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Offshore Voluntary Disclosure Report

23/05/2013


​​As most people are by now aware, the U.S. government has been making laws and implementing programs to find Americans with unreported income and assets abroad. One of the incidental results is to ferret out Americans living abroad.

The IRS has a number of voluntary disclosure programs to allow taxpayers who have failed to report to “come in from the cold.” While the programs are generally reasonable, some require expensive filing of prior years’ returns or forms, or payment of penalties and interest. Not all taxpayers want to go down this path, so some are filing “quietly” – they just file some missing returns, or amend incorrect ones (outside these voluntary disclosure programs), and hope nobody notices.

The U.S. Government Accountability Office (GAO) commissioned a study to determine the effectiveness of some of the IRS’ efforts. In March 2013, the GAO released a report. One of the objectives of the study was to assess the IRS’ identification of taxpayers who have made quiet disclosures to circumvent tax, interest and penalties.

This GAO report focuses on taxpayers hiding large sums of money abroad, but there are some interesting tidbits that could mean increased risk for a U.S. citizen living abroad who decides not to use the proper channels to get back on side with the IRS.

The GAO used tax return data (including questions answered on Schedule B) to identify taxpayers who late-filed or amended returns for the 2009 Offshore Voluntary Disclosure Program (OVDP, covering 2003-08). Second, they identified taxpayers who late-filed or amended Foreign Bank Account Reports (FBARs) during the same period. Then they removed participants who were already in the 2009 OVDP.

So what was the result?

Potential quiet disclosures individuals found in analysis:

  • 9,884 taxpayers filed late or amended returns and FBARs in calendar year 2009 and calendar year 2010.
  • Of these, 7,440 saw a change in their tax liabilities.
  • Of these, 6,668 saw increases.
  • 3,240 filed late or amended returns with FBARs for more than one tax year between tax year 2003 and tax year 2008.

The point of the analysis was to send a wake-up call to the IRS that there was still quiet disclosure going on. In its response, the IRS noted it would review the GAO report and implement procedures to emulate results going forward. It was also intriguing to hear that the IRS would consider year-to-year filing behaviour, which suggests it was not adequately doing this to begin with.

So what does this mean for U.S. citizens abroad who have not properly filed? It means if you aren’t in the system, you’d better get there; the IRS has the capability of matching forms, and this capability is increasing under political and bureaucratic pressure. The IRS will be stepping up its detection methods for individuals who are not using the required programs.

The IRS currently offers a Streamlined Filing Compliance ​Procedure which many of these taxpayers should consider.