The Difference Between Tax Equalization vs Tax Protection

Does Tax Equalization Provide Tax Protection to Taxpayers?

Does Tax Equalization Provide Tax Protection?

For companies that hire U.S. Persons (U.S. Citizens and certain U.S. residents) to work overseas, oftentimes they will provide the Taxpayer with Tax Equalization services. Essentially, it means that when a U.S. Person goes to work overseas, they will not be in a better or worse tax position with the IRS than they would have been in had they performed the same work in the United States. The problem is that tax equalization does not always produce a fair outcome. And, just because the firm that prepares the taxes may be a “big 4 firm,” does not mean that the taxes are done properly (read: Most CPAs at larger firms did not get into public accounting to perform tax equalization for individual taxpayers.) Let’s look at three (3) important facts about Tax Equalization.

Experience Level of the Preparer

When a large CPA firm takes on a large employer client for tax equalization, they do not usually throw their most experienced staff at the project. That is because in general, individual tax preparation is not the main income-generating aspect of the business. Therefore, oftentimes the tax CPAs preparing the returns are relatively newer CPAs. This does not mean that the preparation will be incorrect, it just means the Taxpayer should be sure to review and re-review the documents before submission.

The IRS Outcome is Not Guaranteed

Tax equalization generally involves certain usage and forfeits of various tax liabilities and tax credits. This is to ensure the Taxpayer is not placed in any better or worse position by working abroad. The IRS can still come back and audit the submission and oftentimes the same firm that prepared the tax documents may not offer audit protection – especially if the Taxpayer is no longer with the company and/or the CPA firm is no longer contracted with the employer.

International Reporting, Fines and Penalties

In addition to tax preparation, Taxpayers who live and work abroad may also have various international information reporting requirements for their foreign accounts, assets, investments, and passive income. The failure to report these assets timely may result in fines and penalties, so Taxpayers who have opened foreign bank accounts, started a foreign company, or acquired foreign investments or pensions will want to ensure that all of the proper forms are included in their package (Sometimes, the CPA firms do not include this as part of their service).

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.