It’s that time of the year when resolutions will soon be made and subsequently broken. According to the University of Scranton Journal of Clinical Psychology, only 8% of New Year’s resolutions are kept. This is not surprising given that two of the top five New Year’s resolutions include items such as “lose weight” and “enjoy life to the fullest.” The problem with these resolutions is that they are (1) vague and (2) require continual effort. And, let’s be honest, depriving oneself of the fun of eating is not compatible with enjoying life to the fullest.
This year the IRS has given many taxpayers the opportunity to make resolutions that will unambiguously change their lives. Specifically, there are a few procedures and programs currently available which allow taxpayers who previously failed to comply with foreign reporting requirements to come clean. Importantly, one of the procedures is so generous that coming into compliance should be a no brainer because it is penalty free. Under the procedure, a taxpayer who has a foreign reporting requirement because she has mere signatory authority over, but no financial interest in, a foreign financial account can come into compliance by filing a few forms. For example, a taxpayer who moves to the US from India and has retained the ability (even if unexercised) to write checks on a bank account that her relative owns has an FBAR filing requirement, even if she has no financial interest in the account. However, the taxpayer can cure any past noncompliance by simply filing current and past FBAR (FinCen Form 114) forms.
Another program recently announced by the IRS allows certain taxpayers who previously failed to disclose foreign accounts to come clean, even if the accounts were generating income that was not reported. Under this new “streamlined offshore account compliance program,” taxpayers who qualify only have to pay a 5% miscellaneous offshore penalty to be relieved of other applicable penalties. The program is available only to taxpayers who can certify that past failures to report were due to non-willful conduct. This generous program is even available to taxpayers who previously made “quiet disclosures” by filing delinquent forms without notifying the IRS in hope that the IRS would never detect the prior omissions. The major downside of this program is that it does not ensure that taxpayers will avoid criminal penalties if the IRS determines failure to file was due to willful conduct.
Finally, there is a program for taxpayers who were willful in their noncompliance with foreign reporting requirements. The program requires the payment of a significant 27.5% penalty, but will relieve taxpayers of any criminal liability (and other penalties) for previous noncompliance, even if the noncompliance was willful.
Based on our experience, it is becoming increasingly clear that taxpayers with any type of foreign relationships — including doctors or engineers who are emigrants or green card holders, or other individuals with foreign business holdings — are likely to have foreign reporting requirements, many of which are obscure. The IRS is focusing heavily on this area, and several events can cause the door to shut on a taxpayer’s ability to take advantage of the above programs. So, taxpayers that really want to make a meaningful, easy and lasting New Year’s resolution should resolve to come into compliance under one of the above programs. It will feel good to be part of the 8%.