September 2, 2012 - WASHINGTON - The IRS announced yesterday over Labor Day weekend a new streamlined filing compliance procedure for non-resident U.S. taxpayers to go into effect on September 1, 2012. These procedures are being implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1, but have recently become aware of their filing obligations and now seek to come into compliance with the law. These new procedures are for non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns.
Description of the New Streamlined Procedure
This streamlined procedure is designed for taxpayers that present a low compliance risk. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.
Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), 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.
In addition, retroactive relief for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by relevant treaty is available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.
This procedure is available for non-resident U.S. taxpayers 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. These taxpayers must present a low level of compliance risk.
If you need to file an amended return to correct previously reported or unreported income, deductions, credits, tax etc, you should not use this streamlined procedure. Depending on your circumstances, you may want to consider participating in the Offshore Voluntary Disclosure Program.
Compliance Risk Determination
The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a 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 years, they will be treated as low risk and processed in a streamlined manner.
The risk level may rise if any of the following are present:
- 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.
Instructions for Using This Procedure
Taxpayers wishing to use these streamlined procedures must:
1. Submit complete and accurate delinquent tax returns, with appropriate related information returns, for the last three years for which a U.S. tax return is due.
2. Submit payment of all tax due and owing as reflected on the returns and statutory interest due and owing.
3. Submit complete and accurate delinquent FBARs for the last six years for which an FBAR is due.
4. Submit a complete, accurate, and signed Questionnaire.
5. This program has been established for non-resident non-filers. Generally amended returns will not be accepted in this program. The only amended returns accepted through this program are those being 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. Non-resident taxpayers who have previously filed returns but wish to request deferral provisions will be required to submit:
1. an amended return reflecting no adjustments
to income deductions, or credits; and
2. all documents required in item 7 above.
Other Considerations
Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer's particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. It should also be noted that taxpayers who are ineligible to use OVDP are also ineligible to participate in this procedure.
Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Beit Shemesh, Tel-Aviv and New York and affiliate offices in Greater China, London and Amsterdam.