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Starting fresh with the IRS all there is to know about the IRS’s voluntary disclosure plan

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It is no longer a secret that our private financial information is being passed between the tax authorities in the world. This exchange is done within the framework of the tax standards set by the OECD, and within the framework of the Financial Information Exchange Treaty that Israel has signed with the United States.

The increasing amounts of information exchanged, along with the increased investigative efforts on the part of the U.S. Tax Authority, the IRS, exposes many Israelis not only to significant tax liability but also to severe sanctions due to lack of reporting.  Fortunately, there is a voluntary disclosure plan that can help in such cases – a plan that makes it possible to retroactively report unreported profits.

In the following article, we will review all types of taxpayers who are required to report, briefly discuss the sanctions for non-reporting, and review the voluntary disclosure plan – its advantages, disadvantages, and possible routes. So, if you want to know if you might be considered a tax evader who is exposed to criminal sanctions, and what can be done to prevent it – keep reading.

 

Could it be that you are evading tax without your knowledge?

Contrary to popular belief, unreported profits and assets are not owned solely by wealthy tycoons or lawbreakers – unreported capital is estimated at many billions, and many of these assets are often owned by ordinary people that have not complied with the reporting obligation imposed on them. Given the extensive reporting obligations that exist in the United States, many people are not even aware of the reporting obligation that applies to them and may be found to be tax evaders exposed to criminal sanctions.

 

Who is required to report income to the U.S.A IRS?

U.S. Citizens and Green Card Holders

Any U.S. citizen, and any green card holder, even if they do not live in the United States, hold additional citizenship, or never visited the United States, must report income tax to the U.S. Tax Authority, provided they meet the statutory income thresholds.

 

As for the self-employed, the income threshold is particularly low and stands at $400 a year. Thus, any self-employed person with an annual income higher than $400 must file a tax return. As for employees, different income thresholds have been set based on the personal status of the applicant – single (single or divorced/widowed without children), married filing separately, married filing together, household owner, and known widower.

The following is a table containing the relevant income thresholds according to submission status:

table: [column:A {single, Household owner, Married filing together, Married filing separately, Known widower}; column B {12,200$, 18,350$, 24,400$, 5$, 24,400$}];

If the applicant is over the age of 65, an additional $1,650 must be added to the income specified in the table. Similarly, $1,650 must be added to the income specified in the table if the applicant is blind.

 

Foreign citizens with income earned in the United States

Any foreign citizen who earned income in the United States must report income taxes for that income.

 

U.S. and Foreign Corporations

Corporations are another entity that is required to report income to the U.S. IRS. U.S. corporations must report all of their revenues, while foreign corporations must report only their income originating in the United States.

 

What are the consequences of failing to report?

As mentioned above, in an attempt to increase enforcement and deterrence, the tax authorities around the world have signed broad financial exchange agreements. This means that discrepancies in reporting or non-reporting are more easily identified and may provoke an investigation of taxpayers by the U.S. Internal Revenue Service. Beyond the fact that such investigations are not a pleasant experience, the sanctions that will apply to tax evaders are extremely severe.

The following are some of the sanctions that will be imposed for non-reporting or inaccurate reporting:

  • Failure to file the report on time may result in a fine of up to 25% of the tax liability.
  • Inaccuracy in the report carries a fine at a rate of approximately 20% of the tax liability.
  • A delay in the payment of income tax also entails a fine of about 0.5% of the original tax liability.
  • In addition to all these fines, an annual interest rate of approximately 6% of the tax liability should be added.
  • Failure to report revenue or inaccurate reporting may be considered a criminal offense.
  • Those with significant tax obligations may be exposed to the confiscation of their American passports.

As we can see, an application that did not report his income and assets or reported them inaccurately will be exposed to immense liabilities.

 

You did not report your income and you are worried about severe sanctions?

A Voluntary disclosure program might help you

There is a widespread understanding among U.S. tax authorities that most U.S. citizens living outside the United States do not meet their reporting obligations, not out of malicious intent but out of a lack of recognition of the obligation. Since there is also a widespread understanding that the amount of unreported revenue and profits are extremely large, there is an attempt to encourage American citizens who have not filed the reports so far, to begin reporting to the tax authorities. Thus, the Streamlined Foreign Offshore program was founded.

 

The nature of the voluntary disclosure plan

The plan allows U.S. citizens living outside the United States to settle tax returns, pay the tax they owe, and open a new, clean page with the tax authorities. Unlike years past when retrospective disclosure involved heavy fines, under the new plan taxpayers receive protection from criminal sanctions. It should be noted that if it turns out that the lack of disclosure was done with malicious intent, the U.S. IRS may impose fines and other sanctions.

 

Program Benefits

Obsolescence

The plan allows income tax reports of the past three years to be filed, and FBAR reports of the past six years, in a way that eliminates any tax liability of the years before. In other words, since there is no statute of limitations when it comes to taxes, the plan prevents a situation of retrospective examination of decades back.

 

Immunity

Grants immunity from criminal proceedings and the imposing of fines (as long as the lack of reporting is done with no malicious intent).

 

Forms to submit

Tax Return

Tax reports on Form 1040 for the last three years. Or revised tax reports on designated forms.

 

FBAR Report

Reporting financial accounts outside the United States worth more than $10,000 for the last six years.

 

Bona-fide statement

A statement in which you declare that you meet the criteria for the program and that the non-submission was made in good faith. In the form, the applicant is asked why he did not file the past reports. The manner in which this subject is addressed is important, since it may influence how closely the case will be examined.

 

Our Recommendation

As the information exchange trend intensifies, many Israelis are exposed to unnecessary sanctions. The voluntary disclosure program may help many of them, but it takes knowledge and experience to get through the program. Contact us for advice, and together we will decide what tax strategy is best for you.

The aforesaid should not be regarded as legal advice. It is advisable to consult with the MasAmarika team before any action. The service is provided by a professional team, fluent in English and Hebrew, and includes attorneys and accountants with American licenses.

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