In a prior U.S. Tax Tip, (July 2018), we had outlined 5 new, at the time, compliance programs that the IRS Large Business and International division (LB&I) introduced. On July 19, 2019 the IRS announced 6 new compliance programs, bringing the total to 59. These new programs are
- S Corporations Built in Gains Tax
- Post OVDP Compliance
- High Income Non-filer
- S. Territories – Erroneous Refundable Credits
- Section 457A Deferred Compensation Attributable to Services Performed Before January 1, 2009.
Two of these programs should be of interest to U.S. taxpayers who live outside of the United States. Those two, being Post OVDP Compliance and Expatriation
Post OVDP Compliance
The Offshore Voluntary Disclosure Program (OVDP) was first introduced in March, 2009 and ended on October 15, 2009. Additional programs were subsequently introduced or amended in February 2011, June 2012 and June 2014. The Offshore Voluntary Disclosure Program officially ended on September 28, 2018, just under one year ago.
The Offshore Voluntary Disclosure Program (OVDP) was a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP was designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
In IR-2018-52 (March 13, 2018) the IRS estimated that more than 56,000 taxpayers had used one of the programs and that these taxpayers had paid a total of US $11.1 billion in back taxes, interest and penalties. The IRS Criminal Investigation has indicated some 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indited on international criminal tax violations.
While no one can argue that US $11.1 billion is not a lot of money, it should be noted that just before the enactment of the Foreign Account Tax Compliance Act (on March 18, 2010) Senator Carl Levin (D-MI) stated “Right now, thousands of U.S. dodgers conceal billions in assets within secrecy-shrouded foreign banks dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee of Investigations…estimated that these tax-dodging schemes cost the Federal Treasury $100 billion a year.” Economist Gabriel Zucman estimated the annual tax loss to be closer to US $36 billion. As such, over the, almost, 10 years that the various OVDPs were in place, it would have been reasonable to expect that the US Treasury would have realized between $360 billion to US $ 1 trillion in taxes, let alone interest and penalties. Whether you would consider the various OVDPs to be successful, however, is another discussion.
Under this new campaign, the IRS will address tax noncompliance related to former OVDP taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements (including, for example, Form 8938 and FinCEN 114). Taxpayers who had filed under the OVDP or the still ongoing Streamline Compliance Filing Procedures need to be aware that they must continue to timely and accurately file their U.S. income tax and information returns. They can no longer plead innocence or ignorance of the law.
The IRS will address this (potential) non-compliance by performing examinations and through “soft” letters.
With the current political environment in the U.S., the inability to tax efficiently own some foreign investments and the increased compliance costs, many U.S. citizens and long-term residents (a long term resident being defined as someone who was a lawful permanent resident, or Green Card holder, for at least 8 out of the last 15 taxable years) have made the decision to either renounce their citizenship or surrender their permanent resident status. The Quarterly Publication of Individuals Who Have Chosen to Expatriate reported 5,132 names for 2017, 3,974 names in 2018 and 1,627 names for the first six months of 2019.
There are two paths to renunciation – what is done under immigration law and what is done under tax law. The Internal Revenue Code clearly defines at what point in time an individual ceases to be a United States person for U.S tax purpose and what their filing obligations are.
The IRS is concerned that taxpayers, who expatriated after June 17, 2008, may have not met all of their filing requirements or tax obligations. The current expatriation provisions became effective June 17, 2008. The current rules require a “covered expatriate” to, among other provisions, include in their last U.S. personal income tax return, capital gains arising from a deemed sale of all property on the day before the expatriation date. (There being, however, a threshold of which gains, under the threshold, may be excluded. For 2019, that threshold is US $725,000.)
The IRS will address noncompliance through a variety of treatment streams, including outreach, soft letters and examinations. Affected taxpayers may wish to consider obtaining IRS transcripts to verify that prior filings had been received and processed by the IRS (if the required returns had indeed been filed). When you renounce, your name should also appear in a Federal Register – Quarterly Publication of Individuals Who Have Chosen to Expatriate (though it cannot be guaranteed that this register is 100% accurate). Again, affected taxpayers may want to review the Register to see if their name is listed. This requirement, to list names, was brought in under HIPAA (the Health Insurance Portability and Accountability Act of 1996 – P.L. 104-191) as an amendment by Sam Gibbons (D-FL) as a means to “shame or embarrass” people who give up U.S. citizenship for tax reasons.
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