The Noose is Closing was published by JD Supra on 5/1/19.
Now that IRS has four years of FATCA exchanged data in its computers and is embarking on a FATCA Filing Accuracy Campaign, there is a special urgency for
for noncompliant U.S. Taxpayers that did not previously exist.
Since March 2010, the U.S. has crafted a Taxpayer noose for closing the estimated annual tax gap ($458 billion according to IRS in December 2018) through creating a troika of measures for improving U.S. taxpayer reporting and related tax collections. The troika is the implementation of the Foreign Account Tax Compliance Act (FATCA), the U.S. “Partial Amnesty” programs and Internal Revenue Code (IRC) Section 7345 requiring Revocation or Denial of a Passport in Case of Certain Unpaid Taxes.
In 2007, UBS Switzerland became the target of an international U.S Department of Justice (DOJ) investigation regarding suspicions of aiding and abetting U.S. taxpayer income tax evasion. UBS Switzerland ultimately paid the U.S. government a $780 million fine and entered into a limited deferred prosecution agreement with the DOJ. This was a scandal leading to the passage of Chapter 4 of the U.S. Internal Revenue Code (FATCA) in 2009 and its signing into law in March 2010.
FATCA requires Foreign Financial Institutions (FFIs) to register with the U.S. Treasury. An FFI’s registration with the U.S. Treasury results in its assignment of a unique Global Intermediary Identification Number (GIIN). Registered reporting FFIs annually automatically report the existence of U.S. Taxpayer owned/controlled custodial accounts along with their related passive income (interest, dividends, etc.) to the U.S. Treasury.
The U.S. Internal Revenue Service (IRS) enforces FFI FATCA reporting compliance through its authorization for imposing certain noncompliance consequences. Among those, authorized disciplinary consequences for FFI noncompliance are:
- Imposition of 30% non-recoverable withholding from U.S. source Fixed Determined Annual Payments transferred to noncompliant FFIs.
- Requiring a registered noncompliant FFI to engage in an independent audit and/or IRS reporting regarding its FATCA policies and procedures; including remediating policies and procedures failings.
- Loss of an FFI’s GIIN (leading to a consequential loss of U.S. correspondent financial institution accounts and isolation from the world banking system).
Since July 1, 2014, when FFI reporting became required, the U.S. Treasury has collected an enormous amount of specific identifying and income information regarding U.S. Taxpayer owned/controlled custodial accounts in held FFIs.
FATCA created an annual IRS reporting form for FFIs and a separate one for U.S. Taxpayers with reporting obligations. These two forms are intended to cross-check each other in the IRS database.
In the beginning of 2019, the IRS Large Business and International division announced its FATCA Filing Accuracy Campaign; which will match FFI reporting forms with U.S. Taxpayer reporting forms. Inconsistencies between FFI reporting and U.S. Taxpayer reporting will cause contact between the IRS and FFIs as well as between the IRS and U.S. Taxpayers. According to the IRS, FFI reporting noncompliance consequences and U.S Taxpayer reporting noncompliance consequences will be pursued by IRS. IRS recently reported that at least 50% of FFI reports already received are inaccurate.
Six U.S. “Partial Amnesty” Programs
Between 2009 when it was implemented and September 28, 2018 when it was terminated by IRS, more than 56,000 taxpayers took advantage of the IRS Offshore Voluntary Disclosure Program (OVDP); paying more than $11.1 billion in back taxes, interest and penalties.
Two Streamlined Filing Compliance Procedures Programs
On September 1, 2012, IRS opened the streamlined filing procedures programs. The streamlined filing procedures are designed to provide qualifying Taxpayers with a “Streamlined” procedure for fling amended and/or previously unfiled returns, along with terms for resolving unpaid tax and related interest amounts.
While the OVDP was directed at willfully noncompliant U.S. Taxpayers, the two Streamlined Filing Compliance Procedures Programs are directed at individual taxpayers (including estates of individual taxpayers) certifying under penalty of perjury that their failure to report foreign financial assets and pay all tax due in respect of those assets resulted from non-willful conduct (conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law), who are not under a civil examination for any year, not under criminal investigation, have a valid U.S. Taxpayer Identification Number and whose income is derived only from legitimate sources.
The two Streamlined Filing Compliance Procedures Programs are divided between U.S. Taxpayers residing in the United States and U.S. Taxpayers Residing Outside the United States. Both Programs require filing up to three years of U.S. Tax returns and six years of Reports of Foreign Financial Accounts (FBAR).
Providing they meet a non-residency requirement, U.S. Taxpayers Residing Outside the United States may use the Streamlined Filing Compliance Procedures to file both amended and previously unfiled U.S. Tax Returns, pay related unpaid income taxes and interest and avoid assessment of otherwise assessable penalties.
U.S. Taxpayers residing in the United States may use the Streamlined Filing Compliance Procedures to file only amended U.S. Tax returns, pay related unpaid income taxes and interest and pay a penalty equal to 5% of the highest aggregated account balance on their previously unfiled and/or inaccurately filed FBARs.
