On August 31, 2012, the Internal Revenue Service ("IRS") released the instructions for their new streamlined filing compliance procedures for non-resident U.S. taxpayers. This procedure was originally announced on June 26, 2012, and becomes effective September 1, 2012. See our Practice Update.
The new procedure was designed to help U.S. taxpayers living abroad that have failed to timely file U.S. federal income tax returns, information returns or Form TD F 90-22.1, Reports of Foreign Bank and Financial Accounts (FBARs), but have recently become aware of their filing obligations. These new procedures are for non-residents including, but not limited to, dual citizens who have not filed U.S. income tax, information returns or FBARs.
Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns. Additionally, taxpayers must file a new questionnaire identifying the taxpayer's financial interests in foreign financial accounts, including interests in and signature authority over financial accounts outside their country of residence and other questions relating to their foreign interests. The questionnaire must be signed under penalty of perjury.
In order to be eligible for the new procedure, the non-resident U.S. taxpayer must have resided outside of the U.S. since January 1, 2009 and have not filed a U.S. tax return during the same period. These taxpayers must also present a low level of compliance risk.
The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and on additional information provided in response to the questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the tax years, the IRS will treat the taxpayer as low risk and process the returns under the new streamlined program.
The IRS will raise the level of risk if certain factors are present when the taxpayer's return is reviewed. Claiming a refund or U.S. source income on a return are examples of the factors that would raise the level of risk. Additionally, the level of risk would rise if the taxpayer is under audit or has been contacted by the IRS with respect to FBAR penalties.
With respect to taxpayers presenting a low compliance risk, the IRS has indicated that the review of the submission will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risks are not eligible for the new procedure and will be subject to a more thorough review and possibly a full examination.
Amended returns are not allowed under the new procedure, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty. Amended returns submitted through the new procedure will be treated as high risk returns and subject to examination.
Although the new process will assist taxpayers in becoming income tax compliant, the new process offers no protection against criminal prosecution by the IRS and Department of Justice. Taxpayers with any potential concerns about criminal prosecution should not use the new process and instead pursue other options, such as the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012. The OVDP offers taxpayers with undisclosed offshore accounts that do not otherwise qualify for the new process or that are concerned about possible criminal prosecution an alternative to become compliant. See our Practice Update.
Careful analysis and review of each taxpayer's facts and circumstances should be undertaken before deciding on which program best suits the taxpayer. Under the new procedure, once a taxpayer makes a submission, he or she is no longer eligible to participate in the OVDP. The new procedure does not provide for the ability to opt-out and pursue another option.
The advantages and disadvantages of the new procedure and how it applies to each U.S. citizen living abroad and dual citizens should be carefully analyzed based upon each person’s facts and circumstances. If you or anyone you know has outstanding U.S. income tax or informational returns, or you are concerned about the recent IRS offshore scrutiny, we strongly suggest you acquire immediate assistance.