The IRS has announced new streamlined procedures for U.S. citizens who are resident in Canada or other countries and who have failed to file U.S. federal income tax returns or Reports of Foreign Bank Accounts (FBARs). The new procedures seek to identify certain taxpayers who present “a low compliance risk.” Submissions by such taxpayers will be subjected to an expedited review by the IRS and will not be subject to penalties. Taxpayers that are identified as presenting a higher compliance risk will be subject to a more thorough review and possibly a full examination, with no assurance that penalties or even criminal prosecution will not be pursued. The new procedures primarily apply to taxpayers who have resided outside of the U.S. since January 1, 2009, have not filed a U.S. tax return during the same period, and whose tax when computed is less than $1,500 each year.
The procedures include a list of nine factors whose presence may cause the compliance risk level to rise. Some of these factors are obvious, such as a failure by the taxpayer to report all of his or her income in the taxpayer’s country of residence, but others seem unfairly to prevent innocent taxpayers from qualifying under the new procedures. For example, a taxpayer’s ownership of a financial interest in an entity located outside of his or her country of residence or a bank account located outside of such country is considered a high-risk factor.
Taxpayers wishing to use the streamlined procedures are required to submit delinquent tax returns for the last three years for which a U.S. tax return is due and to submit FBARs for the last six years. Taxpayers are also required to submit a completed questionnaire designed to identify the taxpayer as a low compliance risk.
One of the new procedures applies only to Canadian residents: a Canadian non-resident who failed to make a timely election on IRS Form 8891 (to defer income earned in an RRSP) can retroactively cure the failure by filing a late election under the new procedures. Even though, as noted above, the streamlined compliance procedure is generally available only for taxpayers who failed to file returns altogether, the special relief for late-filed RRSP elections is available even for taxpayers who did file original returns (regardless of whether they meet the tests for low compliance risk or the $1,500 tax threshold), but failed to make the RRSP election on their original returns.