IRS Streamlined Filing Compliance Procedures

(A Way for Delinquent U.S. Taxpayers Living Abroad to Come Clean)
By Céline Couillaut, Tax Principal
July 2013

Background
US citizens, including dual citizens and resident aliens (e.g. green card holders) residing abroad, are required to timely report their worldwide income (regardless of which country is the source of the income) on a US individual income tax return by filing Form 1040, and report foreign bank and financial accounts by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).  Numerous taxpayers recently have become aware of their reporting obligations, realized they are delinquent, and are ready to catch up.  New IRS procedures that took effect on September 1, 2012 are meant to help delinquent taxpayers overseas comply with their tax filing obligations without facing penalties or additional enforcement action.  The new procedures also provide resolution of specific issues regarding certain foreign retirement plans (i.e. Canadian Registered Retirement Savings Plans and Registered Retirement Income Funds).

Eligibility requirements
These procedures are available only to non-resident US taxpayers who have lived outside of the US since January 1, 2009 and have failed to file US tax returns during that same period.  Participants must present low compliance risk.  This means that they must have simple returns and owe taxes of less than $1,500 in each of the covered years.  The IRS will determine the level of compliance based on the submission.  All returns submitted under this procedure must have a valid Individual Taxpayer Identification Number (ITIN) or a valid Social Security Number.  In general, amended returns will not be accepted in this program, except for amended returns submitted for the sole purpose of seeking relief for failure to timely elect deferral of income from certain foreign retirement or savings plans, where deferral is permitted by relevant treaty.

Process
Taxpayers eligible for the new procedures must submit the following:

  • complete and accurate (although delinquent) income tax returns and related informational returns such as Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or Form 5471, Information Return of US Persons With Respect to Certain Foreign Corporations, for the past 3 years,
  • complete and accurate delinquent FBARs for the past 6 years,
  • payment of all taxes and interest, if applicable,
  • a complete, accurate and signed nonresident questionnaire with 20 yes/no questions,
  • an ITIN application, if applicable, and
  • with respect to foreign retirement accounts, a request for retroactive relief for failure to elect income deferral where deferral is permitted under a tax treaty may also be submitted.

Conclusion
The streamlined procedures described above are part of ongoing IRS efforts to raise awareness of tax filing and information reporting obligations of US taxpayers.  They present a very attractive opportunity to come into compliance in a manner that avoids possible IRS enforcement action and the significant penalties that accompany it.  All submissions will be reviewed, but the level of review depends on the compliance risk, as perceived by IRS examiners.  Low risk submissions will be processed in a streamlined manner.  However, taxpayers who present higher compliance risk may be subject to higher scrutiny and potentially be subject to a more thorough review or examination that may cover more than 3 years.  Penalties may be imposed in that situation, and the streamlined procedures do not protect taxpayers against criminal prosecution.  An alternative Offshore Voluntary Disclosure Program announced on January 9, 2012 addressed in a previous BNN article may be a more appropriate option for taxpayers with higher compliance risk, depending on the facts and circumstances. 

It is never too late to come forward and comply with the law, and we encourage our readers to do that.  If you have any questions regarding this program and how it may apply to you, please contact Céline Couillaut or your BNN tax advisor.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.