As we previously discussed, in June of 2012, the IRS announced a new streamlined FBAR filing compliance procedure for non-resident U.S. taxpayers and dual citizens, recognizing that some of them were unaware of their US filing obligations and have failed to timely file US income tax returns and FBARs.
The IRS has finally issued instructions and a questionnaire to be used by eligible non-resident U.S. taxpayers who want to catch up on past-due filing requirements under new streamlined filing procedure that took effect on September 1, 2012. This procedure is intended for certain “low-risk” U.S. taxpayers living abroad who haven’t timely file U.S. federal income tax returns or Forms TD F 90-22.1, Reports of Foreign Bank and Financial Accounts (FBARs), and who now would like to come into compliance. The new compliance procedures will also provide assistance for eligible taxpayers with foreign retirement plan issues.
The new compliance procedures are for non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns. The program is open to 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. Qualifying taxpayers must present a low level of compliance risk, i.e., submitted returns and the application must show less than $1,500 in tax due in each of the years involved. For those taxpayers presenting low compliance risk, the review will be expedited and IRS will not assert penalties or pursue follow-up actions.
Taxpayers taking advantage of this procedure will be required to submit: (1) delinquent tax returns, with appropriate related information returns, for the past three years, (2) delinquent FBARs for the past six years, and (3) complete a special Questionnaire. Payment of any federal tax and interest due must accompany the submission.
For relief from the failure to timely elect deferral of income from certain retirement or savings plans (where permitted under a treaty), taxpayers will need to submit: a request for an extension of time pursuant to an identified treaty provision; Form 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, for each tax year and each plan, with a description of the plan (only for Canadian plans only); a dated and taxpayer signed (under penalties of perjury) statement explaining the events that led to the failure to make the election, events that led to the discovery of the failure, and where the taxpayer relied on a professional advisor, an explanation of the nature of the tax advisor’s engagement and responsibilities.
The IRS has cautioned that the risk level may rise if any of the following elements are present:
- Any of the returns submitted through the program claims a refund;
- There is material economic activity in the U.S.
- The taxpayer has not declared all of his/her income in his/her country of residence, or is under audit or investigation by IRS;
- FBAR penalties have been previously assessed against the taxpayer or if he/she has previously received an FBAR warning letter;
- The taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
- The taxpayer has a financial interest in an entity or entities located outside his/her country of residence
- There is U.S. source income; or
- There are indications of sophisticated tax planning or avoidance.
According to the IRS announcements, those 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 OVDI.
Former IRS Tax Attorneys of Holtz, Slavett & Drabkin are available to assist you with the issues related to offshore assets and foreign accounts. To arrange for a consultations, please contact us at (310) 550-6200.
Copyright (c) 2012 Igor S. Drabkin. All Rights Reserved.