will start reviewing the Foreign Financial Asset and Bank information obtained through the various intergovernmental agreements and under FATCA. In fact, our colleague, Ali Khan, CPA wrote an article on this not long ago.
We know the current US Tax Cuts and Jobs Act has legislated a (what can be a) significant tax on US Shareholders of Controlled Foreign Corporations with accumulated Earnings and Profits. Max Reed, another colleague and tax lawyer wrote an article on this tax. In short if delinquent US taxpayers who are also Canadian business owners fail to at least estimate their repatriation tax and make a payment by April 17, 2018 of at least 8% of the transition tax owing, the full amount of the tax is due in 2018 (vs just 8% of the total). This should be of significant concern to any non-compliant US Owner of a Controlled Foreign Corporation.
We know the unknown keeps you up at night.
Find out what obligations you may have as a US person living, earning and investing abroad by speaking with experienced advisors in US Expatriate Tax.
WE KNOW cross-border tax. WE KNOW the Streamlined Programs. WE CAN HELP.
Book a consultation with one of our partners at www.citizen-abroad.com
**of course this isn’t in anyway a technical advisory article, it is for information only (if that isn’t obvious already) and should not be construed to be tax advice in any way, shape or form. Rather it is instead to be considered an article intended to encourage (in a passively nagging sort of way) delinquent US taxpayers to take action and go GET TAX ADVICE.