Delinquent FBAR Submission Procedures
U.S. Taxpayers who have reported ALL of their worldwide income and paid their required income tax but who have not filed a required Report of Foreign Bank and Financial Accounts (FBAR), are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about their delinquent FBARs should file the delinquent FBARs according to the FBAR instructions (that Includes a statement explaining why the FBARs are late filed).
IRS will not impose a penalty for the failure to file the delinquent FBARs if all required reportable income was properly reported on U.S. tax returns, all required tax was paid on the income from the foreign financial accounts reported on the delinquent FBARs, and the U.S. Taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
Delinquent International Information Return Submission Procedures
Taxpayers who do not need to use the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have not filed one or more required international information returns, have reasonable cause for not timely filing the information returns, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.
Revocation or Denial of a U.S. Passport in Case of Certain Unpaid Taxes
IRC Section 7345 authorizes the IRS to certify U.S. Taxpayers with Seriously Delinquent Tax Debt (SDTD) to the U.S. State Department for action involving the revocation or denial of a passport. On January 2018, IRS issued procedures for enforcing IRC Section 7345. IRC section 7345 was enacted on December 5, 2015, as part of the Fixing America’s Surface Transportation Act (FAST Act).
SDTD is an individual’s unpaid, legally enforceable federal tax debt totaling more than $50,000 (including interest and penalties) – indexed yearly for inflation –
- for which a Notice of federal tax lien has been filed and all applicable administrative remedies have lapsed or been exhausted, or a levy has been issued
SDTD is limited to liabilities incurred under the IRC and does not include other debts collected by the IRS such as the FBAR Penalty and Child Support.
Regardless of whether it meets the criteria for otherwise being classified as SDTD, some tax debt is not included in determining SDTD. This includes tax debt:
- Being paid timely with an IRS approved installment agreement,
- Being paid timely with an Offer In Compromise (OIC) accepted by the IRS, or a settlement agreement entered into with the DOJ,
- For which a collection due process hearing is timely requested regarding a levy to collect the debt,
- For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made
Additionally, a U.S. Taxpayer’s passport will not be at risk under this program for any taxpayer:
- Who is in bankruptcy,
- Who is identified by the IRS as a victim of tax-related identity theft,
- Whose account the IRS has determined is currently not collectible due to hardship,
- Who is located within a federally declared disaster area,
- Who has a request pending with the IRS for an installment agreement,
- Who has a pending offer in compromise with the IRS, or,
- Who has an IRS accepted adjustment that will fully satisfy the SDTD
IRS is required to notify affected U.S. Taxpayers in writing at the time that SDTD is certified to the State Department (CP508C). The IRS is also required to notify U.S. Taxpayers in writing at the time that it reverses certification. The IRS will send written notice of both certification of SDTD and the reversal of SDTD (CP508R) by regular mail to a U.S. Taxpayer’s last known address.
A U.S. Taxpayer’s Power of attorney (POA) will not receive a copy of IRS Notice CP508C!
If a U.S. passport application is denied or a U.S. passport is revoked through this program, the U.S. State Department is required to provide written notice to the affected U.S. Taxpayer.
If a U.S. Passport is cancelled or revoked after certification of SDTD, the tax debt must be resolved by paying the debt in full, making alternative payment arrangements or showing that the certification is erroneous.
IRS will reverse certification of SDTD within 30 days of the date that it is resolved and provide notification to the State Department as soon as practicable; which means that there is no certainty as to when the IRS provides notification to the State Department.
It is important to note that cancelation, revocation, non-renewal or non-issuance of a U.S. Passport because of IRS certification of SDTD to the U.S. Department of State is not a loss of U.S. citizenship.
This has consequences for affected U.S. Citizens and U.S. Permanent Residents.
When U.S. Taxpayers are outside of the U.S. at the time that their U.S. Passports are canceled or revoked, there are travel risks for them. For those:
- Who do not have another non-U.S. Passport, their presence in another country could be considered improper by its government.
- Residing outside of the U.S. on a U.S. Passport and who have a passport issued by the country where they are residing, a revocation or cancelation of their U.S. Passport during travel could result in their presence in another country being complicated by that country.
- According to U.S. Immigration and Customs Enforcement (ICE), the only passport that a U.S. citizen may use to exit from and re-enter the U.S. is a U.S. passport. When a U.S. Citizen/Taxpayer residing outside of the U.S. who has an additional passport from his/her country of residence, suffers revocation or non-renewal of the U.S. Passport, U.S. re-entry could be complicated by the loss of the U.S. Passport.
The Tightening Noose
In addition to SDTD that is created from filed tax returns, a U.S. Taxpayer with previously unreported Foreign Financial account balances reported through FATCA could be assessed additional income tax based on the Internal Revenue Code authorized presumption that previously unreported FFI account balances are unreported income. When this occurs a, U.S. Taxpayer has a limited time to contest the assessment of additional tax and avoid U.S. State Department SDTD certification by IRS.
Don’t be a victim of your own making
If you have not timely and accurately filed required FBARs or certain other required international information reporting forms; and whether you qualify for or do not qualify for relief under the U.S. partial amnesty programs, obtain immediate advice and assistance from a qualified licensed U.S. tax advisor. Of course, if you owe legally enforceable federal tax debt, avoiding having it classified as SDTD is the preferable course of action.