CPA Offshore Reporting Negligence Examples and Relief

Tax Preparer Foreign Reporting Negligence Penalty Relief

CPA Offshore Reporting Negligence Examples 

The international tax and reporting components of a U.S. tax return can be very complicated. This is especially true in situations in which the taxpayer has various foreign accounts, investments, trusts, etc. Most tax attorneys and practitioners who handle international and foreign tax and reporting-related matters specialize exclusively in this area, because of how complex and nuanced the area of tax law is. Unfortunately, it is not uncommon for some tax professionals to take on these types of foreign tax matters when they do not have the proper experience and/or background to do so — and then land the taxpayer in hot water with the IRS for failing to report various assets and accounts on the different international information reporting forms. This type of tax preparer negligence may result in significant fines and penalties against the taxpayer. Remembering of course, that mistakes happen — and oftentimes this type of issue can be resolved through one of the offshore amnesty programs. Let’s take a brief look at some of the more common examples of tax-preparer negligence and foreign penalty relief.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Visa Holder and Unfiled Returns/Assets

It is not uncommon for many tax preparers who do not specialize in international tax to be aware that even if a taxpayer is not a U.S. citizen or lawful permanent resident, they may still be required to file a U.S. tax return:

• • • Example: Jennifer is a foreign national who recently relocated to the United States on an L-1 work transfer visa. She has lived in the United States for 300 days in each of the past three years, but she never reported her foreign income because her tax preparer told her that only U.S. citizens and lawful permanent residents have to report their worldwide income. Since Jennifer met the Substantial Presence Test, she as required to report her worldwide income.

    • Example: Justine is a foreign national who travels to the United States on a B1/B2 tourist visa. She is not employed in the United States but has remained in the United States for 180 days in each of the past three years and does not qualify for any exceptions to substantial presence. Even though she is not on an employment visa and is not employed in the United States, she does meet the substantial presence test and is required to report her foreign income and file a U.S. tax return

    • Example: Jeffrey is a foreign national who is on an H-1B visa but only remained in the United states for 28 days in the current year. Since Jeffrey was not in the United states for at least 31 days in the current year, he is not considered a U.S. person for tax purposes and is only required to file a U.S. tax return to report his U.S.-sourced income if he has any.

Foreign Income Not Included

Many times, taxpayers will reach out to us to let us know that they did not include their foreign income because their prior CPA or tax preparer told them that they were not required to do so:

• • • Example: Frank is a U.S. citizen who has a foreign rental property. The foreign rental property nets a loss, so his CPA told him he was not required to report the income and/or expenses on his U.S. tax return. Unfortunately, that is incorrect and even if the income nets a loss, it is still required to be included on the U.S. tax return (and may even benefit the taxpayer).

    • Example:  Fred is a lawful permanent resident who recently relocated to the United States a few years ago and has foreign accounts that generate interest income. Since Fred does not transfer the money to the United States, his CPA tells him he is not required to include the income on his U.S. tax return — but that is not correct since the United States taxes individuals on their worldwide income, and whether or not the money is transferred to the U.S. is not disositive of reporting.

    • Example: Felicia is a U.S. citizen who has dividend income in a foreign country, but that foreign country does not tax dividend or capital gains. Her CPA tells her that since it is not taxable overseas, she is not required to include it on her U.S. tax return. Unfortunately for Felicia, that is also incorrect because unless a specific U.S. tax rule exempts the foreign income, it is included on a U.S. tax return.

Pension Account Not Reported

Even if a pension is not distributing income, the account or asset itself may still be reportable on various international information reporting forms such as the FBAR and Form 8938.

• • • Example: Peter is a lawful permanent resident who previously worked in a foreign country and maintains foreign pension plans but no bank accounts. Peter received incorrect information from his tax preparer that foreign pension plans are not reportable, but that is incorrect. Since Peter is required to file a Form 1040 based on his income, he should have filed the Form 8938 along with the FBAR.

    • Example:  Paul is a lawful permanent resident who also previously worked in a foreign country. He has multiple pension accounts, but he did not report any of his accounts because his tax preparer told him that he was not required to report anything until he began receiving distributions. While Paul may not yet have any tax implication for the foreign pension accounts until he receives distributions, he is required to report these accounts on form 8938 and FBAR.

Form 8621 and PFIC

PFIC Refers to Passive Foreign Investment Companies. Reporting PFIC can be very complicated, especially in situations in which a taxpayer is required to report an excess distribution due to the sale of a fund:

• • • Example:  Renee is a U.S. citizen who has $300,000 in foreign mutual funds and an account overseas in a securities account. The account is not a pension, and it is not located in a treaty country. The tax preparer reported the account on Form 8938 and the FBAR, but not Form 8621 (PFIC). Even though the mutual funds are in an account, for tax return purposes the tax preparer should have parsed out all 10 of the funds on separate Form 8621s.

    • Example: Robert is a lawful permanent resident who has multiple foreign mutual funds in a foreign investment account. Recently, Robert sold two of his funds and so his tax preparer reported the fund sales as capital gains. Since these funds were PFIC, the sale/redemption of the fund is not treated as capital gain but is instead treated as an excess distribution which requires a much more complicated calculation when the fund is sold or redeemed.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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 would 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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.