Streamlined Tax Amnesty

Under certain circumstances, Americans living in another country can back-file their returns through a complex process, effectively erasing tax penalties and settling their bill with the IRS. If you are a U.S. citizen or legal permanent resident who has been living abroad for some time, you are probably filing local tax returns but may have forgotten that you are required to file tax returns in the U.S. If so, you can correct this misstep to avoid serious consequences later on. If you think you may owe the IRS, explore your options for tax amnesty.
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For those whose non compliance is considered “willful”, the streamlined procedures above may not be an option. Therefore Voluntary Disclosure is needed. The IRS developed the OVDP (Offshore Voluntary Disclosure) back in 2009 when it was first referred to as OVDI. The purpose of the initiative is to help U.S. Taxpayers disclose previously unreported offshore accounts, assets, investments and income. In 2018, the IRS closed OVDP, but updated the traditional voluntary disclosure (VDP) in order to expand the offshore reporting procedures.

While the general practice of IRS OVDP and Offshore/Voluntary Disclosure is similar to what it was before, there have been some significant changes.

1. Previously, OVDP (Offshore Voluntary Disclosure) required that applicants had at least some offshore (aka foreign or international) income in order to apply. Now. with the updated voluntary disclosure procedures, IRM will be the only disclosure option for willful applicants (or those not applying for reasonable cause/delinquency proceedings)

2. The IRS released an updated form 14457 (which was a form previously used in OVDP, but not for preclearance).

3. Typically, under the new procedures, the disclosures will be for 6 years (which is less than the 8 years required under OVDP). BUT, if a person wants to submit for prior years beyond the 6 years, that may be a possibility.

4. With the prior OVDP, there was a 20% annual penalty on the unreported taxes due. Now, Taxpayer will pay a 75% penalty on the amount of tax due (for the highest year only).

5. The IRS issued a 27.5% penalty (or 50% if a bad bank) for the year with the highest unreported foreign account balance. Under the updated procedures, the IRS will refer to the IRM 4.26.16 and 4.26.17. That generally means that the penalty is $100,000 or 50% maximum value of the account, whichever is GREATER.

6. Under prior OVDP rules, informational returns did not receive preferential treatment. Now, the IRS will NOT automatically issue penalties against applicants who failed to file informational returns.

Informational returns typically include:

  • Form 5471 (Corporation)
  • Form 5472 (Corporation)
  • Form 8865 (Partnership)
  • Form 3520-A (Trust)