Are you a U.S. taxpayer with foreign assets? You’ll want to tune into our series. In part one of this series, we addressed the IRS prescribed procedure for the submission of delinquent foreign related informational forms where there was no underreporting of income. In this installment we are going to discuss the recommended disclosure procedures where there has been an underreporting of foreign income and the streamlined filing compliance procedures.

What is the program?

This program can both eliminate or reduce penalties associated with the related filings as well as limiting the number of years that need to be reported.

How does it work?

Essentially it entails filing up to three years of amended or missing income tax returns and six years of foreign bank reports (FBARs) along with a certification that the omissions were non-willful. According to the IRS non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

What are the penalties?

Here’s where it gets a little complicated. For taxpayers residing in the US the penalties are based on five percent of the highest aggregate balance /value of the unreported foreign assets during the years being reported.

For taxpayers residing outside of the US in one of the three reporting years there is no five percent penalty imposed thus making the program even more attractive.

Presumably the rationale for such a distinction is that when one is living in the US, they should have better familiarity with their tax obligations.

The penalty is in addition to paying the tax owed along with interest.

Am I eligible for the program if I didn’t file a return?

Here again the Service is more lenient with those individuals residing outside the US for the requisite period. Those residing outside the US are eligible whether or not they have previously filed. If one resides in the US, it is only applicable for amended filings. The rationale here is that those residing in the in the US are being held to a higher standard regarding their filing obligations.

Should I wait until I hear from the IRS to act?

No, as with most other programs you are only eligible if you get to the IRS before they find you.

How strictly do they interpret being non-willful?

Tough question as the submissions are being evaluated by different IRS personnel at various points in time. It is a subjective determination. Therefore, the non-willfulness certification statement takes on so much importance. At the one end of the spectrum, you have the accidental US citizen who has never lived in the US who was understandably unaware of their reporting obligations. Somewhere in the middle you have a US citizen who moved overseas who erroneously believed that this terminated their US tax obligations. At the other end of the spectrum, you have a US citizen who has resided in the US for their entire life who has squirreled away millions of dollars in Swiss bank accounts. This latter person may want to consider a different IRS program that provides protection against criminal prosecution.

Our International Tax Services team at KLR specializes in the analysis and minimization of worldwide income tax obligations. Contact our International Tax Services team for assistance.