Each year, the IRS sends out an approximate 50 million penalty notices. Of 100 million eligible taxpayers, statistically speaking, one out of every two taxpayers will receive a notice.
The number of automated tax penalty assessments is also increasing every year, and the trend is very much true among small business, professionals, and expat taxpayers. Statistics also show that the IRS will audit one out of every 100 tax returns filed by ordinary American taxpayers.
Citizenship-based Taxation – FATCA, and FBAR
The United States of America is one of the very few countries to enforce citizenship-based taxation. If you are born accidentally in a US hospital with foreign parents on vacation, you will pay your taxes for a lifetime.
Also, tax policies such as the FATCA and the FBAR were initially designed to catch tax evaders. But now, these IRS initiatives are haunting honest, hardworking Americans who have started businesses at home, small-time side jobs, or moved overseas.
The IRS’ influence reaches around the globe, and it can identify and impose penalties on American expats who unknowingly “evaded” taxes for years. Foreign banks are rejecting American expats who failed to prove their compliance with the IRS. Even the most basic banking services have become inaccessible.
Taxpayers can access the IRS Self-Help Tool to appeal their penalty notice while expats who received the notice often contact the American government representatives for help.
However, the overseas American embassies and consulates are rarely able to help when it comes to taxation policies. Both legal and tax implications for expats are too complicated.
So what can be done when you receive the penalty notice from the IRS stating you owe years of back taxes
Expats could dispute the claim within 60 days, and the IRS generally is willing to listen.
However, the process will likely take a substantial amount of time. If the IRS isn’t willing to forgo the penalties, one is advised to pay promptly to avoid incurring interests.
If the recipient of the notice doesn’t pay the amount stated on time, the IRS would generally impose a late payment penalty of .5 percent for each month. The penalty can reach up to a maximum of 25 percent.
Using a tax professional can help you avoid penalty notices
What many American taxpayers and expats don’t realize at the moment is that they can prevent these systematic penalty assessments with the right guidance and help from well-equipped tax professionals.
The IRS offers different programs in which the expat American taxpayers could prevent the worst tax nightmare. Do not panic at the prospect of receiving the penalty notice from the IRS, and you must resort to a legal and logical solution.
Here are your options
1) Streamlined Filing Compliance Procedures
If a taxpayer non-willfully does not report foreign assets, he or she can submit six years of FBAR and three years of tax return under the streamlined procedure.
Depending on the status, there are two streamlined procedures. One called “the streamlined procedures residing in the United States” and the other called “the streamlined procedures residing outside the United States.”
The Streamlined Procedures
For eligible U.S. taxpayers residing outside the United States, the IRS will waive all penalties under the streamlined procedures.
Non-resident taxpayers might be better positioned than resident taxpayers to achieve their goal of a non-willful, no penalty resolution under the Streamlined Procedures.
Taxpayers likely consider a Streamlined submission if they are comfortable and have sufficient factual basis to certify their “non-willful” status. If there are any uncertainties or potentially difficult factual scenarios involved, consult with experienced counsel.
The purpose of seeking experienced counsel is to discover the seriousness of the situation and to be guided into the best resolution at the least overall cost.
2) The Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program designed explicitly for taxpayers with exposure to potential criminal liability and substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.
The OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
3) Quiet Disclosure
The IRS is aware that some taxpayers have made “quiet disclosures” by filing amended returns, by filing delinquent FBARs, and paying any related tax and interest for previously unreported income from the OVDP assets without otherwise notifying the IRS.
Taxpayers who have already made “quiet disclosures” are encouraged to participate in the OVDP by submitting an application, along with copies of their previously filed returns (original and amended), and all other required documents and information to the IRS’s Voluntary Disclosure Coordinator. Taxpayers are encouraged to avail themselves of the protection from criminal prosecution and the favorable penalty structure offered under the OVDP. Unlike a voluntary disclosure through the OVDP, quiet disclosures provide no protection from criminal prosecution and may lead to civil examination and the imposition of all applicable penalties.
The best approach is to work with a CPA who works in close communication with a tax attorney.
In some cases, the lawyer’s input can benefit immensely when the situation involves a possible settlement process or criminal procedure. Locus has both CPAs and attorneys on staff to provide the most effective tax services to taxpayers and American expats in the potential trouble.
Get in touch with us for your concerns or questions today and receive a personalized expat tax services from our experts.