The Internal Revenue Service has issued new procedures to help nonresident U.S. taxpayers, including dual Canadian citizens, comply with U.S. tax laws even if they have previously undeclared foreign bank accounts.
The new rules, which were announced last Friday, eliminate civil penalties and make life easier for taxpayers who follow the IRS’s streamlined disclosure process. The program also provides retroactive elections for certain retirement plans and adds relief for Canadian citizens in the U.S.
The streamlined procedure is designed for taxpayers who present what the IRS considers to be a low compliance risk. All submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers who present a low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue followup 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.
“The streamlined version of the 2012 program imposes no FBAR penalties and only requires the submission of three years of tax returns,” said Jim Mastracchio, co-chair of the tax controversy practice at the law firm BakerHostetler, in a statement.
However, he noted that taxpayers who fail to report income from offshore accounts face stiff financial penalties and possible criminal prosecution. “We’ve seen cases where a taxpayer is now facing criminal charges after attempting to make voluntary disclosures, but were ineligible because the IRS was already in possession of their foreign account information,” he said.
The streamlined procedure generally requires a submission of a questionnaire, along with the filing of federal income tax returns 2009-11 and submission of FBARs for the last six years.
Canadian citizens also benefit from the IRS’s new policy.
“The streamlined program offers needed relief for Canadian citizens who live in the U.S. and failed to properly report their Canadian Retirement Plan,” said BakerHostetler counsel Jay Nanavati, a former DOJ Tax Division prosecutor.
The new rules follow up on the streamlined filing compliance procedures for nonresident U.S. taxpayers that the IRS announced in June, which were set to take effect on Sept. 1, 2012 (see IRS Pledges to Help Dual Citizens Meet Tax Obligations). The 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, also known as FBARs or 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.
The new procedures are for nonresidents, including, but not limited to, dual citizens who have not filed U.S. income tax and information returns. They are available for nonresident U.S. taxpayers who have resided outside of the U.S. since Jan. 1, 2009 and who have not filed a U.S. tax return during the same period.
6 Comments
Whoever thought the day would arrive when, in order to survive living abroad the US citizen would have to decide whether to remain a US citizen and spend thousands of dollars in obtaining expert tax assistance in order to accurately prepare all of the tax forms Congress and the IRS has legislated into existence just for them, or to simply call it quits and renounce US citizenship.
Special reference is made to making it easier for US citizens, many of which are unknowingly dual US citizens as well as Canadians, because there are about a million of them and they are raising many objections. But US citizens in other countries, many of which hold "accidental" US citizenship having been born abroad to a US citizen parent, or in the US to foreign parents temporarily studying or working in the US at the time of the child's birth. Their problems are just as great or even greater than those of US citizens in Canada.
You would think that Congress would finally wake up not only to the folly, but the absoiute insanity in subjecting all persons with US citizenship who are bona-fide residents, and often citizens as well, of a foreign country. Faced with a $750 billion trade deficit (60% of the total trade deficits of the world and which is directly responbsible for the destruction of some 7.9 million jobs (Commerce Department metrics), what the US urgently requires is a lot more Americans abroad selling our exports. Exports don't sell themselves. That takes feet on the ground which all our high-wage trade competitors have, but the US does not. This tax policy, plus FATCA, literally makes it impossible for all but a few US citizens to even survive living abroad. They are automatically excluded from executive positions and any job which has signature authority over a foreign employer's expenditures or bank accounts in which they have no personl ownership bwecause under FATCA and FBAR they must expose all of their employer's financial data to the IRS. The penalties for failing to do this accurately are draconian.
Neither Obama or Romney seem to be able to figure out how to create new jobs as they both blindly go on supporting legislation like this which raises a pittance in tax revenue but acts powerfully to destroy American jobs manufacturing for export.
While less than 8% of our GDP is created from Exports, most of our industrialized trade competitors with wage levels well above those in the US, have unemployment rates well below ours because they encourage their citizens to relocate abroad and sell their exports. Generally their contribution of exports to their GDP exceeds 40%. And most of them have trade surpluses with China, the 2nd largest import market in the world, in spite of China's currency manipulations.
Posted by: RogerC | September 12, 2012 7:47 AM
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I also remain skeptical of this new program. I am trying to understand the definition of "nonresident". Does this include folks who are currently residing in the States and are deemed to be a "resident" for tax purposes but are "nonresidents" for immigration purposes?
Posted by: iwachsler | September 5, 2012 8:29 PM
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David Treitel, a London based US tax specialist and Director of American Tax Returns Ltd comments on this new IRS simplified filing process aimed at the overseas American who is late with filing US income tax and information returns.
Treitel says that "according to the IRS this is designed for low risk taxpayers and with IRS agreement any such qualifying low risk individuals will not be penalised". Treitel notes that "perhaps fewer than half of Americans in the UK file what is currently required by the IRS, so any relief is welcomed. Indeed, in recent years many folks have been close to tears when they discover that the IRS wants a huge bunch of complicated forms every year, each with large penalties if filed late or completed just slightly wrong".
