On June 26, 2012, the IRS released “Instructions for New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer US Taxpayers.” The new procedure is aimed at certain so-called low-risk US citizens who live outside the country for the ﬁling of past-due US income tax returns and reports of foreign bank and ﬁnancial accounts (FBARs). The new procedure came into effect on September 1, 2012 and means that certain US citizens who reside in Canada now need ﬁle only three years of back US federal income tax returns.
Generally, a US citizen, regardless of where he resides, must ﬁle a federal income tax return to report worldwide income regardless of its source. In addition, each US person who has a ﬁnancial interest in or signature or other authority over any foreign ﬁnancial accounts (including bank, securities, or other types of ﬁnancial accounts in a foreign country) whose aggregate value exceeds $10,000 at any time during a calendar year must report certain information in each calendar year by ﬁling an FBAR with the Treasury on or before June 30 of the next year.
To be eligible for the new streamlined process, a tax-payer must show that he has resided outside the United States since after 2008 and has not previously ﬁled a US income tax return for taxable years 2009 or later. The taxpayer must not owe more than $1,500 in US tax on any tax return submitted under the program. Additionally, the IRS said that an amended US income tax return sub-mitted through the program is treated as high-risk and is subject to examination, unless relief is being sought solely to timely elect deferral of income from RRSPs and similar retirement accounts.
The IRS warns that the streamlined procedures do not protect taxpayers against potential criminal prosecution. Therefore, a taxpayer who is concerned about criminal penalties should consider his options under the 2012 offshore voluntary disclosure program (OVDP). If a taxpayer participates in the streamlined process, OVDP participation is not permitted. (For more information on the 2012 OVDP, see “US Citizens Abroad: New Filing Procedure and OVDP FAQs” and “Third US Offshore VDP,” Canadian Tax Highlights, August 2012 and February 2012, respectively.)
A taxpayer who seeks to use the streamlined procedures must submit (1) US federal income tax returns, including information returns, for the last three years; (2) payment of all tax and interest due on the three returns; (3) FBARs for the last six years; and (4) a signed questionnaire (de-scribed below). For relief from the failure to timely elect deferral of income from certain retirement or savings plans, such as RRSPs, a taxpayer must submit additional information, including a form 8891 for each tax year and each plan.
The IRS will determine the submission’s level of compliance risk on the basis of the information provided in the returns ﬁled and additional information provided in response to the required questionnaire. The risk level may rise if any of the following are present:
- any of the submitted returns claim a refund;
- there is material economic activity in the United States;
- the taxpayer has not declared all of his income in his country of residence;
- the taxpayer is under audit or investigation by the IRS;
- FBAR penalties were previously assessed against the taxpayer or he previously received an FBAR warning letter;
- the taxpayer has a ﬁnancial interest or authority over ﬁnancial accounts located outside his country of residence;
- the taxpayer has a ﬁnancial interest in an entity or entities located outside his country of residence;
- there is US-source income; or
- there are indications of sophisticated tax planning or avoidance.
In order to determine a taxpayer’s compliance risk, the questionnaire (which must be signed under penalties of perjury) asks 20 yes/no questions subdivided into four categories: (1) eligibility; (2) ﬁnancial accounts/entities; (3) tax advisers; and (4) tax position. Speciﬁcally, a tax-payer is initially asked if he has resided in the United States for any period of time since 2008, if he has ﬁled a US tax return for 2009 or later, or if he owes more than US$1,500 on any tax return that is being submitted. A taxpayer who answers yes to any of those questions is warned that he is not eligible for the streamlined procedures and that his returns will be treated as high risk and subject to an examination.
The questionnaire asks whether a taxpayer has a ﬁnancial interest in or signature or other authority over ﬁnancial accounts as well as ﬁnancial interests in entities located outside his country of residence; space is provided for a taxpayer to list the countries where his accounts or entities are located. The questionnaire also provides ﬁve questions about tax advisers. The form seeks information on whether the taxpayer sought the advice of a tax professional and whether that professional was located in the United States. A taxpayer must disclose whether he informed his tax professional of his US-citizen or resident-alien status and whether he revealed the existence of ﬁnancial accounts and entities outside his country of residence. The form also asks the taxpayer to answer basic tax questions, including whether he has ever ﬁled a US tax return or an FBAR, and whether he is under IRS investigation. The new streamlined procedure may not be appropriate for many US citizens living in Canada, but it may offer a less cumbersome alternative for those who meet its very speciﬁc criteria.