The U.S. recently passed a significant piece of legislation called the Inflation Reduction Act. The legislation includes several tax changes. One significant change that has garnered a lot of attention is the allocation of $79.6 billion in funding for the IRS. Approximately $45.6 billion will be used for enforcement as the IRS cracks down on non-compliance. Therefore, the IRS will soon have significantly more resources dedicated to tax enforcement activities. The inflow of money will allow the IRS to increase the frequency of civil and criminal investigations, hire additional employees, and improve investigative technology. The funding is available until 2031, so the IRS will likely spread the growth of their enforcement activities over the next 9 years.
With enforcement activity on the rise, so is the likelihood of being audited. Taxpayers that are not currently in compliance may wonder how they can prepare for more aggressive IRS enforcement. This is especially true if there is non-compliance on international reporting, which can carry severe penalties. Obviously, the best way to prepare is to become compliant with all U.S. tax obligations. When a non-compliant taxpayer takes steps to become compliant prior to being investigated by the IRS, they may have access to IRS amnesty programs and other noncompliance options which can become unavailable once official IRS action has been taken.
International noncompliance can involve when a taxpayer has failed to report foreign accounts, assets, investments, or income. Failing to report such items is a common error made by Americans who move abroad and mistakenly believe that they no longer have U.S. tax and reporting obligations, or are expanding business outside the U.S. It is also common among taxpayers who recently became residents of the U.S. and are unfamiliar with the U.S. tax system. Not reporting the required information can result in severe penalties and potentially criminal exposure.
The streamlined filing compliance procedures (“streamlined procedures”) are available to assist certain taxpayers who failed to report foreign accounts, assets, investments, or income. The streamlined procedures are an incredible program for taxpayers that fit the criteria, but participation in the program is barred if you are already being investigated by the IRS. Taxpayers can avoid substantial penalties by participating in the streamlined procedures. In some situations, taxpayers can become current on their taxes and international filings without any penalties.
To benefit from the streamlined procedures, taxpayers must fit certain criteria.
Non-Willful Conduct
Taxpayers must certify that their failure to meet their U.S. tax and reporting obligations was due to “non-willful conduct.” While no exact definition of “non-willful” exists for purposes of the streamlined procedures, it is generally conduct that was due to negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.
IRS Examination of Taxpayer’s Returns
If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, the taxpayer will not be eligible for the streamlined procedures. This is also true for taxpayers who are under criminal investigation by the IRS.
SSN or ITIN
All returns submitted under the streamlined procedures, or any return for that matter, must have a valid Taxpayer Identification Number (“TIN”). For U.S. citizens, resident aliens, and certain other individuals, the proper TIN is a valid Social Security Number (SSN), all other taxpayers will need an Individual Taxpayer Identification Number (“ITIN”). For taxpayers who are ineligible for an SSN but do not have an ITIN, a submission may be made under the streamlined procedures if accompanied by a complete ITIN application.
Program Details
There are two versions of the streamlined procedures, depending on how much time has been spent in the U.S. during the three preceding years. The general requirements of both versions are similar. To complete the streamlined procedures, taxpayers generally need to complete the following steps:
- file original or amended returns for the most recent 3 tax years for which the U.S. tax return due date (or properly applied for extended due date) has not passed (a fourth year may be required to address the transition tax in 2017),
- submit the necessary international information returns such as Form 5471 and Form 8938.
- File the FBAR (Foreign Bank Account Reporting or FinCEN Form 114) for the previous 6 years,
- complete and sign a statement certifying that you are eligible for the streamline procedures, that your conduct was “non-willful,” and that you have filed all necessary returns and forms, and
- pay all tax due as reflected on the original or amended return in step one and pay any penalties assessed.
If you are not in compliance with your U.S. tax obligations due to failure to report foreign accounts, assets, investments, or income, take action to become compliant as soon as possible. Being audited or investigated by the IRS would disqualify you from participating in the streamlined procedures. If you do not fit the eligibility requirements of streamlined procedures, there are other options such as the Delinquent FBAR Reporting Procedures and reasonable cause filings that may be options for you. The key is that any option is better than waiting to be audited by the IRS.
At Hone Maxwell LLP, our attorneys have extensive experience with these filings and situations. Our accounting backgrounds allow us to provide more in-depth analysis to choose the best program, and our tax controversy experience allows us to analyze the best option and discuss risks and best/worst case scenarios. As a first step, we can perform a compliance analysis to give you a complete picture of your options, costs, risks, and a recommendation for the best path to gain compliance. Please contact us today if you have any questions regarding your international reporting and possible non-compliance.
