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Dear ExpatForum friends,

I have talked to many people about this (lawyers, accountants, tax professionals, etc...), and I am hoping to find a good pathway moving forward, so I appreciate your help and insights. I have read similar threads on Expatforum, but I still can't really make up my mind, so I need your lights!

Just to summarize, this is about becoming compliant with the IRS after forgetting “non-willfully” to disclose my foreign assets on my tax returns (and obviously the associated FBARs for the US Treasury). I have been a resident for tax purposes in the US since 2011. I realized last year, when I got my green card, that I was supposed to report the income from foreign accounts that I currently hold overseas (only savings accounts for a total of about $150k, so my annual earnings on these accounts are interests of roughly $5k/year).

Because I am trying to find the best solution to become compliant, I filed for an
extension on my 2016 tax return so I have until October 1st to file for 2016, and find the best way to become compliant with the previous years.

My understanding is I have 4 different ways to become compliant at this stage:

1) File my 2016 tax return now suddenly including the income + credits from the foreign savings accounts (so add these on Schedule B of the 1040X, and attach forms 8938 and 1116) + file FBAR for 2016... Then pretend nothing happened between 2011-2015. That would great but the risk is that the IRS flags the sudden appearance of a few foreign accounts, and start asking questions about my accounts and why they were not declared on the previous years (how can $150k suddenly appear?) ? So that is the option where I just start reporting these foreign accounts in 2016, and forget about the past. What is the risk that the IRS will detect something suspicious if I do that? The main drawback with this option is that I would not really become compliant. I would make myself compliant from 2016 on. That is what bothers me.

2) Do 1 + file amended returns for 2011-2015 (these will be sent to a different address than 2016 by the way, and for each year separately). I can hope that the IRS will just accept these amended returns and either never get back to me, or ask me to pay extra penalties on the tax that was unpaid for each year. I was considering 2 as a good option, due to the small amounts of tax that I owe each year (about $400/year) because of the nondisclosed foreign income. The lawyers and accountants I talked to were concerned, however, that I would just open a can of worms by doing that… I guess there is a high risk that the IRS will want to see more… and ask for more penalties. Of course, in parallel, I would backfile the FBARs for 2011-2016.

3) Proceed with a Domestic Streamline Procedure. I don’t like this idea very much, because I would need to pay the extra tax due to the income from the foreign assets ($400/year from 2011-2015 so about $2k) + the 5% penalty fee (about $7.5k if the total max balance of my foreign accounts is $150k). That would be a total of nearly $10k to make a choice to come forward and become compliant before the IRS even contacts me for an audit! That seems like a heavy price tag to pay (and I am not even counting the time and resources needed to amend all the tax returns). I understand I would also need to hire a lawyer to work on my non-willfulness statement too, which will be very expensive too…

4) Obviously, there is the OVD program, but the high penalties would eat up even more of my savings (something like $30k), so I am already ruling that option ou, as I can prove my non-willfulness.

So, in your opinion, which one of these options is more acceptable? What would you do in my situation? I was really hoping that options 1 or 2 are acceptable ways to move forward, but I would like to hear if folks have had the same type of experience, and how they finally became successful in their compliance procedure.

Many thanks for your help!
 

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OK, this is a situation where you're going to have to do your own "risk assessment." Since you are currently resident in the US and presumably have your main financial resources there, it is more likely the IRS can catch up with you and simply impound one or more account to get what they think you owe. OTOH, if we're only talking $5K of unreported income a year (plus the possibility that some foreign taxes were withheld or paid on those amounts - that would give you a foreign tax credit), the tax amount potentially due is small to non-existant.

First thing to do is to get your 2016 return filed, including the interest. Once you've done that, you can start working on the amendments for the prior years.

Up to you whether you want to come clean using the Streamlined Compliance plan or just file the amended returns for those prior years and hope for the best. If you just file the amendments you'll pay interest charges on any balances due, but interest rates the last few years have been about as low as they can go - so you could consider this an opportunity.

The Streamlined program is really intended for those who have been omitting to declare foreign income for a long time, so by filing three years back and paying those penalties, you get absolved for however many prior years you may have sinned. Since your tax filing obligation only dates back to 2011, I'd be inclined to just amend those filings, pay the interest charges and be done with it. That way you don't need a "mea culpa" statement and all the hassle that goes with it.

It's also possible to just file 2016 "correctly" and going forward. Despite what you or I may think, $150K in a savings account isn't much in the IRS grand scheme of things - and could be explained in any number of ways. Chances are, they'll just accept your tax payment and be done with it - unless there is something else "funny looking" on your current return that causes them to come back for an audit. (But to get audited, you do need to appear to be "worth" the time and trouble in terms of potential recovery.)
Cheers,
Bev
 
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