In recent years, offshore tax compliance has been a major focus for the IRS. Individuals with foreign accounts that meet certain aggregate account and asset value triggers are required to make annual disclosures. The main offshore disclosure obligations existing are the Foreign Account Tax Compliance Act (FATCA) and the obligation to file Report of Foreign Bank & Financial Accounts (FBAR) under the Bank Secrecy Act. The failure to file an annual disclosure statement can result in significant penalties and in certain cases voluntary or intentional action is present, criminal prosecution.
However, in light of the massive regulatory shift that the disclosure regime represented, the IRS has provided options for taxpayers to correct their non-compliant status while paying reduced penalties. Offshore Voluntary Disclosure Program can provide some level of protection from criminal prosecution as IRS practice since the 1950s illustrates that individuals who make legally sufficient disclosures are only prosecuted in extreme situations. For taxpayers without potential criminal concerns, Streamlined Disclosure permits reduced filing burdens and reduced penalties as opposed to standard OVDP.
Problems Existing with OVDP for Divorced Couples
Many married taxpayers elect to file taxes jointly. For many couple, filing jointly is a way to reduce the filing burden. In many cases filing jointly may confer at least some tax benefit top the married taxpayers. These benefits may include increased IRA contribution limits, a jobless spouse would be able to contribute to an IRA, potentially greater charitable deductions, and protecting the estate after the death of one spouse. However, one major downside of filing jointly is that both spouses assume liability for everything that is (and isn’t) on the tax filing. One area this can create problems is for spouses who filed jointly, but failed to make required offshore disclosures, and then separated or divorced. One spouse may be unable to secure the signature of the other spouse to file amended tax returns.
Both OVDP and Streamlined Disclosure require the filing of amended tax returns. But since joint filing of taxes requires both spouse’s signatures, the filing of an amended return also requires the signature of both spouses. Thus, previously the IRS had required taxpayers unable to secure their former spouse’s signature into OVDP where a closing agreement can be used in lieu of the other signature. Unfortunately, the penalties imposed by OVDP are much greater – 27.5 percent and up to 50 percent for financial institutions on the foreign facilitators list – compared to a five percent penalty (domestic, no penalty for foreign filers) for Streamlined and significantly less filing burdens.
IRS Issues Guidance Permitting Divorced and Separated Couples Unable to Obtain Former Spouse’s Signature to use Streamlined Filing Procedures
Taxpayers who wish to use the Streamline procedures due to non-willfulness and a desire to benefit from the more favorable terms may now file for the streamlined program regardless of whether they live within the United States or abroad. The IRS now states that “we understand that in certain cases (including but not limited to separation or divorce), your spouse/former spouse may not be willing to sign joint amended income tax returns or a joint certification on Form 14653.”
The taxpayer can now apply for the Streamlined program by filing IRS Form 14653 and including a joint income tax return provided that the return shows a net increase in tax. The filing spouse must also provide a written explanation why they were unable to obtain their former spouse’s signature in the narrative section of Form 14653. Domestic filers should also indicate “SDO FAQ 14” in red ink and foreign filers should indicate “SFO FAQ 7” in red ink where the spouse would otherwise sign. Per routine processing, a request will be made for the missing signature and the filing spouse should once again reference the FAQ number indicated above. However, taxpayers should not rush into applying for the Streamlined program because it does not offer any protection against referral for criminal investigation should the examining agent perceive potential willfulness by the taxpayer.
Rely on an Experienced Tax Attorneys Offshore Disclosure Compliance Guidance
Robert Hoffman, a tax lawyer of the Hoffman Law Offices, can provide clear tax advice to people living in the United States and abroad. He can assist individuals who have been noncompliant with past filing or past offshore disclosures. To schedule a free and confidential consultation call the firm at 800-897-3915 or contact us online today.