- 1 10 Streamlined Filing & Voluntary Disclosure Mistakes to Avoid
- 2 IRS Procedure for Resolving Streamlined Submissions
- 3 Streamlined Submissions
- 4 Timing the Streamlined Submission
- 5 Foreign Residence Requirement for SFOP
- 6 Penalty Calculation for SDOP
- 7 Missed International Reporting Form Filing
- 8 Misunderstanding Willfulness Issue
- 9 Voluntary Disclosure
- 10 Not Mentally Preparing for the VDP Penalty
- 11 Incorrect Preclearance Letter Submission
- 12 Planning on Claiming Non-Willfulness Later in the Process
- 13 Not Realizing there is an Automatic Audit
- 14 No Plan to Continue Subsequent Year Filings
- 15 Golding & Golding: About Our International Tax Law Firm
10 Streamlined Filing & Voluntary Disclosure Mistakes to Avoid
In recent years, the Streamlined Procedures have become much more popular, as the IRS has become much more aggressive in enforcing matters involving offshore disclosure and compliance. Each year, our international tax law specialist team publishes an article identifying common mistakes Taxpayers can avoid when submitting either a streamlined submission or voluntary disclosure submission to the Internal Revenue Service. General tax professionals who do not specialize exclusively in offshore disclosure and compliance tend to make significant mistakes with a streamlined or voluntary disclosure submission — since oftentimes the submission process can be much more complicated than meets the eye. Noting, most mistakes are not fatal and relatively easy to fix, so try not to consume too much of the online fearmongering by less-experienced tax counsel. It is important to note there is a distinction between making a faulty streamlined submission as opposed to making a good submission that may have some mistakes in it. Let’s go through 10 common streamlined and voluntary disclosure mistakes.
IRS Procedure for Resolving Streamlined Submissions
*For most streamlined submission mistakes, they can be resolved by following the IRS instructions, FAQ 16.
Let’s start out with the Streamlined Procedures and then move on to Voluntary Disclosure.
Timing the Streamlined Submission
Depending on which submission procedure a Taxpayer is applying for, there are different rules to keep in mind. For example, with a Streamlined Foreign Offshore Submission, a Taxpayer can submit original tax returns, but for a Streamline Domestic submission, the Taxpayer can only submit amended returns. These requirements must be considered in accordance with the fact that a Taxpayer does not want to make a quiet disclosure in the current year – and so timing is important.
Foreign Residence Requirement for SFOP
In order to qualify for the Streamlined Foreign Offshore Procedures and the coveted penalty waiver, Taxpayers must qualify as foreign residents. Qualifying as a foreign resident under the Streamlined Foreign Offshore Procedures has very specific requirements — and it is not as simple as living overseas for more than half the year.
Penalty Calculation for SDOP
Under the Streamlined Foreign Offshore Procedures version of the program, there is a 5% Title 26 miscellaneous offshore penalty. Not all assets are included in the penalty base, so it is important to evaluate the assets carefully to determine which assets should be excluded from the penalty.
Missed International Reporting Form Filing
Missed international reporting forms are a mixed bag. That is because while some forms are typically always required such as the FBAR and FATCA Form 8938 (presuming that the thresholds were met) – other forms are a bit more ambiguous. For example, a foreign pension may be considered a foreign trust for Form 3520/3520-A reporting, but Revenue Procedure 2020–17 eliminates the Form 3520 reporting requirement for certain foreign trusts. Likewise, while some tax practitioners are all too eager to qualify any passive investment as a PFIC (which typically requires an 8621 Form to be filed), that is not always the case that the foreign passive investments qualify as a PFIC.
Misunderstanding Willfulness Issue
If you are willful, you do not qualify for the streamline procedures, delinquency procedures, or reasonable cause. The problem is that there is no “bright-line test” to determine willful vs. non-willful — and many fearmonger-type of tax practitioners/attorneys are all too eager to throw a taxpayer into the voluntary disclosure program without providing sufficient understanding of the parameters of the VD Program and/or properly analyzing the different factors to determine willfulness.
Here are five important mistakes to avoid with IRS Voluntary Disclosure.
Not Mentally Preparing for the VDP Penalty
Under the voluntary disclosure program, the penalty is typically going to be 50% value of the unreported foreign assets. There are several different factors, including the specific facts and circumstances and the agent assigned to the case (some examiners are more apt to negotiate parts of the penalty, while others are not). But, with that said, it is important the Taxpayers go in with the understanding that they may get dinged for a 50% penalty.
Incorrect Preclearance Letter Submission
Under the revised version of voluntary disclosure, Taxpayers are required to submit a pre-clearance letter on IRS Form 14457. The entire form is not required to be completely filled out in order to submit a pre-clearance letter, and the IRS only requires part one.
Planning on Claiming Non-Willfulness Later in the Process
The Taxpayer only gets one bite at the apple. By submitting to the voluntary disclosure program under the new version of the program (post-2018), Taxpayers are essentially acknowledging that they are willful. This does not mean that they are criminals — it just means they do not qualify for the lesser non-willful civil penalty.
Not Realizing there is an Automatic Audit
Under the new version of voluntary disclosure, Taxpayers are typically audited as part of the submission process. Many of these audits are not extremely detailed like a typical tax audit, but it is still required nonetheless — and therefore Taxpayers must realize that more often than not, they will have to speak with an agent about their case under an audit-type of situation.
No Plan to Continue Subsequent Year Filings
Submitting to the voluntary disclosure program does not mean the Taxpayer is off the hook in future years. In fact, there is an international campaign directed solely at Taxpayers who have entered into OVDP — to ensure that they continue to file properly in subsequent years. Therefore, it is important for Taxpayers to be aware that they have to continue filing post-OVDP/VDP.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.