One way or the other you have come to realize that you have a tax obligation with the US Government and would like to settle the obligation, but you either cannot pay it all at once, or are unable to pay the full amount because your financial circumstances have changed or you realize that you may incur significant penalties for under reporting or non-disclosures in the past and you are concerned about the risks of now coming clean. What are some options that are available to you now that can address these concerns?
There are three significant points to recognize before we address these options. First, if you have a tax obligation and/or the IRS has previously issued liens and you have lived outside the US for more than six consecutive months, then the collection statute of ten years is suspended – so, you cannot claim that you are past the ten year statue and the obligation is no longer enforceable. The second point is that voluntarily settling your obligation before the IRS investigates you gives you more options and flexibility with them rather than after the fact. Third, coming clean on underreporting and/or foreign assets and bank accounts will alleviate other risks of possible criminal investigation and save you substantial amounts of money.
There are three major options that you might want to consider if you want to settle your tax obligations sooner than later. They are entering into a payment plan agreement, entering into an offer in compromise agreement and/or entering into the offshore voluntary disclosure program. Let me address some of the basics elements of each one.
Payment Plans Agreements
Payment plan agreements can be used by the any taxpayer, individuals or entities, which owe up to $50,000 in tax obligations. Payment plan agreements are typically no longer than for 72 months (if the obligation is over $10,000) and are generally are guaranteed accepted if the balance of the tax obligation is under $10,000. To qualify for an installment agreement for a tax obligation that is $10,000 or less the taxpayer a) has filed timely tax returns for five years, b) not entered into an previous installment agreement, c) the IRS determines that you cannot pay all of your obligation in full at one time, and d) the structured payment plan cannot be more than 36 months.
For balances over $10,000, generally, the taxpayer has to submit more documentation regarding their personal finances. This information includes assets and the equity in those assets you have, access to lines of credit or credit cards, monthly income and expenses of your household and other related information.
The fee to file a payment plan is $105 or $52 if you will submit to electronic fund withdrawals. The IRS will typically notify you in about thirty days whether your plan is acceptable. In that time frame, they may contact you for more information. If after acceptance, your financial situation changes and you want to modify the payment plan, you can petition the IRS.
Remember, the payment plan is useful when you want and have the ability to settle your debts in full.
Offer In Compromise Agreements
The offer in compromise agreement (“OIC”) is for taxpayers who generally cannot afford to pay the entire amount that is owed or if they would be subject to paying the entire amount would incur substantial economic hardships in doing so.
Like the payment plan, documents concerning your personal assets and monthly income and expenses are required to be submitted with substantiation of the details. This process is more intensive then a payment plan agreement as it typically involves larger sums of tax liability that the taxpayer is attempting to substantially reduce. During the process, the IRS will frequently ask for clarification on submitted items, new financial updates and other information that is needed to properly evaluate the OIC.
Under the OIC, the taxpayer has two options for settling the proposed liability – a lump sum cash offer or a periodic payment offer. Under the terms of the lump sum cash offer, the taxpayer must pay at the time of submitting the OIC 20% of the offer and pay the balance in five or fewer payments after the acceptance of the offer. Under the periodic payment offer terms, the taxpayer must pay off the offer amount in no more than twenty four equal payments and make those monthly payments while the offer is being considered by the IRS. The main advantage of choosing the lump sum cash offer over the periodic payment offer is that the actual amounts of the offer submitted will be 50% less.
You should also be aware that IRS just recently introduced new procedures for computing the offer amount. Perhaps the most significant change is that under lump sum cash and periodic payment offers, the amounts that are used to compute the offer are 75% and 60% less than previously, respectively. This is huge opportunity now for those who want to use the OIC program, as now your proposed offer will be substantially less than under the previous set of regulations. For example, if your “qualifying monthly income” was $2,000, then under the old rules, your offer would have been $96,000 for lump sum cash or $120,000 for periodic payments. Under the new rules, that same $2,000 will be $24,000 for the lump sum cash or $48,000 for the periodic payments.
All payments made to the IRS while the OIC is being processed and reviewed are non-refundable. The application fee for submitting the offer is generally $150.
Offshore Voluntary Disclosure Program
The offshore voluntary disclosure program (“OVDP”) is for taxpayers who have tax exposure for both under-reporting and failure to disclose foreign source income and assets. It is important to note that this program is purely voluntary and the taxpayer is ineligible if there is an active civil or criminal tax investigation. Because of new laws concerning foreign asset disclosure under the Foreign Accounts Tax Compliance Act (“FATCA”), many new taxpayers, unknowingly, may become subject to active investigations in the near future.
The major advantages in participating in this program are the civil penalties are substantially less than the normal penalties and the general elimination of the risk for any criminal prosecution. Currently, the civil penalty for failure to disclose these foreign income and assets is a fixed 27.5%. Of course, you are liable for the actual income taxes on any unreported foreign source income, plus interest and a 20% underreporting penalty.
The downside of the program is that you have to disclose eight years worth of tax information and you need to pay the tax liability at the time of submission of the documents. If you cannot pay the entire amount, you are eligible to participate in an offer and compromise plan.
Let me provide one quick and easy example of the tax savings in civil penalties if you choose to participate in the program. One caveat – this example only refers to civil penalties of the failure to report on the foreign bank account. The taxpayer has an unreported foreign bank account that has an initial balance of $200,000, earns 5% interest per year and takes no withdrawals. Over the course of eight years, the taxpayer would have earned $95,421 of unreported income and thus have an account balance of $295,421. The current civil penalties for failure to file the required forms on your foreign bank account would be 50% of the account balance per year. This amounts to $1,002,656, which is over 350% of the taxpayer’s account balance. Under the OVDP, the civil tax penalty would be only 27.5% of $295,421 or $81,260. Thus, under this program, the taxpayer would save $921,396 or about 92% on civil penalties and avoid criminal prosecution!
For tax years where the tax information was under-reported or not disclosed, you must submit all original and amended and/or new tax returns and disclosures. There are other forms and documents as well that will needed to be submitted. Depending on the complexities of your situation, this process will take time for approval. While participating in the is program, you will be subject to an fairly intensive review of your taxes for the past several years. Because of the nature of the program (avoiding criminal investigation and/or prosecution), it is essential that you have both an attorney and an accountant on your team to advise you and work directly with the IRS.
In all of the above programs, it is crucial that your work with a tax professional who can aid, plan and navigate through the above scenarios and help you determine which one is right for you. Remember, solving your tax liability problem sooner than later will actually save you lots of money and just may keep you from the terrifying prospects of a criminal investigation.
Robert L. Pioso, CPA, with 20 years of experience as a CPA, CFO and owner of a Costa Rican business can help you navigate through the complexities of US taxation for US expats and those who own investments and assets in Costa Rica. You can contact him for a free consultation – CR 6050-3831 or US 312-235-2301 or visit him at www.richcoastaccounting.com or email him at [email protected]. Rich Coast Accounting and Financial Services are focused at providing positive and tangible results that will bring real value to you or your business and offers a unique guaranty “You pay only for the value of the services received or the invoice, whichever is less.”