In a previous article, I described the three main advantages of doing an offshore voluntary disclosure through Streamlined Domestic Offshore Procedures (“Streamlined Domestic Compliance”). Today, I would like to discuss three main Streamlined Domestic Compliance disadvantages.
Streamlined Domestic Compliance Disadvantages: Audit Risks
The first main disadvantage of Streamlined Domestic Compliance is the potential IRS audit within three years after the voluntary disclosure is completed. The audit is likely to include everything: FBARs, amended tax returns, Miscellaneous Offshore Penalty calculation and, most importantly, the determination of non-willfulness.
The potential IRS audit stands in a shark contrast to the IRS flagship Offshore Voluntary Disclosure Program (“OVDP”) which closed in September of 2018. At the end of a voluntary disclosure through OVDP, the taxpayer and the IRS sign the Closing Agreement, which (absent fraud or material mis-statements) effectively closes prior tax noncompliance issues forever.
The audit risks may be particularly important to taxpayers who are in the process of obtaining their US citizenship or US permanent residence.
Streamlined Domestic Compliance Disadvantages: Penalty Base Not Limited to Income Noncompliance
One of the main Streamlined Domestic Compliance disadvantages is the fact that the calculation of the penalty base (i.e. what assets are subject to the 5% penalty) includes assets that never produced any foreign income. Moreover, the penalty base includes a foreign asset even if the foreign income from this asset was timely disclosed on the taxpayer’s original tax return, but the asset itself was not reported on FBAR or any other international information return.
In other words, a taxpayer who participates in the Streamlined Domestic Compliance should be prepared to pay a 5% penalty even on assets that are compliant with the US income tax laws.
Again, this is contrary to the rules of the OVDP. In the OVDP, only assets that are tied to income tax noncompliance are included in the penalty base.
Streamlined Domestic Compliance Disadvantages: Danger of Superficial Analysis
Finally, the danger of superficial analysis concerning non-willfulness constitutes the third main disadvantage of the Streamlined Domestic Compliance. In reality, there are two dangers which should be placed at the opposite ends of the voluntary disclosure continuum.
The first danger is the natural bias in the self-assessment of non-willfulness. Oftentimes, a taxpayer may exaggerate the facts in his favor while selectively ignoring the facts that may establish willful noncompliance. This is very natural. It is difficult to find a person who will state outright that he was willful in his prior tax noncompliance.
Usually, this problem can be (and should be) fixed by retaining an international tax attorney to do an independent assessment of the taxpayer’s non-willfulness.
At the opposite end is the danger of concentrating on non-willfulness and ignoring the possibility of doing a Reasonable Cause disclosure. In most cases, this is not a problem because Streamlined Domestic Compliance would be a superior choice despite the 5% penalty. This, however, is not true in all cases and real opportunities are often lost by failure to explore this route.
I should state that the biggest problem that I found in my practice is the fact that some taxpayers do not consult an international tax attorney on this issue. Instead, they try to do everything themselves even though they have no specialized knowledge in this field. I strongly discourage this practice.
I believe that the involvement of an international tax attorney is essential to doing a proper offshore voluntary disclosure.
Contact Sherayzen Law Office for Professional Help with Your Offshore Voluntary Disclosure
Choosing the correct offshore voluntary disclosure path is the most important decision for a taxpayer who wishes to remedy his past noncompliance with US tax laws. Every voluntary disclosure option has its advantages and disadvantages. All essential factors must be considered.
The failure to do proper legal analysis may have highly negative legal and tax consequences. It may even put a taxpayer in a position worse than what he was prior to his attempt to do a voluntary disclosure.
This is why you need the professional help of Sherayzen Law Office. Our experienced legal team has helped hundreds of US taxpayers to do their offshore voluntary disclosures properly. We Can Help You! Contact Us Today to Schedule Your Confidential Consultation!