What is a CP88 Notice Unfiled Tax Return Letter (Examples)

What is a CP88 Notice Unfiled Tax Return Letter (Examples)

What is a CP88 Notice Unfiled Tax Return Reminder?

There are many reasons why a U.S. Taxpayer (living in the U.S. or abroad) may fail to file a tax return in one year or multiple years. Oftentimes, this is common for taxpayers who are new to the United States and previously resided in a country that either did not tax personal income or resided in a country where the government files the tax return on the taxpayer’s behalf and then just sends the taxpayer a confirmation for them to sign off on. Alternatively, a taxpayer may live overseas and not be aware that they are still required to file U.S. tax returns and international reporting forms even if they are foreign residents and even if all the money is foreign-sourced. There are many other reasons as well as why a taxpayer who was required to file a tax return (and may have done so in the past) stopped filing returns. When the taxpayer receives an IRS CP88 Notice, they must act because this notice represents that the IRS is aware that the taxpayer has failed to file a tax return in one or several years. The failure to file returns can lead to unwanted consequences, such as fines and penalties – especially when foreign income, assets, accounts, or investments are involved. Let’s look at some common examples of why a taxpayer may fail to file a tax return.

*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.

First, Beware of Fear-Mongering, Free Consultations & False Claims of Being ‘Board-Certified’

Several times each month, our international tax law specialist team is contacted by Taxpayers who were fear-mongered into believing that they would be going to prison or even deported for failing to report their foreign income or assets. They are oftentimes also misled by the attorney they were speaking to that the attorney was a Board-Certified Tax Law Specialist when they are not. Here are a few tips:

1. 1. 1. Make sure your antenna is up when speaking on a ‘free offshore disclosure consultation’ because these attorneys will oftentimes claim to be ‘experts’ and employ fear-mongering tactics designed to unnecessarily scare Taxpayers with examples that have no relation to the caller’s  facts and circumstances.

      2. Just because the attorney claims to be board-certified, does not make it so. Some unethical attorneys falsely claim to be board certified as a tax law specialist. If the attorney claims to be a Board-Certified Tax Attorney, ask them which state they are certified in so you can confirm. Any attorney who is board-certified, even if all they practice is federal law, must be Board-Certified by at least one State Bar association. Also, just having a CPA on staff does not make a firm  a ‘Board-Certified Tax Lawyer Specialist.’

A Taxpayer Who is New to the U.S.

One of the most common reasons why a person does not file a tax return is because they were not aware that they were required to file a tax return. Usually, this is because the taxpayer may be new to the United States:

• • • Example:  Greg recently relocated to the United States on an L-1 transfer visa. He is not a U.S. citizen or lawful permanent resident of the United States and was unaware that he is still required to file a U.S. tax return, because he pays taxes overseas on the income he earns.

    • Example: Glenn recently relocated to the United States and is a permanent resident. In the country he previously resided, individuals were not taxed on personal income earned from employment sources. Therefore, Glenn was not aware that he was required to file a U.S. tax return. In addition, he was receiving W-2 so he thought that any taxes were already handled when they were withheld by his employer.

    • Example: Gabriel is a foreign resident who travels to the United States on a B1/B2 tourist visa. He was unaware of the substantial presence test or that since he met the substantial presence test, he was still required to file a U.S. tax return — even though he was not earning any employment income in the United States.

U.S. Taxpayers who Moved Overseas (FEIE and FTC)

Another common situation in which taxpayers do not file tax returns is when they relocate overseas — and especially in a situation in which all of their income is foreign-sourced:

• • • Example: Hank is a U.S. citizen who recently took assignment overseas. The income that he earns overseas is taxed heavily in the foreign country and he was unaware that he was still required to file U.S. taxes because he did not have any U.S. sourced income at the time he has been residing overseas.

    • Example: Heath is a U.S. citizen who moved overseas. He earns a significant amount of passive income from foreign sources but in the country where he resides that category of income is tax-exempt. Therefore, Heath was unaware that he was still required to file US tax return to report his foreign income.

    • Example: Helen is a U.S. citizen who is employed overseas and earns about $100,000 a year. Since the amount she earned is below the foreign earned income exclusion, Helen misunderstood that she was still required to file a U.S. tax return to report the foreign income even though she falls below the foreign earned income exclusion threshold.

Other Common Reasons for Unfiled Tax Returns

There are many other common reasons as well why a taxpayer may inadvertently fail to file a tax return or mistakenly believe that they were not required to file their return. Here are a few examples:

• • • Example:  David is a U.S. citizen who has various foreign rental properties. Even though all of the properties earn income, once the expenses are factored in, he nets a loss. Therefore, David misunderstood that he was still required to file a U.S. tax return to report the income and the deductions (even though technically there is no profit).

    • Example: Danielle is a lawful permanent resident who moved back to her home country. She earns income in the foreign country and paying taxes but she did not make a treaty election to be treated as a non-resident alien (NRA) for tax purposes. Thus, Danielle misunderstood that she was still required to file aU.S. tax return and report her worldwide income.

    • Example: Dustin is a lawful permanent resident who recently relocated back to his foreign country and his green card expired. Even though his green card expired, Dustin did not take steps to formally terminate his lawful permanent residency status. As a result, Dustin is still required to file U.S. tax returns. In addition, now Dustin may be subject to the expatriation exit tax regime because it has been more than eight years in total since he was first granted his green card status and he never officially terminated that status.

Intentional/Willful Unfiled Tax Returns

Taxpayers who willfully or intentionally fail to file a tax return must be very cautious when filing the return. That is because if the IRS believes that the taxpayer acted fraudulently it could lead to significant fines and penalties in addition to the fact that the taxpayer may become subject to a criminal investigation. In these types of situations, taxpayers would typically submit to the voluntary disclosure program. Before making any proactive representation to the IRS, the taxpayer should consult with a board-certified tax law specialist who specializes in these types of matters specifically.

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.