What if You Have Not Filed Tax Returns (Are You at Risk)?

What if You Have Not Filed Tax Returns 

Unlike the more serious IRS violation of filing a false tax return, when a US Taxpayer is required to file a tax return but does not file a return — the consequences can run the gamut depending on whether the person knew they were supposed to file a tax return and chose not to — or simply was unaware that they had a tax return filing requirement. Complicating the matter further is the situation in which taxpayer has foreign income and international information reporting requirements such as FBAR (FinCEN Form 114), FATCA Form 8938, Form 5471, and Forms 3520/3520-A, but have not filed returns or reported the accounts. When a taxpayer has international information reporting requirements but fails to meet those requirements, they may get hit with assessed penalties, which could be very significant and are not impacted by the fact that there may be no unreported income. What happens if a taxpayer has not filed tax returns?

Taxpayers out of US Tax Compliance

 When are US person has not properly filed their annual tax returns and FBAR (Foreign Bank and Financial Account aka FinCEN Form 114), they are considered to be out of compliance. While it can appear overwhelming for taxpayers to learn that not only did they miss following the US tax return, but they may have also missed various international information reporting requirements such as foreign corporations, foreign pension plans, offshore life insurance policies, investment funds, and more – it can get overwhelming (understandably so). Luckily, the Internal Revenue Service has developed various tax amnesty programs to assist taxpayers with safely getting into compliance. Depending on the specific facts and circumstances, taxpayers may avoid many of the penalties they will find on the fear-mongering websites — and their penalty will be severely reduced if not avoided altogether. Let’s go through some of the different programs designed to assist non-filers with getting back into FBAR compliance.

Delinquent FBAR Submission Procedures (DFSP)

When a Taxpayer does not have to make any substantive changes to their tax return involving unreported income, they may qualify for the Delinquent FBAR Submission Procedures. This program is typically limited to Taxpayers who have no unreported income and are not required to file other delinquent forms in addition to the FBAR. For Taxpayers who qualify for these submission procedures, there is generally no penalty applied for prior-year noncompliance.

Delinquent International Information Return Submission Procedures (DIIRSP) 

Up until November of 2020, Taxpayers who had no unreported income (but missed filing international information reporting forms) could sidestep any offshore penalties by filing delinquent forms under DIIRSP. In November of 2020, the IRS rules changed and the IRS does not guarantee that filing delinquent forms will circumvent penalties — although with the right set of facts and circumstances, the Taxpayer may avoid penalties by showing reasonable cause (see further below).

Streamlined Domestic Offshore Procedures (SDOP)

The Streamlined Domestic Offshore Procedures are IRS procedures designed for Taxpayers who do not qualify as foreign residents, are non-willful, and filed their original tax returns timely. Under these procedures, a Taxpayer can opt to pay a 5% Title 26 Miscellaneous Offshore Penalty in lieu of all the other delinquent FBAR and FATCA penalties.

Streamlined Foreign Offshore Procedures (SFOP)

The Streamlined Foreign Offshore Procedures are probably the best of all the offshore tax programs for Taxpayers who qualify as eligible. This is because if a Taxpayer qualifies as a foreign person and is non-willful, they can avoid all offshore penalties under these procedures. In addition, Taxpayers can file original tax returns.

IRS Voluntary Disclosure Program (VDP) for Delinquent FBAR & FATCA

The IRS Voluntary Disclosure Program (VDP) has been in existence for many years. From 2009 to 2018, there was an offshoot of the VDP program — which was referred to as the Offshore Voluntary Disclosure Program (OVDP) — and was primarily for Taxpayers with undisclosed foreign income and assets.  In 2018, the IRS closed this program — but also expanded the traditional voluntary disclosure program on matters involving foreign and offshore income and asset disclosures.

Under the prior version of OVDP for delinquent FBAR, FATCA, etc. — even non-willful Taxpayers would submit to the program in order to both receive a closing letter and almost always avoid an audit (unless they opted-out). The new version of the VDP program is geared primarily for Taxpayers who are willful or are unable to certify under penalty of perjury that they are non-willful. It is still a great program in which Taxpayers can almost always avoid criminal prosecution — and it rarely if ever would have any impact on a person’s immigration status (unless the Taxpayer was also “criminally” willful and the government pursued that criminality against the Taxpayer, which is extremely rare).

Reasonable Cause for Delinquent FBAR and FATCA

In general, a Taxpayer cannot be subject to penalties for missing the filing of delinquent FBAR and other international information reporting forms if they can show reasonable cause and not willful neglect. This is not a program per se but rather an alternative submission package in which the Taxpayer seeks to avoid or minimize penalties without formally going through the programs listed above — while also avoiding making a quiet disclosure. If you are considering a reasonable cause submission, you should speak with a Board-Certified Tax Lawyer Specialist about your different options.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

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