In June, the IRS announced new procedures to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and assist with resolving some issues related to certain foreign retirement plans. The Internal Revenue Service finally issued instructions for the streamlined filing compliance procedures that became effective on September 1, 2012.
Notably, the IRS’s latest guidance injections more uncertainty into an already uncertain process. On the surface, the procedures appear to provide a form of amnesty to U.S. taxpayers living abroad who have not filed U.S. tax returns or Reports of Foreign Bank Accounts (FBARs). Under the program, taxpayers who have resided outside the United States since January 1, 2009 and have not filed tax returns or FBARs can avoid penalties and potentially additional enforcement action by filing three years worth of tax returns and six years worth of FBARs.
However, a careful review of this program reveals its flaws. Only a limited number of taxpayers will qualify because amended returns will not be accepted and taxpayers who owe more than $1,500 in tax for any of the three tax years are excluded.
Non-resident U.S. taxpayers who present a low compliance risk and who have resided outside of the U.S. since January 1, 2009 and who have not filed a U.S. tax return during the same period are eligible to participate.
Generally amended returns will not be accepted and taxpayers can only take advantage of this “streamlined” process if they owe $1,500 or less in each tax year and the IRS deems the taxpayer to be a “low compliance risk.” If the IRS, however, determines that the taxpayers is a “high compliance risk” the taxpayer will not be eligible for this program and may be subject to civil and criminal penalties. Of course, the determination of “low compliance risk” versus “high compliance risk” is made solely by the IRS. Thus, a taxpayer who applies to the program may find themselves subject to more serve penalties than would otherwise be available under the Offshore Voluntary Disclosure Program. Furthermore, once a taxpayer enters this program, the Offshore Voluntary Disclosure Program is no longer available leaving open the possibility that an unwitting taxpayer could be prosecuted criminally if the IRS determines they are a “high compliance risk.”
In determining whether a taxpayers is a “high compliance risk” the IRS considers the following factors:
- If any of the returns submitted through this program claim a refund;
- If there is material economic activity in the United States;
- If the taxpayer has not declared all of his/her income in his/her country of residence;
- If the taxpayer is under audit or investigation by the IRS;
- If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
- If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
- If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
- If there is U.S. source income; or
- If there are indications of sophisticated tax planning or avoidance.
See our previous posts for more information on how compliance risk is determined.
Here is a summary of how to take advantage of the new procedures. Please see the IRS website for more details.
- Submit completed tax returns for the past 3 years.
- Include the word “Streamlined” at the top of every page.
- Submit all taxes due or owing on the returns and all interest.
- Submit completed FBARs for the past 6 years.
- Submit a completed IRS non-resident_questionnaire. Be sure to sign it.
Foreign Retirement Plans
- a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty provision;
- for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission; and
- a dated statement signed by the taxpayer under penalties of perjury describing:
- the events that led to the failure to make the election,
- the events that led to the discovery of the failure, and
- if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.
Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Austin, TX 78741
For More Information
Please consult an attorney with specific questions. We will continue to post updates to these procedures as they become available. Here are some previous posts and related news on tax issues for U.S. citizens living overseas:
IRS Offshore Voluntary Disclosure Programs Nets More Than $5 Billion, Boston Tax Attorney Blog
New IRS Guidelines on Offshore Voluntary Disclosure Program, Boston Tax Attorney Blog
Still Waiting on More Details from IRS on Compliance Procedures for U.S. Taxpayers Living Overseas, Boston Tax Attorney Blog