Tax tips for non-compliant cross-border clients

September 10, 2018 | Last updated on September 15, 2023
4 min read
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Certain cross-border clients with undisclosed foreign assets will soon lose an option to get compliant. The IRS’s offshore voluntary disclosure program (OVDP) for willfully neglectful taxpayers ends on Sept. 28.

The program’s end (more on what it means below) serves as a reminder that cross-border clients should be timely with their tax reporting.

For non-willful non-compliant cross-border clients, the IRS’s streamlined filing compliance procedures continue, but clients shouldn’t wait to take action. Like the OVDP, the streamlined program could end “at some point,” says the IRS website.

With the streamlined program first offered in 2012 and expanded in 2014, “If people are interested in getting caught up, it’s probably better to do it sooner rather than later,” says Max Reed, a cross-border tax lawyer at SKL Tax in Vancouver.

To participate in the streamlined program, taxpayers must certify, under penalty of perjury, that their conduct is non-willful. The IRS website says non-willful conduct is “due to negligence, inadvertence or mistake,” or is “the result of a good-faith misunderstanding of the requirements of the law.”

Reed says a client’s demonstrable intentions and knowledge of U.S. filing requirements indicate non-willfulness or not. “The IRS’s expectation is that you provide a fairly detailed explanation of what you knew and when, and why you didn’t file,” he says.

Shannon Retzke Smith, a partner at Withers Bergman in New Haven, Conn., says a poor candidate for the program is the cross-border client who previously completed their U.S. filings but stopped. In such a case, “There’s very little you can point to as to how that person could be non-willful,” she says.

Another poor candidate: the client who meticulously reports small accounts on their Report of Foreign Bank and Financial Accounts (FBAR) but not large ones, which raises a red flag, she says.

Matt Altro, president and CEO of MCA Cross Border Advisors in Montreal, says non-willful clients tend to be stressed when they seek help, and the streamlined filing requirements offer relief—clients file the most recent three years of taxes and six years of FBARs.

Further, the use of foreign tax credits for paying Canadian taxes means cross-border clients often have no U.S. tax owing, so compliance costs are the only consideration—though those can be significant depending on complexity, Altro adds.

Advisors should also note that these unaware clients might be holding investments that are tax-punitive for U.S. citizens, such as Canadian mutual funds in non-registered accounts, TFSAs, RESPs or shares in Canadian companies. “The more wealth they have by the time they become compliant, the worse of a situation they could be in,” says Altro.

OVDP ends Sept. 28

For the willfully neglectful, the OVDP option is over this month; thereafter, avoiding prosecution will be more difficult.

The OVDP program provides protection from criminal liability and terms for resolving civil tax and penalties for those who willfully failed to report and pay tax on foreign assets.

On its website, the IRS says the program’s end reflects increased awareness of offshore reporting obligations and a significant decline in participants. Taxpayer disclosures to the program peaked at about 18,000 people in 2011, while disclosures fell to 600 last year.

Generally, every taxpayer who uses the OVDP is at risk of criminal liability, says Retzke Smith. An important first step is requesting pre-clearance, which includes faxing the client’s personal and banking information to the IRS and receiving confirmation of program eligibility. “To skip that step means you’re making an admission to the IRS without knowing whether or not your client is cleared to participate,” she says.

The IRS established a pre-clearance deadline in August because a minimum of 30 days is typically required to consider pre-clearance requests. Regardless, clients aren’t precluded from asking for pre-clearance now, says Retzke Smith, adding that she would do so even up to the last minute.

If the IRS doesn’t give the client clearance—for example, the agency says it’s investigating the client with information it already has—then information submitted to the program will be used against the client. “For a client that’s willful, in this program they’re risking criminal prosecution if the submission isn’t timely,” says Retzke Smith.

Submission of information received or postmarked by Sept. 28 includes a disclosure letter, signed under penalties of perjury, and attachments for each of the client’s financial institutions. The program imposes an offshore penalty of 27.5% on the highest aggregate value of a client’s assets during the last eight years.

As the OVDP closes, non-compliance with foreign reporting potentially remains significant, Retzke Smith says, despite increased awareness. The IRS reported that more than one million FBARs were filed in 2015, while an estimated nine million Americans live abroad. “The difference between those numbers is an immense amount of people who are all going to sit on a spectrum of non-compliance,” she says.

For example, many expats leave the U.S. for employment or marriage opportunities abroad, reported the Washington Post earlier this year, so they likely have foreign accounts to report.

The IRS says it will continue to use other tools to combat offshore tax avoidance, such as whistleblower leads, civil examination and criminal prosecution. The agency “remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, chief of IRS criminal investigation, in a release earlier this year. “Stopping offshore tax non-compliance remains a top priority of the IRS.”

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