IRS Streamlines Tax Compliance Procedures for Nonresident Taxpayers

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.