IRS Funding Means Bad News for International Tax Noncompliance

Recently, the big news on the tax front has been that the Internal Revenue Service will soon be flushed with cash sufficient to hire tens of thousands of new agents to promote tax enforcement. While this may help to improve processes at the IRS, taxpayers who are out of compliance with international-related issues may find themselves at the receiving end of a soft letter or notice of examination. The IRS has significantly increased enforcement of international-related matters in the past 10 to 20 years and chances are that with their newfound funding, they will increase the intensity on matters involving noncompliance. Let’s take a look at a different aspect of international tax that taxpayers should be aware of.

General International Tax Compliance

In general, FBAR audits and IRS Voluntary Disclosure are two very important aspects of international tax compliance. In the past year, these two types of enforcement activities have already increased, so additional funding will only further enforcement.

FBAR Audits

FBAR refers to Foreign Bank and Financial Account reporting. In the past few months, the IRS has already significantly increased enforcement through either soft letters or examination notices. The reason that this is so important is that FBAR penalties for noncompliance border on the absurd — and some notices may prevent taxpayers from entering into the offshore disclosure programs. Currently, a crucial non-willful FBAR violation case is currently being heard by the Supreme Court.

IRS Voluntary Disclosure Has Restarted

There was once a time when the IRS would let taxpayers know within 30-days of submitting a pre-clearance letter whether or not they were preliminarily accepted into VDP for the initial process (revised in 2018/2019 with updated Form 14457). Then there was a lack of funding and COVID — and some cases sat around for months if not years. In the past few months, the IRS has begun moving forward with processing these cases, so taxpayers who have submitted pre-clearance letters in prior years should be on the lookout for a response from prior submissions.

LB&I Compliance Initiatives

In addition to general international tax enforcement, the IRS has various compliance initiatives which reflect specific compliance types that they want to enforce. Here are a few of the several different compliance initiatives that impact taxpayers more so than others.

FATCA Filing Accuracy Form 8938 Audits

FATCA refers to the Foreign Account Tax Compliance Act. For US taxpayers, this typically involves filing Form 8938 to report their specified foreign financial assets. The form is similar to but not identical to the FBAR. In recent months, the IRS has increased the number of soft letters they have begun sending to taxpayers, and this will presumably lead to more examination notices.

Expatriation of Individuals

Expatriation is the process of formally relinquishing permanent resident status (for Long-Term Lawful Permanent Residents) or renouncing US citizenship. Some expatriates who are considered covered expatriates have an exit tax implication at the time of expatriation. Many taxpayers do not submit these forms (such as Form 8854) properly and therefore the IRS may come after them for fines and penalties. In the larger cases, the IRS may also go after taxpayers for fraud and evasion, as in the case of US v Tinkov.

Malta Personal Retirement Plan

Some taxpayers have been utilizing retirement schemes in Malta due to a glitch in the tax treaty in which some tax professionals made it appear as if taxpayers could load up millions of dollars into a Roth-equivalent plan in Malta — and then escape tax on various types of income. Some taxpayers would seek to avoid all taxation on gains for certain assets and distributions. The IRS issued a Competent Authority Agreement confirming that these types of schemes are improper — and that the tax treaty would not protect these types of non-employment pension arrangements.

Puerto Rico Act 60

Puerto Rico Act 60 (formerly Acts 20 and 22) is designed for certain taxpayers who relocate to Puerto Rico in order to reduce, if not eliminate, certain US income taxes. As you may imagine, the program has been exploited and is not a fan favorite of the US government. Several politicians have made it known that they intend to go after the taxpayers who have skirted or circumvented their US tax requirements by moving to Puerto Rico under Act 60.

Post-OVDP Audit

Just because a person may have completed the offshore voluntary disclosure program does not mean they are done with compliance; in fact, it is just the beginning. The IRS wants to make sure that taxpayers who completed these programs are properly continuing to file, and they have an initiative designed specifically to pursue taxpayers who completed voluntary disclosure.

Be Aware of Increased IRS Enforcement

While funding for the IRS is overall a good thing, it is important to keep in mind for non-compliant taxpayers that there is a higher likelihood that they will receive soft letters and notice of examinations — so Taxpayers who are out of compliance may want to consider one of the compliance programs such as streamlined or voluntary disclosure to proactively get into compliance before they missed the opportunity to do so. Taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of matters.

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