Foreign Tax Compliance for Those Who Did Not Complete the Offshore Voluntary Disclosure Program

 Posted on October 30, 2020 in Tax Audits

U.S. taxpayers are required to report foreign financial accounts and other offshore assets and investments, and taxes may apply to income earned from foreign sources. In the past, the IRS allowed taxpayers who had not met these requirements to become compliant through the Offshore Voluntary Disclosure Program (OVDP). This program is no longer available, and it has left some taxpayers unsure about how to report their foreign assets and pay any taxes owed while minimizing the potential penalties that may apply. 

One issue that the IRS has identified as an area of concern involves taxpayers who applied for pre-clearance with the OVDP but did not complete this program. Specifically, some taxpayers may have been denied access to the program, or they may have voluntarily withdrawn their requests. The IRS’s Large Business & International (LB&I) division will be investigating these taxpayers, and tax audits may be performed in cases involving continued noncompliance.

Options for Compliance With Foreign Tax Reporting Requirements

In some cases, taxpayers who were unable to become compliant through the OVDP may be eligible for the Streamlined Domestic Offshore Procedures (SDOP) or Streamlined Foreign Offshore Procedures (SFOP) programs. A person will qualify for this program if he or she can show that his or her noncompliance was non-willful, meaning that the taxpayer did not know about or did not understand the requirements for reporting foreign assets and income. These taxpayers will be required to comply with tax return requirements for the past 3 years, Foreign Bank and Financial Account Reports (FBAR) requirements for the past 6 years, and other required information. They must provide information about the balances of unreported foreign accounts for the past 6 years, and they must pay all outstanding taxes and interest. In most cases, a 5% penalty will apply to the taxpayer’s highest aggregate foreign account value, although this penalty may be waived in certain cases.

Those who do not qualify for one of the streamlined programs can become compliant by submitting all required tax returns, FBARs, and any other required forms. In these cases, penalties may apply, although taxpayers may be able to avoid these penalties if they can provide reasonable cause for their noncompliance. 

Taxpayers who believe they have fully complied with the IRS’s requirements must provide a statement explaining their position. These submissions must include a complete history of unreported foreign income, assets, or financial accounts and an explanation of the steps taken to become compliant.

Contact Our San Jose, CA Foreign Tax Compliance Lawyer

If you have received a letter from the IRS stating that you did not complete the requirements of the Offshore Voluntary Disclosure Program, John D. Teter Law Offices can help you prepare your response, and we will explain your best options for addressing a tax audit and minimizing the penalties you may face. To learn more about how we can help, contact a San Jose tax audit attorney at 408-866-1810 to set up a consultation today.

Sources:

https://www.irs.gov/pub/irs-utl/5935.pdf