Non-residents who are not tax-compliant have two ways to get compliant.
Many taxpayers are surprised to learn that, even if you do not live in the United States, certain taxpayers with income earned in other countries still must file and pay taxes in the US. These taxpayers would include US citizens, permanent residents (green card holders) and people with a substantial presence in the United States (i.e., if they lived in the US for 183 days or more in the past three years according to a specific IRS formula. See the details here.). Legally speaking they are “US persons for tax purposes.” If they have income earned outside the United States, they must file and pay taxes on that income with the IRS.
Often, these people discover several years down the road that they have an obligation under US tax laws but they failed to file a tax return in a timely fashion. This means they are non-compliant with their taxes for those years. For people who simply weren’t aware of their obligation to pay US taxes on that income (in other words, their failure to pay taxes was not willful), there are many different methods for getting compliant under the US tax law. One of the methods is the streamlined foreign offshore procedure. The streamlined foreign offshore procedure is fairly complex and requires gathering significant amounts of paperwork and filling out relevant forms, such as the FBAR and Form 8939. In addition, an individual who would like to use this program is required to file three years of US tax returns and six years of FBARs. If accepted to the streamline offshore procedure, the taxpayer could see significant benefits.
If the IRS accepts that the taxpayer is following the proper procedure and correctly submitting all of the paperwork required, they will not have to pay penalties for non-compliance such as failure-to-file and failure to pay penalties, accuracy-related penalties, information return penalties and FBAR penalties. However, the taxpayer shall be required pay any tax liabilities.
The IRS takes a darker view of taxpayers who were willfully non-compliant; in other words, they knew they had to file US tax returns and pay tax on foreign income but failed to do so. The IRS has another procedure for these types of taxpayers who seek to get compliant, the Offshore Voluntary Disclosure Program (OVDP), but the program requires timely disclosure and full cooperation with the IRS in order to mitigate exposure to criminal prosecution.
The process for willfully non-compliant taxpayers initially requires the taxpayer to obtain a pre-clearance from the IRS criminal investigation to determine whether the taxpayers is eligible for the OVDP. Upon receiving pre-clearance confirmation, the taxpayer is required to provide additional information.
Needless to say, taxpayers judged to be willfully non-compliant must meet a difficult standard to get compliant. The potential penalties for these taxpayers include a civil fraud penalty that can be substantial. However, there are several items that are at the discretion of the examiners, providing willfully non-compliant taxpayers with an incentive to fully cooperate with the IRS and make restitution in a timely manner.
It is highly beneficial for a US person for tax purposes to seek the counsel of an international tax lawyer before using the procedure mentioned above. The IRS is dedicated to having taxpayers pay what they owe promptly and completely, and the rules and paperwork are complex and make people anxious. THEVOZ Attorneys will evaluate each taxpayer’s situation and assist with IRS programs to be compliant with US tax laws.