What are my options if I can’t pay an offshore disclosure?
Surprising to some, the collections department of the IRS has several options available for those who owe taxes and cannot afford to cut a check and pay off the balance that they owe. You absolutely can negotiate with the IRS, and just because they say you owe something doesn’t mean that’s what you will end up paying. However, if you are going through a special program to disclose foreign accounts or assets, the IRS is uniquely uncompromising. So, what are your options if you don’t have the ability to pay in full the taxes and/or penalties that you expect to owe?
The IRS first introduced the streamlined procedures for those taxpayers who failed to file their foreign accounts/income and were non-willful in doing so (they weren’t trying to avoid taxation). There are two streamlined disclosure programs that allow for the filing of unfiled tax returns to report offshore earnings and to file FBARs — or other international reporting forms — that may be missing or incomplete. One program is for people who live abroad and involves no penalties on foreign assets. The other program is for people living in the United States and imposes a penalty of 5% of their foreign assets. See more information here. Please remember, these programs are only available to people who were “non-willful” in their failure to disclose offshore income and offshore assets in the past. It’s ultimately up to the IRS to decide if a taxpayer’s particular situation is considered willful; the IRS has no obligation to let taxpayers into either of these programs.
While the printed official terms of the program state that you must submit full payment of any taxes, interest, and applicable penalties, we know — for a fact — that while there may be some more headaches involved, the IRS will process a streamlined submission that is accompanied by an installment agreement request. We are in the process of seeing if the IRS will accept a streamlined submission accompanied by a request for an offer in compromise. If they are willing to do so, this could open up a strong option for taxpayers unable to pay their accrued debt in full.
Please note that the IRS will not grant these payment plan requests or offer in compromises for every case, so a certain degree of “massaging” must be employed (yes, that’s the technical term).
Offshore Voluntary Disclosure Program
The question is begging to be asked – what if you were not “non-willful” in your failure to disclose your foreign assets or if you have other factors placing you at risk for criminal prosecution? In either of these situations, you would need to go through the IRS’s full-fledged Offshore Voluntary Disclosure Program (OVDP).
Under the current OVDP terms, you will have to file eight years of amended or original income tax returns instead of the three years required under the streamlined program. Unfortunately, it is likely that you will owe taxes for those additional five years. Not only that, but there is also a 20% accuracy-related penalty on any additional taxes you owe while going through this program, increasing what you owe in penalties. And, instead of a 5% or 0% assessed penalty on your offshore asset value, you will owe a penalty of 27.5% (or 50% if your bank is on the naughty list) of your highest total account balances as reported on your FBARs over the past eight years. In many cases, this means that you are being penalized on money that you don’t have anymore (anyone remember the big boom in the stock market that was followed by a crash that the world still hasn’t recovered from? Yep, that’s included in this time period).
What options are available if you can’t pay these taxes and penalties?
OVDP FAQ #20 says:
If I don’t have the ability to full pay, can I still participate in this program?
Yes. The terms of this program require the taxpayer to pay with his submission the tax, interest, offshore penalty, and accuracy-related penalty and, if applicable, the failure-to-file and failure-to-pay penalties. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements.
Finally, some good news! The provided answer shows that the IRS is willing to consider other payment arrangements if payment in full is not a possibility. Based on the rest of that FAQ, it certainly sounds as if the IRS would be open to any of its normal collection alternatives. Having worked with those alternatives for a decade in our tax resolution practice, that’s music to our ears.
These terms have real-world significance as we have had cases where our clients have been in this exact boat. In one case, the taxpayer used to have a lot of money (both overseas and in the United States), but no longer has that money and cannot afford to pay the taxes, penalties, and interest that he will owe as a result of going through the OVDP. It was time to get creative, so we put together the required financial information and had a nice discussion with the Revenue Agent assigned to the case. Laying out the situation and our client’s inability to pay the entire amount, we requested an offer in compromise. The Revenue Agent had no idea what to do about this, so he had to ask his manager, who in turn had to ask the Technical Services specialist for their group. Finally coming back to us, they let us know that a suitable alternative to a full payment would be an installment agreement that would pay off the liability within six years. This proved that alternative collection options are possible, but it still wasn’t going to work for our client.
Offshore Voluntary Disclosure Program followed by an opt out
When we informed the Revenue Agent that our client did not have an income that would allow him to fully pay off the liability within six years, and he really needed an offer in compromise or smaller payment plan (which would be unlikely to ever pay off the balance), we were told that he would need to opt out of the standard OVDP program and undergo an audit.
When people hear audit, they tend to automatically think that the worst has happened. That’s not always correct though, as an audit can be incredibly beneficial to a taxpayer. When going through an opt out, the IRS does not typically assess additional taxes for the full eight years that were involved in the OVDP program. And, if you really did make an innocent mistake or relied on the advice of counsel, your penalties could be much lower than they would be if you remained in the OVDP program (they could even be zero). That being said, opting out is not all good news.
First, your legal fees will be much higher through an opt out than they would be to accept the standard OVDP program terms. Not only that, but you will have secondary legal fees after your audit is concluded in order to get a payment plan or offer in compromise that you actually can afford.
Second, if you are assessed any FBAR penalties — even the lower, non-willful FBAR penalties — they are not eligible for the normal resolution options used to resolve a tax debt. The IRS would have to assess the FBAR penalties through its administrative procedures, allowing them to seize every tax refund you receive until the penalty is paid off. And, if the IRS wants to collect more than just your refund, they will be pressed to pursue a court judgment allowing collection on the penalty.
For someone who genuinely does not have the ability to pay the large taxes, interest, and penalties owed as a result of the OVDP process, opting out may provide the necessary relief from those excessive costs.
Take a deep breath
Thanks to recent developments in the streamlined program, it’s not always necessary for full repayment of an offshore tax liability. Unfortunately, that doesn’t mean that it’s going to be a straight-forward process when deciding whether the streamlined procedures, full OVDP, or opting out is going to be the right choice for you. Try and find some relief in knowing that there are options, and one of them is more-than-likely to set you up for a bright future.
All of this information can be incredibly confusing. Not only are there a wide range of options, but the IRS has not set the available ones up to be readily understandable. If you find yourself unsure of what to do, start by taking a deep breath. We are always ready to look at your situation and find a strategy that makes sense for you. If you need assistance, contact us. We’re here to help.