Long arm of the IRS

PUBLISHED : Tuesday, 31 January, 2012, 12:00am
UPDATED : Tuesday, 31 January, 2012, 12:00am


The United States Inland Revenue Service (IRS) is reopening its voluntary disclosure programme for US citizens and green-card holders living overseas. This includes US citizens living in Hong Kong. According to estimates there are 30,000 to 40,000 Americans living in Hong Kong.

Jay Krause, of law firm Withers, says US tax and reporting obligations are broad and far-reaching, affecting many persons living outside the US. While people most typically think of expatriates they are only one of several groups affected. Others include children born to non-US persons who were working in the US and children born outside of the country where one of the parents is a US citizen.

'Green-card holders are another significant group with US tax and reporting obligations,' Krause says. 'Many of these individuals are not aware of their US worldwide tax and reporting obligations. However, with the upcoming implementation of the new FATCA [Foreign Account Tax Compliance Act] law, many financial institutions will need to identify their US citizen and green-card holder clients and turn over their details to the IRS.'

The IRS has announced a new voluntary disclosure programme allowing individuals to become compliant with their historic obligations. Previous programmes were a great success with more than 33,000 people coming forward and raising in excess of US$4.4 billion to date. The IRS is expecting many more to come forward under the new programme given the upcoming implementation of FATCA.

Preliminary guidance indicates that the new programmes will be similar to last year's programme, but with several modifications: the new programme will be open-ended, though the IRS has retained the right to modify the terms at any time in the future, encouraging people to apply under the available penalty framework; the top penalty will increase from 25 per cent to 27.5 per cent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets; the highly advantageous 5 per cent penalty rate (rather than the 27.5 per cent penalty rate) will remain in place for taxpayers living outside the US who have not been making more than the minimum investments into the US and are tax compliant locally; and participants will have to file new or amended returns going back eight years and pay outstanding taxes, interest and delinquency penalties for those years.

As with previous voluntary disclosure programmes, participants can be eligible for the programme only if they file under the programme prior to the IRS being on notice of their non-compliance.

According to Withers, the two earlier IRS voluntary disclosure programmes were seen as overwhelming successes, and the IRS hopes to bring additional US citizens and green-card holders into compliance through voluntary means.

As an incentive to come forward, the IRS is likely to step up investigations of non-compliant taxpayers, especially given the implementation of FATCA, which will require financial institutions to disclose details of clients who are US citizens or green-card holders. It is already known of the arm twisting that investment bank UBS had to go through to cough up the names of Americans who were its clients.