|Photo by John Morgan|
As you know if you've been reading this blog, there are many Americans living abroad who have only just found out that they owe many years of back taxes to the US government. Some are being driven into bankruptcy while others are being driven into hiding while the vast majority of us are just trying to catch up and figure out what the heck is going on.
To deal with this, the United States created the Offshore Voluntary Disclosure Program, or OVDP. At first it sounds like a program to help overseas Americans catch up on their back taxes, but in reality, it's a fairly draconian program which starts, amongst other things, as a criminal process. It's a very long, complicated affair with the potential for massive financial penalties and the possibility of a criminal conviction. You have years of back returns and FBARs (Foreign Bank Account Reporting) to complete, but don't worry, you won't be fined more than $500,000 or spend more than half a year in jail for making a mistake with your FBARs.
So the new reports of an IRS amnesty for expats is welcome. It's a much lighter weight process, doesn't assume you're a criminal, and doesn't contain penalties or fines. However, there's a couple of tiny catches. First, the IRS must assess you as a "low risk" offender, but they don't tell you what "low risk" is, other than to say that you must not have owed much in taxes or shown signs of "sophisticated" tax planning (whatever that is). So you might be eligible for an amnesty, but you have no way of knowing if you are. If you're aren't, you're still eligible for prosecution.
And the other tiny catch? From the Forbes article linked above (emphasis theirs):
Besides, the IRS [amnesty program] does not guarantee immunity from prosecution. What’s more, a taxpayer who applies for this streamlined program becomes ineligible for the OVDP. Suppose you apply for streamlined relief but the IRS examines your case and thinks you are high risk, not low?
You can’t complete the streamlined program, but are ineligible for the OVDP! What’s left could be a full civil audit and high fines or even prosecution.Lovely, just lovely. If you're a US expat whose just found out about the US tax system for expats and you want to pay your back taxes, you may have absolutely no safe way to do so. While I'm generally familiar with this area of the US tax law, this was a wrinkle I had no idea about. I actually find myself in the ugly position of thinking that those who innocently got caught up in the mess would be justified (morally, not legally) in hiding from the IRS.