During recent years the US senate enacted laws to better enforce compliance with US tax laws. The IRS (Internal Revenue Service) came up at the same time, with programs that intended to facilitate disclosure of taxable income by U.S. citizens and residents, without incurring heavy penalties and criminal charges. There is now an excellent opportunity for many taxpayers to straighten their open problems with the IRS. The tax authorities understand that taxpayers should get a chance to fix their wrong doing, before enforcing the new compliance tax laws.
FATCA- Foreign Account Tax Compliance Act
FATCA is a key law provision to facilitate compliance with us tax law. It mandates countries and financial institutions around the world, to pursue actively in identifying us taxpayers, and reporting their financial holdings to the IRS. Institutions that do not join the program, will not be able to practically do business in the US. They will have to shut down all their US business operations. Israel enacted lately laws that allow Israeli banks and tax authorities, to furnish the IRS, banking information of US taxpayers, such as account balance. FATCA was a direct result of the mortgage crisis that the US suffered on 2007 and 2008. Major US financial institutions became bankrupt, and the US Government had to look for new source of tax revenue, to get out of the financial crisis, that threaten the US economy. The US senate decided to look for money that was hidden by U.S. citizens in offshore accounts, such as Switzerland and other exotic islands around the world.
Who is Obligated to File US Income Tax Return
Taxpayers that their yearly income is over 10000 dollars, or any self-employed, are generally obligated to file income tax returns. The threshold amounts are subject to change each year, and depend on the tax payer filling status.
In addition, taxpayers are obligated to file digitally reports about their account balances, in financial institutions around the world. The threshold is 10000 dollars even one day during the year.
Those filling obligations do not skip green card holders or us residents. They must adhere to us tax law the same way as a us citizen.
Streamlined Voluntary Disclosure Program
The US senate put heavy pressure on US taxpayers to disclose their income through a series of law provisions. The IRS on the other hand came up with voluntary disclosure program (VDP), to sweeten the senate new law provisions.
Taxpayers who reside outside the US have available VDP programs with or without penalties. Innocent taxpayers can join the VDP program without penalties. It is called Offshore Voluntary Disclosure Program.
Taxpayers who reside inside the US do not have the privilege of penalty free VDP. However if they are considered innocent, they will have to pay just 5% percent penalty.
Taxpayers who deliberately did not file FBAR and missed income items from their tax returns, will be subject to heavy penalties and criminal charges. However via VDP program they can avoid criminal charges and reduce penalties.
Streamlined Offshore Voluntary Disclosure Program is an excellent opportunity for U.S. citizens residing in Israel that never filed income tax return or FBAR, to get into the US tax filling system without any penalties. They can file just 3 years of tax returns and six years of FBAR, and the IRS will not bother them in the future about noncompliance.
The major weakness in Streamlined Offshore Voluntary Disclosure Program is the vague definition by the IRS the term, tax payer without intention to hide taxable income. The IRS left this issue vague. Taxpayers that will not be accepted to thisprogram, are not entitled to switch into another VDP program.
Important Key Points
Tax payer that his only fault is FBAR noncompliance, can send 6 years of FBAR reports, attach explanation about late filling, and do not have to join the VDP.
Tax payer who join VDP program with penalties, can apply for penalty reduction and payment plan. The IRS agents have a wide discretion in this area. However do not expect substantial penalty reduction.
Many taxpayers joined the VDP program with penalties, in order to avoid criminal charges. They paid hefty penalties, but earned their freedom and avoided criminal record.
Taxpayers that the IRS started to audit or ask for missing tax returns are not allowed to join any VDP. It is highly recommended to contact our office in order to examine the best compliance Track for you, and avoid criminal charges later.