IRS International Penalties and Relief
Unlike many other types of penalties assessed by the Internal Revenue Service (which go through the typical deficiency procedure process), foreign account penalties operate differently — to the detriment of the taxpayer. When it comes to foreign account penalties, oftentimes the Internal Revenue Service will automatically assess penalties based on the missed or incomplete filing of international information reporting forms. This is the case, even if the taxpayer does not have any unreported foreign income and even if it is the first time the taxpayer has missed filing the form — since the first-time penalty abatement relief does not apply to these types of international penalties per se. But there are certain types of penalty abatement procedures available to taxpayers, so taxpayers should be careful before being led astray by unscrupulous tax professionals who convince them to file a quiet disclosure — which can end up causing many more problems in situations where the taxpayer may have even qualified for a complete penalty waiver, such as the Streamlined Foreign Offshore Procedures. Let’s look at the options of penalty abatement for foreign account penalties.
Non-FBAR Penalty Relief
If the Internal Revenue Service has already issued a foreign penalty to the taxpayer, then they are more limited in what their options are to fight the penalty. If they can prove reasonable cause, then they may be able to get the penalty waived. If the IRS does not accept the reasonable cause submission, the taxpayer can pursue an appeal and/or a Collection Due Process Hearing. If an appeal or CDP is unsuccessful, the taxpayer may be able to go to Tax Court or pay the amount due and pursue the case in federal court.
Challenging FBAR Penalties
If the taxpayer received a penalty for FBAR, then they will have an opportunity to appeal the penalty. If they are not successful at the appeal, then they can pursue the case in federal court. In the recent case of Mendu, the Court held that the taxpayer was not required to prepay the penalty first as is required under the Flora Rule — since taxpayers do not have the opportunity to dispute the penalty in Tax Court beforehand.
Offshore Filing Procedures (Streamlined)
There are two different Streamlined Procedures that the taxpayer may qualify for either the Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP). If a taxpayer qualifies as non-willful and meets the foreign residence test, they may qualify for the Streamlined Foreign Offshore Procedures. SFOP is a great program for taxpayers who qualify as foreign residents because they have the opportunity to file delinquent tax returns and international information returns, without being assessed any offshore penalties.
Alternatively, if the taxpayer does not qualify as a foreign resident, then they may qualify for the Streamlined Domestic Offshore Procedures. The SDOP procedures are more complicated and require that the taxpayer had already filed tax returns prior. Also, Taxpayers will be subject to a 5% penalty on some, but not all, of their foreign assets.
Delinquent FBAR (DFSP) vs. Delinquent Forms (DIIRSP)
The Delinquent FBAR Submission Procedures (DFSP) are for taxpayers who only missed filing the FBAR, whereas the Delinquent International Information Return Submission Procedures (DIIRSP) are for taxpayers who missed other international reporting forms as well. Prior to November 2020, if a non-willful taxpayer did not have any unreported income, they may qualify for either the DFSP or DIIRSP depending on the facts and circumstances of their non-compliance — and avoid offshore penalties. Starting in November 2020, DIIRSP no longer provides for an ‘automatic’ complete penalty waiver. Currently, DFSP still offers a complete penalty waiver.
If a taxpayer has not yet been penalized, they may qualify to make a proactive reasonable cause submission to submit their late forms while avoiding penalties. It is important to note that there is no specific form for this type of submission, and it does require a detailed and persuasive argument to the IRS as to why penalties should be avoided. Even if the reasonable cause submission is not accepted, taxpayers still have the opportunity to challenge the penalties after they have been issued.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs. Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they will submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.