In today’s global financial landscape, private financial information is being shared among tax authorities worldwide. This exchange happens under the framework of international tax agreements such as the OECD’s Common Reporting Standard (CRS) and the U.S. Foreign Account Tax Compliance Act (FATCA), to which countries like Israel are signatories.
As a result, the U.S. Internal Revenue Service (IRS) has access to vast amounts of information, making it easier to detect non-compliance with U.S. tax laws. This means many Israelis who have not properly reported their income or assets may now face significant tax liabilities and severe penalties. Fortunately, the IRS offers a Voluntary Disclosure Program that provides individuals with a chance to rectify previous omissions and report unreported income without facing criminal prosecution.
In this article, we will explore who is required to report income, the consequences of failing to report, and how the voluntary disclosure program works—along with its benefits, potential drawbacks, and what you need to know to take advantage of this opportunity.
Could You Be Unknowingly Evading Taxes?
While it may seem like only the wealthy or intentional tax evaders are at risk, the truth is that many individuals, including ordinary people, unknowingly fail to meet their U.S. tax reporting obligations. This failure could lead to serious legal consequences, especially when individuals are unaware of the comprehensive reporting requirements that apply to U.S. citizens and residents, even if they live abroad or hold multiple citizenships.
Unreported capital could amount to billions, and many taxpayers inadvertently fall into the category of tax evaders without realizing it. If you have failed to report your income or assets correctly, you may be at risk of tax evasion charges, which can lead to significant penalties or even criminal prosecution.
Who Needs to Report Income to the IRS?
U.S. Citizens and Green Card Holders
U.S. citizens and green card holders, regardless of where they live, are obligated to report their income to the IRS if they meet certain income thresholds.
- Self-employed individuals must file if they earn $400 or more per year.
- Employees must file if they meet the income threshold for their filing status, which can include:
- Single: $14,600 or more
- Head of Household: $21,900 or more
- Married Filing Jointly (both spouses under 65): $29,200 or more
- Married Filing Separately: $5 or more
- Qualifying Widow(er): $29,200 or more
For individuals over 65, the threshold increases by $1,650. Similarly, if the individual is blind, the threshold increases by the same amount.
Foreign Citizens Earning Income in the U.S.
Foreign nationals who earn income in the United States are required to report and pay taxes on that income.
U.S. and Foreign Corporations
Both U.S. and foreign corporations must report income to the IRS. U.S. corporations report all revenues, while foreign corporations are required to report only income derived from U.S. sources.
What Happens if You Fail to Report?
With global financial information-sharing, discrepancies in reporting are more easily detected, leading to potential IRS investigations. Beyond the stress of such an investigation, the penalties for non-compliance can be severe. Some possible consequences include:
- A penalty of up to 25% of the unpaid tax liability for failure to file on time.
- Fines of approximately 20% for inaccurate reporting.
- Late payment penalties, typically around 0.5% per month of the unpaid tax liability.
- Interest charges of approximately 6% per year on unpaid tax.
- Criminal charges for failure to report income, which could lead to significant fines or even imprisonment.
In extreme cases, individuals with substantial unpaid taxes may face the revocation of their U.S. passport if their tax debt exceeds $50,000.
Have You Failed to Report Your Income? The Voluntary Disclosure Program Might Help
To encourage compliance and address the large amounts of unreported revenue, the IRS introduced the Streamlined Foreign Offshore Procedures program. This voluntary disclosure initiative allows U.S. citizens abroad to rectify past tax filings and resolve outstanding tax issues without the risk of criminal penalties, provided that the failure to report was not willful.
Key Features of the Voluntary Disclosure Program
The program offers several benefits, including:
Limited Lookback Period
The disclosure program limits the lookback period for reporting past income:
- Income tax returns for the past three years.
- Foreign Bank Account Reports (FBARs) for the past six years.
This restriction on the lookback period helps to prevent the IRS from auditing decades of financial history, which could otherwise expose taxpayers to significant liabilities.
Immunity from Criminal Prosecution
Individuals who participate in the program and demonstrate that their failure to report was unintentional are granted immunity from criminal prosecution. However, if the IRS determines that the failure to disclose was intentional or fraudulent, the individual may still face fines and other penalties.
Forms Required for Submission
To participate in the Voluntary Disclosure Program, applicants must submit several forms, including:
- Form 1040: Income tax returns for the past three years, either original or amended.
- FBAR (Foreign Bank Account Report): Any foreign financial accounts exceeding $10,000 must be reported for the past six years.
- Bona Fide Statement: Applicants must submit a statement explaining why they failed to file past reports and affirm that the non-compliance was unintentional. The wording of this statement is critical, as it may influence the IRS’s decision on how closely to scrutinize the case.
Our Recommendation
As the global sharing of financial data increases, many Israelis unknowingly face risks due to non-compliance with U.S. tax laws. The IRS’s Voluntary Disclosure Program offers a potential pathway to resolve these issues. However, the process can be complex, and it’s essential to have professional guidance to navigate it successfully.
Contact MasAmerica, your U.S. tax advisor in Israel, for expert advice. Together, we will determine the best strategy to address your tax situation and help you achieve peace of mind.
