Under the US tax system, US persons - citizens, green card holders and residents - are required to file annual US income tax returns reporting worldwide income.
It is a legal obligation to ensure that “true and accurate” returns are filed with the IRS in a timely way to avoid risks of numerous penalties and, potentially, criminal prosecution.
The IRS is increasingly likely to find non-compliant taxpayers, as it now receives information from other countries regarding the activities of American persons abroad. Further, from 2013, foreign banks will become increasingly likely to hand over data on their American clientele under new FATCA legislation.
Recently, the IRS has sent a strong message to US taxpayers residing abroad who may not yet have complied with their US income tax obligations.
Taking advantage of the recently announced IRS “Overseas Voluntary Disclosure” program can potentially help taxpayers reduce penalties and avoid prosecution.
Note that OVDI is not the best solution for all US persons and not all US persons are eligible for the program. As always in the past, FAWCO strongly recommends that you consult a tax professional but, given the August 31 deadline for OVDI, you should do so quickly!
We are grateful for the information in this bulletin to the UK-based firm US Tax & Financial Services Ltd, with offices in London, Zurich, Geneva and Tel Aviv ().
WHO DOES THIS APPLY TO?
All US persons, citizens, green card holders and residents are required to file annual income tax returns on worldwide income no matter where they live.
Who is a US person?
• Born in the United States.
• US parents who have lived in the United States (this is a complex area and you may need advice from a tax or citizenship expert).
• Deemed a US resident – there is a 183-day 3-year rolling average test.
• Holding a green card which has not been voluntarily rescinded or administratively revoked. The fact that the green card has expired or confiscated by immigration is not enough.
You do not need to hold a US passport to be deemed to be a US citizen!
What should be filed?
• An annual tax return reporting your income from all worldwide sources (providing you earn more than the minimum reporting requirement, see www.irs.gov for those figures).
• Informational reports detailing benefits in non-US corporations, trusts, partnerships and various other entities.
• US persons may also be required to file an annual report with the US Treasury detailing their ownership and/or signing authority in non-US financial accounts (FBAR: Foreign Bank Account Report).
• State issues will also need to be considered.
WHAT IS OVDI?
The 2011 OVDI is the latest in a number of efforts by the United States Government to encourage US persons who have not complied with their various US tax and related reporting requirements to become compliant.
The IRS has stated that the 2011 program is the non-compliant taxpayer’s “last best chance” to come forward with an element of “certainty” on the amount owed to the US government. After this, the implications are that the IRS will use its full arsenal of penalties, and the possibility of criminal prosecution, to aggressively find and “punish” the non-compliant taxpayer.
What is required under OVDI?
• The taxpayer must file all delinquent or amended returns and additional reporting obligations for 2003 through 2010 calendar years.
• The taxpayer must pay all taxes, penalties and interest charges.
• The deadline for participation in OVDI is 31 August 2011. This may be extended by 90 days if a request is submitted by this date.
What are the benefits of OVDI?
Under OVDI, individuals accepted into the program can avoid criminal prosecution. Costs, penalties and interest charges are clear and the individual has the peace of mind of being fully up to date and compliant.
While there are alternative disclosure procedures, OVDI may provide the best opportunity for the lower fixed penalties for becoming compliant.
Benefiting from OVDI reduced penalty
For US persons living outside the United States, the non-disclosure penalties are a maximum of 25%* and maybe reduced to 5% if all of the following conditions for all of the years of the voluntary disclosure are met:
a). The taxpayer resides in a foreign country;
b). The taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency including paying tax on the income from all offshore accounts; and
c). The taxpayer has $10,000 or less of US source income each year
If you qualify under the above criteria, consider taking action now, before the 31st August deadline.
Failure to disclose income can also subject you to charges related to tax evasion and willfully failing to file tax returns, filing false returns or failing to file an FBAR.
We recommend seeking advice on the most appropriate way to report your worldwide income to avoid penalties and become fully compliant. Many of your questions can be answered here at this link, where US Tax & Financial will answer questions (free of charge) to help you decide which plan and firm is best for you.
* Up to 25% of the highest aggregate balance in foreign bank accounts / entities or value of foreign assets.
Once again, we thank US Tax & Financial Services Ltd () for sharing the information in this bulletin. To see their complete fact sheet on OVDI, click .
