We talk to a lot of Americans living abroad who have tax problems. A lot of them are regular people living normal lives. And for a lot of them, the problem is “I haven’t filed U.S. income tax returns for years.”
The reasons are many. “My salary was below the foreign earned income amount so I didn’t have to file” (false). “I paid tax to the country where I live so I don’t have to file the United States” (false). “I don’t have to file if I’m not living in the United States” (false). And frequently, “I meant to do it but somehow I never got around to filing, then the next year I meant to catch up but missed the deadline, and then . . . .”
Fear’s corrosive powers compound as inexorably as interest on a debt.
If you talk to the IRS (and unfortunately, most tax professionals) it will probably seem to you that your only choice is to follow the Offshore Voluntary Disclosure Program
Don’t do it. Go get legal advice from someone who’s done a ton of these already and has experience.
But my opinion is that the official program is fabulous for someone who is in deep trouble and might otherwise face a spot of prison time. For that person, the “Your money or your life!” demand from the IRS is easy to answer. Give ’em your money.
For almost everyone else, the voluntary disclosure program is stupidly expensive–in tax cost, penalties, interest, and professional fees to give the government all of the paperwork they want.
Again, look at the voluntary disclosure program and your specific situation. If the IRS has a chance to impose stiff penalties (you inherited some money and didn’t know you had to file Form 3520; hey presto a 25% penalty for missing a piece of paper!) you may want to not play the “I’m lucky” game
(Youtube). Get good advice before you strike this off your list.
After that, you have two choices. The IRS has created a system they call the “Streamlined Procedure”
. It’s full of loosey-goosey judgment calls on their end. Check it out and see if it is for you. I’ll blog a bit about it in the upcoming days. Really, this is a way for the government to solve their problem with quiet disclosures. Periodically the IRS publishes a press release solemnly swearing that it is watching all of the mailboxes at all of the IRS service centers, looking for amended tax returns or late-filed tax returns with foreign income components. They tell us that they’re setting them aside for scrutiny and they’re coming to get you
(Youtube; not Clint Eastwood this time).
Well it is a pain to go searching for miscreants. Better just to set up a desk and require everyone to turn up and surrender to you. Much, much easier. Also, this makes mass data collection easier for the IRS. And I suspect the Streamlined Procedure is all about data collection so the IRS can get smart about pursuing American’s abroad. Just as the Service used the voluntary disclosure programs to develop leads, they’re going to do it here, too.
If the voluntary disclosure program is not for you, and you don’t fit into the Streamlined Procedure’s rather restrictive criteria, then your third choice is quiet disclosure. Just file your tax returns, pay the tax, and move on with your life. Surprisingly (or maybe not so surprisingly) this is frequently the best choice. Just eat your broccoli. 🙂 If the tax professional you talk to doesn’t give serious consideration to this as an option for you, immmm, go talk to someone else. You must be willing to live with unresolved ambiguity in your life for a while. Your risk profile will have a half-life rather like radioactive decay, and it will feel that way to you. But one day the risk will be gone.
Your fourth choice–continue with your nonfiling life–is not a good idea. Life is short. Clean up your messes.
Elena Redko, CPA of our firm will be giving a 90 minute webinar on August 16, 2013. She will be talking about normal people, Americans abroad, who are way out of compliance with the IRS tax filing requirements. What are the risks? How can you fix the problem? She will talk about OVDI, the so-called Streamlined Procedure, and quiet disclosures. More information is here. Ten people maximum, and plenty of time for questions.