HOW WILL IT WORK The IRS announcement says that they now require just three years of back US income returns plus six years of "FBAR" forms (Report of Foreign Bank and Financial Accounts) as well as a special questionnaire aimed at helping the IRS decide who is low risk.
IRS RISK FACTORS? To qualify, someone must have lived outside America since 1 January 2009 and not have had material economic activity in the US. Any US tax payable (after credit for "foreign" tax such as UK PAYE) must be less than $1,500 per year.
In addition one must have declared all income in the country of residence; which itself presents a problem, for example here in the UK where the vast majority of taxpayers don't need to file tax returns at all.
High risk factors - according to the IRS - also include for example anyone relying on a double tax treaty - which is common here in the UK to avoid current US tax on UK employer pension contributions
There is apparently an ever higher risk if someone holds a bank account outside of their home country, for example in Jersey, Guernsey or indeed France.
TAXPAYER RISK FACTORS The greatest risk from the streamlined approach is that the IRS simply say no - and judges any submission as "high risk". According to Treitel "the IRS want to be seen as generous but are giving almost nothing away". Treitel says that "the taxpayer can effectively only rely on IRS goodwill to keep to their side of this bargain and not charge penalties".
If the IRS rejects the idea that a return is low risk they retain the power to charge statutory penalties and - in the worst case - even criminally prosecute.
Treitel notes that he has dealt with many Americans overseas, including handling many previous voluntary disclosures with the IRS. By reviewing all possible options for delivering overdue tax returns to the IRS before filing one can significantly increase the chances of a good outcome. This new process is simply another option for some Americans living outside America - and will doubtless suit a small number. Overall this is just another signal that the IRS are still playing at being the tough guys. Many Americans - or indeed advisers who have Americans among their client base - would be wise to start taking professional advice on the best way to approach the IRS.
Posted by: k40911 | September 5, 2012 2:34 PM
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This still leaves many questions unanswered. Is a US "foreign account" of an Expat really as undesirable as this seems to make it to be? What could possibly be wrong with banking locally? Expats are already required to be tax compliant in the nations where they live. While it is understandable that accountants profit heavily from the ability to scare and threaten expats with the thought of "stiff financial penalties and possible criminal prosecution", is all of this really necessary? US citizenship is most certainly not worth "stiff financial penalties and possible criminal prosecution" for those who are tax complaint where they live and don't earn enough to pay US taxes. We just don't need all of these stupid threats. Instead of trying so hard to encourage Americans to stop being US citizens, why not instead focus on making their foreign address recognized in the US, such as on tax forms? All these silly threats and scare tactics, and yet the IRS can't even scare FreeTaxUSA into allowing Americans abroad to file their taxes! This is all just one lousy joke.
Posted by: ExpatAmi | September 5, 2012 11:39 AM
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Count me in the skeptical class on this program. The IRS NEVER provides a simple path to compliance, this most recent amnesty announcement not withstanding. In my opinion, this has too narrow criteria for what the IRS determines is low risk, and there is too much risk that they will define "reasonable cause" differently than the way a Minnow wishing to be compliant would do. I would bet that few informed individuals abroad will find this an attractive route for compliance to a distant Master.
A Minnow abroad is still going to have some very consequential cost in LCUs and expert professional advice as what to do. Filing 3 years of returns and 6 years of FBARs is not just a weekend project. Nothing is simple or easy with the IRS. They love their technical details, qualifiers and hard-line thresholds. They make, interpret and enforce the rules of their game. Given the IRS past practices with 'Bait and Switch' in the 2009 OVDP programs, and given the incredible complexity in the 2011 OVDI, you have to approach this newest program with that nursery rhyme in mind, "Come into my parlor says the spider to the fly."
Exercise Caution, is my warning.
Bottomline, folks who have never thought about U.S. Citizenship in the form a self selective Tax 'Form and Penalty' Membership Club, have to now consider the deal they are signing up for (or were born into). U.S. citizenship (Person-hood) is becoming like any other financial decision you make or any product you buy, Caveat Emptor. Let the buyer beware. Given the past 3 years of IRS offshore Jihad, and the insistence that it Citizens tax revenue belongs to them no matter where you live in the Universe, the benefit might not be worth the cost any more. I am just saying...
Posted by: Just Me | September 5, 2012 10:48 AM
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Who wants to be the first to find out what the IRS really means by "For those taxpayers who present a low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue followup actions."
Those who signed up for earlier IRS amnesty programs to bring themselves into compliance by filing FBAR Reports, which until recently were never mentioned in instructions for overseas filers, discovered that Amnesty had its own unique meaning to the IRS.
Posted by: RogerC | September 5, 2012 9:15 AM
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