Voluntary Disclosure in the United States

The Streamlined Procedure for Resolving Missing Filings with the IRS

U.S. reporting obligations often apply even to individuals who do not actually live in the United States. U.S. citizens living in Israel, green card holders, and in some cases individuals who hold assets or accounts with a U.S. connection, may be required to file tax returns, Foreign Bank Account Reports (FBARs), and additional forms. In practice, many cases of non-filing do not stem from intentional concealment, but from lack of familiarity with the rules, reliance on partial advice, or the mistaken assumption that if tax was paid in Israel, there is no additional reporting obligation in the United States.

In these situations, voluntary disclosure in the United States may be a relevant path for resolving past non-compliance. One of the recognized frameworks in this context is the Streamlined procedure, which is intended for taxpayers whose reporting failure was non-willful. In appropriate circumstances, this procedure allows taxpayers to correct filings, complete the required documents, and bring themselves into compliance with Internal Revenue Service (IRS) requirements.

The expansion of information sharing between financial institutions and tax authorities has increased the ability to identify gaps between financial data and submitted reports. Therefore, anyone who identifies a reporting gap should consider reviewing their position promptly, in an orderly manner and with a full examination of the relevant facts.

What Is the Streamlined Procedure?

The Streamlined Filing Compliance Procedures are intended to allow taxpayers to correct non-filing or incomplete filing where the failure resulted from non-willful conduct. This generally refers to situations involving a mistake, misunderstanding, lack of awareness, or negligence, rather than cases involving conscious concealment or intentional action aimed at preventing disclosure.

The procedure does not eliminate the need to submit complete documents or provide a detailed factual explanation. It is also not suitable for every case. In order to use it, it is necessary to examine whether the circumstances are consistent with the requirement of non-willful non-compliance, and whether there is a sufficient factual basis to support that position.

There are two main tracks within this framework. One track is intended for U.S. residents, and the other is intended for U.S. taxpayers who live outside the United States and meet the prescribed conditions. The distinction between the tracks affects the filing method, the required documents, and the issue of penalties.

Who May Need to Consider Voluntary Disclosure in the United States?

In practice, common cases include U.S. citizens who have lived in Israel for many years, sometimes with local bank accounts, investment portfolios, savings, funds, or rights in assets, without taking the U.S. reporting obligation into account. Other cases involve heirs who received assets, individuals who hold a joint account with a family member, or taxpayers who filed only partial returns.

There are also cases in which the exposure does not arise from the tax return itself, but from related forms, such as reports on foreign financial accounts. Sometimes a person is convinced that all obligations have been met because their income was reported in Israel, only to discover that there was a separate U.S. reporting obligation that was not fulfilled.

How the IRS Reviews the Circumstances of Non-Filing

One of the central elements of the procedure is the distinction between non-willful non-compliance and willful conduct. The IRS does not accept a general statement that the taxpayer was unaware of the reporting obligation as sufficient. The review focuses on the circumstances of the case, the factual background, and the documents that may explain how the failure occurred.

Among other things, the IRS may examine what the taxpayer knew at the relevant time, what documents were in their possession, whether they received professional advice, whether the bank or another financial institution contacted them regarding a U.S. connection, and whether any actions were taken that could be interpreted as an attempt to conceal information. The scope of the assets, the types of income, and the taxpayer’s conduct over the years may also be relevant.

For this reason, the statement regarding non-willful conduct is a substantive component of the procedure. It must be accurate, consistent, and aligned with the documentation. A partial factual explanation, careless wording, or a discrepancy between the documents and the description provided may undermine the credibility of the submission.

What Documents Are Usually Required?

As part of the Streamlined procedures, taxpayers are generally required to submit tax returns for three relevant tax years, as well as six years of FBAR filings for foreign financial accounts, depending on the track and the circumstances. In addition, a signed statement must be attached, explaining the background to the non-filing and the basis for the position that the conduct was non-willful. In our experience, collecting the documentation early and consulting a specialist in Israeli and U.S. taxation assists not only at the filing stage, but also when deciding whether the procedure is appropriate in the first place.

Tax Risks to Consider

When a reporting obligation was not fulfilled, the exposure is not limited to the question of unpaid tax, if any. U.S. law may also impose penalties in certain cases for failure to report foreign accounts, failure to file related forms, or filing incomplete reports. The scope of exposure varies from case to case, depending on the type of failure, the period of non-compliance, and the factual circumstances.

One of the features of the Streamlined procedure is the possibility, in certain circumstances, to resolve the gaps under a reduced framework compared with other exposures. However, this does not mean that every case will be treated in the same way, or that every submission will automatically be accepted in line with the taxpayer’s position.

• Evidentiary and Reporting Risks

As time passes, it becomes harder to reconstruct the full picture. Accounts are closed, banks change systems, documents disappear, and sometimes the factual memory of those involved is no longer accurate. This may make it more difficult to establish the factual narrative and support the claim of non-willful non-compliance.

In addition, where there are gaps between reports filed in Israel and reports filed in the United States, or where certain legal structures were not previously examined from a U.S. perspective, a broader analysis may be required. This analysis is not limited to the question of whether a particular form was filed. Addressing the exposure often requires alignment between documents, returns, and tax positions across several systems at the same time.

• Civil, Family, and Commercial Risks

Sometimes U.S. reporting issues have implications beyond the tax question itself. Holding joint accounts, inherited assets, rights in trusts, family investments, or corporate structures may raise additional questions relating to ownership, documentation, accounting between family members, or implications for future business transactions.

Illustrative Example

Assume that a person with U.S. citizenship who lives in Israel has held a local bank account and an investment portfolio for years. In Israel, they reported their income properly, but in the United States, FBAR filings were not submitted and certain income was not included in the tax returns. Only after the bank contacted them to update documents relating to a U.S. connection did they understand that an additional reporting obligation existed.

In such a case, it may be appropriate to consider the Streamlined procedure, but only after reviewing all the relevant circumstances: whether the non-filing was indeed non-willful, which years are involved, which forms were not filed, whether complete documents are available, and whether there are additional tax aspects in Israel or the United States.

In summary, voluntary disclosure in the United States may be a relevant tool for taxpayers seeking to resolve missing filings where the failure was non-willful. However, using the procedure requires an initial review, sufficient documentation, analysis of the eligibility requirements, and an understanding of the possible implications in each of the relevant countries. An orderly and careful approach may help build a more appropriate course of action and reduce mistakes later on.

Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team consists of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law firms, bringing together a legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and accessible language. We also work with a professional network of accounting firms and law firms around the world, in order to provide comprehensive support in cross-border matters.

If you have a question regarding an account, income, investment, or asset that was not reported in the United States, the situation can be reviewed as part of a professional and discreet examination. An early review of the facts, documents, and available courses of action may assist in making an informed decision regarding the next step.

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