Tax Pros Wary of IRS Notice to Americans Living Abroad

Tax professionals believe the document opens the door for delinquent taxpayers to come clean without the threat of heavy fines and criminal prosecution.

Raphael Ahren
Raphael Ahren
Raphael Ahren
Raphael Ahren

Tax professionals are disputing the true nature of a recent fact sheet published by the U.S Internal Revenue Service, which some say signals leniency for Americans living abroad who failed to file tax returns.

Some tax professionals believe the document opens the door for delinquent taxpayers to come clean without the threat of heavy fines and criminal prosecution. Others say the fact sheet represents, at best, a mere continuation of previous practices; at worst it could be a trap for tax filers, they say.

CPA John Fisher.Credit: David Hayon

"The fact sheet implies a certain degree of kindness to the guys who come forward now," said John Fisher, an international tax partner at the leading accounting firm KMPG Somekh Chaikin. "They know that they have got all these people living abroad who haven't been filing properly just because they didn't think about it because they no longer live in America, and that these people now want to clean up their acts. The IRS is not interested in prosecuting thousands of people."

Fisher said the soon-to-be implemented Foreign Account Tax Compliance Act, which will require foreign banks to provide information to the IRS about financial accounts held by U.S. taxpayers abroad, will serve to encourage people who have never declared their foreign assets to do so now.

"These FATCA regulations basically force banks to kick out their U.S. account holders or expose who they are," said Fisher. "The IRS is smoking out Americans who didn't report, and this fact sheet is intended to sweeten the pill."

The IRS fact sheet details steps that taxpayers must take if they failed to file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts, or FBARs, in a timely manner. According to U.S. law, all Americans who have more than $10,000 in foreign accounts are required to file the FBAR annually, in addition to their U.S. tax return.

While the fact sheet does not announce any new policies, some tax professionals interpret the message as a signal to authorities that taxpayers have may have "reasonable cause" for failing to file.

"Reasonable cause normally means that a taxpayer 'exercised ordinary business care and prudence in meeting his tax obligations but nevertheless failed to meet them,'" explained Fisher.

While it is not clear what exactly the IRS might consider reasonable, the fact sheet does seem to indicate "a move to finally show the milk of human kindness to the dual citizen living abroad who has not intentionally evaded U.S. tax and who comes forward voluntarily to report," added Fisher.

The IRS recently granted partial amnesty to Americans who voluntarily reported previously undisclosed offshore accounts. Tax professionals estimate that hundreds of American-Israelis participated in the so-called Offshore Voluntary Disclosure Program, or OVDP, which expired in September. However, some participants paid hefty fines and were subjected to thorough audits. Hence, many delinquent taxpayers did not to come clean.

"Ironically," said Fisher, the IRS's supposed leniency could mean "that those who ultimately shied away from the recent amnesty could now land a better deal." However, he added, the IRS is unlikely to entertain anonymous applications to establish whether "reasonable cause" will apply.

"People who have not been reporting are up against the wall," explained Fisher. "They're criminally liable. And they're about to be closed in on. At a minimum they should be talking [to a U.S. tax expert] about what their chances are to get a good hearing."

Others are skeptical of the true nature of the IRS fact sheet.

"Nobody knows," said Jeff Melamed, a U.S.-born local CPA. "It sounds like the IRS wants to be reasonable but we're basically at the whim of the clerk's decision as to what is reasonable and what is not."

"People should report if they have something to report, because that's the law," he said, "but nobody can promise that in their case the IRS will be kinder."

David Wolf, a Jerusalem-based tax lawyer, said any leniency the IRS might offer would only apply in select cases.

"I don't think it's a carte blanche," Wolf said. "I see the fact sheet more as a confirmation of a current practice, not to penalize taxpayers living abroad who would not have an additional tax liability in the U.S., because of foreign tax credit, but did not file the FBAR or their tax returns.

"However," he said, "when tax is due, the IRS may not be so quick to forgive the taxpayer."

Those who report themselves now will not be better off than those who participated in previous OVDPs, he asserted.

"The problem with the OVDP is that it is not flexible. You can't really negotiate," Wolf said. "But if you entered the program and you feel you have a reasonable cause why you shouldn't be paying any penalties, you won't have to pay them anyway."



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