If you are a US citizen or green card holder living outside the United States you are still required to file US 1040 tax returns and other disclosure forms and documents required by the IRS.
You must report your worldwide income, foreign holdings of real property, foreign bank and investment accounts, bonds, securities and other financial instruments held in foreign countries, foreign mutual funds, interests in foreign companies and partnerships, and foreign holdings of other property such as automobiles, artworks, jewelry, etc. If you have sold a prime residence located in a foreign country you may be entitled to exclude reporting the sale on Schedule D of your income tax return provided that you meet certain criteria.
You are advised to consult an experienced cross border tax specialist to determine if your particular case qualifies for exclusion.
What does the IRS require?
US citizens and green card holders, no matter where they live, that have foreign bank accounts, assets, income or other entities must file the following returns and information forms if applicable:
- US 1040 Income Tax Return
- Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”)
- Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
- Form 3520-A, Information Return of Foreign Trust With a U.S. Owner.
- Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
- Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
- Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.
- Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Many Canadians that held a green card have returned to Canada and have wrongly assumed that, since the date on their green card has expired, they no longer are considered to be US residents and, therefore, no longer subject to US tax laws. The date on your green card itself may have expired but your alien resident status still exists. Think of it, if you had remained in the United States you would have routinely applied to the US Department of Immigration for a replacement card. In fact, you may still be eligible for a replacement green card (but complications may arise for failure to file your US tax returns). The US government considers a green card holder to be a residential alien until he or she physically surrenders their green card at an IRS or Department of Immigration office, a US Consulate, or a US Customs Post and receives a receipt. It is the issuing of the receipt that triggers the change in your status. If you fall into this category (you still possess an expired green card) you are urged to consult an experienced immigration attorney. If you need assistance to find an experienced attorney your local bar association may be able to recommend one.
If you have failed to file your annual US income tax returns and other returns required by the IRS you could be in deep trouble. The civil penalties alone can be financially crippling and further criminal penalties provide for maximum fines up to $500,000, 10 years in prison, or both. For detailed information regarding IRS penalties you should refer to our article entitled “Penalties Applied by the IRS”.
Voluntary Disclosure Practice: The Benefits of OVDI
Fortunately, there may be a way out of your tax mess. The Criminal Investigation Division of the IRS has a longstanding practice of allowing noncompliant taxpayers to voluntarily disclose violations of US tax laws. If a noncompliant taxpayer makes a truthful, timely, and complete disclosure and fully complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice. Taxpayers with undisclosed foreign accounts or entities should strongly consider making a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. If you are not compliant with your current tax obligations it is critical that you consult an experience tax attorney to discuss the options that will apply in your particular case. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
The current Offshore Voluntary Disclosure Initiative is a counter-part to the IRS Criminal Investigation Division’s Voluntary Disclosure Practice. Like its predecessor, the 2009 Offshore Voluntary Disclosure Program that ran from March 23, 2009 through October 15, 2009, it addresses the civil side of a taxpayer’s voluntary disclosure by defining the number of tax years covered and setting the civil penalties that will apply. The 2011 Offshore Voluntary Disclosure Initiative is available to those taxpayers, including those who have already disclosed under the longstanding disclosure practice, who come forward and complete all requirements before August 31, 2011. A 90-day extension can be applied for if a taxpayer cannot obtain foreign documents by the August 31 date.
The IRS is increasingly active in seeking out the identities of US taxpayers with undisclosed foreign assets and income and more and more sources of information are becoming available under tax treaties or as newly enacted laws take effect. The IRS is increasingly using “John Doe” warrants to force the disclosure of the names of taxpayers hiding funds outside the US from individuals (whistleblowers) that are not involved but have knowledge. Individuals who have applied for voluntary disclosure are expected to disclose others that are involved or their own application could be jeopardized.
The IRS is currently receiving a flood of reports from non-compliant taxpayers that were not previously available. Increasingly sophisticated investigative and analysis techniques enable IRS to better understand the processes used to hide overseas funds and reveal the identities of other tax violators. Hiding funds overseas is more dangerous today than it ever was in the past.
Statute of limitations
The IRS has three years to audit your tax return, and ten years from the day a tax liability is finalized to collect any tax due. A taxpayer has three years to claim a tax refund. Together, these laws are called the statute of limitations. They put time limits on various tax-related actions that you and the IRS can take.
