Increased scrutiny of filings by US taxpayers living overseas causes delay for IRS and for affected taxpayers to avoid fines and penalties.
The USState Department estimates there are 9 million US citizens living and the Department of Homeland Security estimated in excess of 13 million[1] green card holders. Many [2] of these individuals are at risk of facing millions of dollars in potential fines and penalties from the increased scrutiny of the IRS because they have not adequately reported their foreign bank accounts. The IRS may levy significant fines on individuals who do not report these accounts, even when no tax obligation arises from them. However, the increased scrutiny on undeclared foreign income by the IRS has led to a backlog of these cases, which gives taxpayers with undeclared foreign income and bank accounts a narrow window of opportunity to take action to avoid being subject to adverse action from the IRS.
Recently, the IRS has formed an International Tax Enforcement Group and is employing sophisticated data mining techniques to identify non-compliant taxpayers. Under the Foreign Account Tax Compliance Act (FATCA), this group is currently gathering information on foreign financial accounts, including bank accounts held overseas to search for delinquent U.S. taxpayers and will be checking previously filed tax returns to see if the overseas bank accounts were indeed disclosed. However, due to the expansive amount of FACTA information that the IRS has received, taxpayers who have undeclared offshore accounts have a final window opportunity to rectify matters.
“Apparently the IRS has been inundated with too much information under FATCA and other information exchange programs and is still figuring out how to organize and use the data,” said Jonathan MEDOWS, CPA and Managing Member of MEDOWS International Tax in New York City. “This means that taxpayers may still have time to get their affairs in order before the IRS contacts them. One of the best alternatives for U.S. citizens and U.S. permanent residents who are inadvertently non-compliant taxpayers is to use the IRS’s Streamlined Foreign Offshore Procedures. This option is not available if the IRS has already contacted the taxpayer, so it is vital for taxpayers to contact the IRS first.”
When the IRS has information about undeclared foreign bank accounts and contacts the taxpayer who holds them, that taxpayer may not use the Streamlined Foreign Offshore Procedures, which generally allow an inadvertent non-filer to avoid tax penalties. As such it is key that taxpayers who have not declared their foreign income or foreign bank accounts do so before they are identified and contacted by the IRS.
All US citizens are required to file a tax return that includes their worldwide income, but about half of those overseas fail to do so. “Given the prevalence of this issue, our firm has established an international tax team to allow US citizen and US permanent resident taxpayers living overseas who are delinquent in their foreign income and bank account filing to tap into tax professionals with dual accounting and tax qualifications in multiple jurisdictions all under one roof,” explained MEDOWS. “The key for these taxpayers is to act now before the IRS contacts them and the opportunity to avoid significant fines and penalties has closed.”
[1] Department of Homeland Security Estimates of the Lawful Permanent Resident Population in the United States: January 2014 published June 2017.
[2] IRS Statistics for 2015 indicate some 751,180 tax returns with non-US addresses were filed. SOI Tax Stats Table 2 found at https://www.irs.gov/statistics/soi-tax-stats-historic-table-2 [Other Areas] accessed 14 Dec 2017.