Did You Underreport Income to the IRS? 5 Essential Factors

Did You Underreport Income to the IRS? 5 Essential Factors

Did You Underreport Income to the IRS? 

When U.S. Person Taxpayers underreport their income to the Internal Revenue Service, it can usually be resolved without much issue. And, depending on the amount of income (and source of income) will help determine what the taxpayer can do to resolve the issue. Some of the key issues to consider include:

• • • Was it Willful or Non-Willful?

    • Is it U.S. or Foreign Income?

    • How Much Income was Underreported?

    • If it was Foreign, Did you Pay Foreign Taxes?

    • Did You Also Underreport Overseas Assets or Accounts?

Let’s review these five (5) basic questions to determine how to resolve the issue of your underreported income.

Was it Willful or Non-Willful?

One of the first important issues is determining whether the underreporting was willful or non-willful. If the Taxpayer was non-willful (or can show reasonable cause), this is usually not a big headache and something the Taxpayer may be able to resolve without issue. If instead, the Taxpayer acted willfully, this can be a bigger issue, since it may lead to potential Tax Fraud or even Tax Evasion.

 Is it U.S. or Foreign Income?

If the Taxpayer has unreported foreign income, then the taxpayer has also to assess if there are unreported (or underreported) values for foreign assets, accounts, or investments. If so, the Taxpayer may qualify for the Streamlined Procedures or Delinquency Procedures.

How Much Income Was Underreported? 

Unless civil tax fraud is an issue (which has no statute of limitations), then most of the time the IRS has 3-6 years to audit the taxpayer. If it was a small amount of domestic income, then the statute may have already closed. If it was a larger amount and/or includes foreign income, then the Taxpayer must carefully assess their different strategies.

If it was Foreign, Did you Pay Foreign Taxes?

Sometimes, a Taxpayer underreports income because of a misunderstanding of what is required to be reported. For example, suppose the taxpayer underreported foreign income because they already paid taxes abroad. In that case, the taxpayer can usually go back and amend the return to include the foreign income and foreign taxes paid – and may not have any outstanding tax liability.

Did You Also Underreport Overseas Assets or Accounts?

If the Taxpayer underreported (or failed to report) their foreign accounts, assets, or investments on their U.S. tax return or international information reporting forms (such as the FBAR), they may become subject to fines and penalties. However, the IRS has developed various amnesty programs to assist taxpayers with safely getting into compliance.

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 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. 

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.