Taxpayers may be able to file an extension to extend the time period to claim a refund. If the IRS can establish that there is a reasonable basis to suspect tax fraud the limitation period goes back 6 years. Most state tax agencies follow the federal three-year period for auditing tax returns; however some states have a longer statute of limitations.
If a taxpayer fails to claim a refund within 3 years or if the IRS doesn’t collect the full amount of tax owing within 10 years the remaining balance in each account disappears forever because the statute of limitations has expired.
A taxpayer who applies to make a voluntary disclosure must agree to the assessment of tax and penalties for all voluntary disclosure years. The statute of limitations will not apply.
Failure to make a voluntary disclosure
If you’re a US citizen or green card holder living in Canada and have not filed your US 1040 income tax returns and all required information returns you are in violation of the Internal Revenue Code. It is imperative that you contact the IRS before they send you a tax filing notice. This is a race to disclose before the IRS catches you. Once you are on the IRS radar screen you are not eligible for voluntary disclosure and you may face the full impact of civil and criminal penalties.
There are more than 10 civil penalties that may be imposed on individuals who fail to voluntarily disclosure violations. Each of these penalties has the potential to cost violators $10,000 or more for each offense.
- A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000.
- Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
- A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000.
- Failing to file an FBAR subjects a person to a prison term of up to ten years and a fine of up to $500,000.
If you require professional help with your voluntary disclosure to the IRS
The experienced tax specialists at Aylett Grant can assist you to file a voluntary disclosure with the IRS. Our professional accountants will prepare all necessary amended returns and calculate penalties and back taxes that you may owe. Our cross border tax accountants will advise you on everything that you must do to meet the requirements of voluntary disclosure and we will assist you to obtain missing documents. If you wish our experienced tax specialists can negotiate with the IRS on your behalf.
Where and How Should I Make My Voluntary Disclosure?
Voluntary disclosures should be made following the procedures outlined on the IRS website. Those with questions regarding the IRS Voluntary Disclosure and Amnesty program can call the Voluntary Disclosure Hotline at (215) 516-4777.
You can submit your intention to make a voluntary disclosure in writing. You should completely outline your situation and include any amended or delinquent returns you have already prepared. If you elect to be represented by a lawyer or tax specialist, be sure to include Form 2848 and provide a daytime phone number where you can be reached.
What Forms Must Be Filed For Your Voluntary Disclosure to the IRS?
To take part in the voluntary disclosure program you must file the following forms:
- Copies of original and amended federal income tax returns for the tax periods being covered by the voluntary disclosure.
- Accurate amended federal income tax returns of the taxpayer for all tax years covered by the voluntary disclosure.
- Written explanation of previously unreported income or incorrectly claimed deductions.
- Amended information returns for all tax years covered by the voluntary disclosure.
- Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts for all foreign accounts maintained during the years covered by the voluntary disclosure.
So called “Quiet” Disclosures
Some taxpayers have attempted a so-called “quiet” disclosure by filing amended returns and paying any related tax and interest for previously unreported offshore income – without otherwise notifying the IRS. A taxpayer who has made a “quiet” disclosure is eligible to take advantage of the penalty framework applicable to the 2011 initiative by submitting an application, along with copies of previously filed returns (original and amended) to the IRS’s Voluntary Disclosure Coordinator by August 31, 2011. Taxpayers who have made “quiet” disclosures are strongly encouraged to come forward to make timely, accurate, and complete voluntary disclosures. They should be aware of the risk of being examined and the potential risk of criminal prosecution for all applicable years if they fail to make a voluntary disclosure.
The IRS is currently reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 25 percent offshore penalty will not apply. In cases where criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure the IRS may recommend criminal prosecution to the Department of Justice.
Seek Professional Assistance
Before contacting the IRS you are strongly advised to seek professional legal and financial assistance. Aylett Grant’s internationally experienced tax experts can provide advise and assistance on all your tax and financial matters. Our tax professionals are dedicated to ensuring that you resolve your compliance problems as efficiently and stress free as possible at the lowest possible cost.
AG Tax LLP Can Help
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts who can help you with your U.S. and Canadian Tax preparation, Cross-Border Tax consulting, and all of the necessary accounting to satisfy both Canadian and U.S. regulations.
IRS Circular 230 Disclaimer: Please note that this document is to be considered other written advice. Any tax advice in this document was not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law provisions.
Furthermore, the information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.