The Internal Revenue Service has implemented a new procedure designed to allow qualifying non-resident U.S. taxpayers to return to tax compliance in a streamlined manner.1 This procedure is available to any non-resident U.S. taxpayer who meets the following criteria: (1) the taxpayer must have resided outside the U.S. since January 1, 2009; (2) the taxpayer must have not filed any U.S. tax return during this period; and (3) the taxpayer must present a "low tax compliance risk."
To take advantage of the new streamlined procedure, a taxpayer must:
- Submit complete and accurate delinquent tax returns with appropriate related information returns (e.g., Forms 3520 or 5471), for the last three years;
- Pay all tax and applicable interest due;
- Submit complete and accurate delinquent Forms TD F 90-22.1 (commonly known as the FBAR form) for the last six years; and,
- Submit a complete and accurate questionnaire for the streamlined filing compliance procedure.2
This new streamlined procedure is designed for taxpayers who present a low compliance risk as defined by the IRS. A low compliance risk is generally found when there is less than $1,500 in tax due for each of the years covered by the new streamlined procedure and there are no high compliance risk factors (as discussed below in more detail). Low compliance risk taxpayers will be subject to an expedited review, will not be subject to penalties, and the IRS generally will not pursue follow up actions.
A taxpayer's compliance risk increases, however, if any of the following are present:
- The taxes due in any of past three years is equal to, or greater than, $1,500;
- The taxpayer is seeking a refund through this submission;
- The taxpayer has material economic activity in the U.S. in the past three years;
- The taxpayer has not declared all of his/her income in his/her country of residence;
- The taxpayer is already under an audit or investigation by the IRS;
- The taxpayer has been assessed FBAR penalties or received an FBAR warning letter;
- The taxpayer has a financial interest in an entity (or entities) located outside the taxpayer's country of residence;
- The taxpayer has U.S.-source income;
- The taxpayer has already filed for one or all of the years covered by the new streamlined procedure, and needs to file an amended return to be in compliance; or
- The IRS believes there are indications of sophisticated tax planning or avoidance.
Taxpayers that are determined to present a higher compliance risk will not be eligible for the streamlined processing procedures and instead will be subject to a more thorough review including, in some instances, a full audit. Such an audit may also include more than three tax years. The IRS will determine whether a taxpayer is low compliance risk or high compliance risk only after a taxpayer's submission, including the questionnaire, is received and reviewed.
Amended returns submitted through the streamlined compliance program will generally be treated as high risk returns and subject to examination. Taxpayers who need to file an amended return to correct previously reported or unreported income, deductions, credits, or other items may not use this streamlined program. Instead, such taxpayers should consider participating in the ongoing IRS Offshore Voluntary Disclosure Program (OVDP).3
Importantly, this new program does not provide protection from criminal prosecution if the IRS and Department of Justice determine that a taxpayer's circumstances warrant criminal charges. Any taxpayer concerned about possible criminal prosecution should consider participating in the OVDP which provides another mechanism by which taxpayers with undisclosed foreign bank accounts may become compliant and avoid criminal prosecution. Further, once the taxpayer has made a submission under this new streamlined procedure, the taxpayer can no longer take advantage of the OVDP. Taxpayers who are ineligible for the OVDP are also not eligible for the streamlined procedure.
Individuals with questions about U.S. tax or FBAR compliance, or who are considering making a voluntary disclosure to the IRS regarding foreign bank accounts, should consult experienced tax counsel to understand the benefits and risks of the OVDP and the new streamlined compliance procedures for non-residents. Blank Rome's FBAR compliance team has significant experience with U.S. tax and FBAR reporting obligations and the IRS voluntary disclosure programs, and can assist individuals in navigating these complex reporting regimes.