On June 18th, the Internal Revenue Service announced changes to the Offshore Programs to help ease the tax reporting compliance burden on delinquent taxpayers and assist more taxpayers to come forward to get their US tax return filing obligations up to date. Now referred to as the “Streamlined Foreign Offshore Procedures” or “Streamlined Domestic Offshore Procedures” the announcement is welcome news to taxpayers and professionals.
The changes impact both taxpayers residing inside and outside the US. They expand the streamlined filing compliance procedures that were announced in September 2012 and modify the 2012 Offshore Voluntary Disclosure Program. Today’s blog entry will focus on the Streamlined Foreign Offshore Procedure (for US persons resident outside of the US). One of our previous blog entries summarized the September 2012 streamlined program; a link to it is here: http://wldtax.com/low-compliance/. We will follow-up with a blog entry on the Streamlined Domestic Offshore Procedure (for US persons resident in the US) in the near future.
Old and New Streamlined Foreign Offshore Procedures
The previous program required the taxpayer to have a US income tax liability of less than $1,500 per year for the last three years to qualify. In addition, the program required that taxpayers be considered “low-risk.” Among indicia of higher risk were not having reported all income on income tax returns of the taxpayer’s country of residence or having financial interests in accounts outside of their country of residence.
The New Streamlined Foreign Offshore Procedures have eliminated the requirements to have a US income tax liability of US$1,500 or less and otherwise be considered a low-risk taxpayer. Thus, a taxpayer that would have been considered a high-risk taxpayer under the old program and/or had a greater than US$1,500 US tax liability will not be disqualified from the new streamlined procedure. The Internal Revenue Service will be processing US tax returns filed under both the old and new Streamlined programs without regard to a risk assessment.
The New Streamlined Program, like the old program, requires delinquent US taxpayers to file the most recent 3 years of US income tax returns and related informational disclosures and 6 most recent delinquent US Department of Treasury FinCEN Form 114, Report of Foreign Bank and Financial Accounts. US persons who qualify for the new program will not be subject to failure-to-file or failure-to-pay penalties which can be up to 25% of the unpaid tax. In addition accuracy-related, information disclosure and FBAR penalties will also not be assessed.
This is welcome news to those delinquent US taxpayers who may have been uncertain about their qualification for the old streamlined program. The IRS has expanded on the requirements for the new streamlined program including a new non-residency requirement which applies in any 1 or more of the delinquent tax years:
1) The US person must not have a US “abode”; and
2) Must be physically outside the US for at least 330 full days.
The term abode is generally defined as one’s residence, domicile or dwelling. This is where a taxpayer maintains one’s economic, family and personal ties. An abode in the US does not include a place in the US that is transient in nature like a vacation home if the individual normally and customarily lives outside of the US.
Nevertheless, if in each of the 3 delinquent tax years a US person has spent more than 35 days in the US, he or she would not qualify as a non-resident for purposes of the Streamlined Foreign Offshore Procedure. This requirement may disqualify snowbirds, business travellers and frequent cross-border shoppers from the program. We are surprised that the IRS set this requirement and we think the IRS may not have intended to disqualify Canadians who are in the US for more than 35 days a year. We intend to discuss this issue with the IRS and are hopeful they will release further guidance on the non-residency requirement in the near future.
Other requirements include US persons must certify under penalties of perjury that they have failed to report all income, pay all tax and submit all information returns and that this failure was due to non-willful conduct. Non-willful conduct is conduct that was due to negligence, mistake or as result of good faith misunderstanding of US tax law. If the IRS has initiated civil examination of the US person in any tax year (including those years outside of the streamlined filing years), the individual does not qualify for the new streamlined program.
Given the US’ Foreign Tax Compliance Act implementation in Canada this summer, US persons who are delinquent with respect to their US tax returns and related disclosures should give serious consideration to becoming compliant. The New Streamlined Foreign Offshore Program offers relief for individuals who wish to become current with their US federal filing obligations but did not meet the strict requirement of the old streamlined program and found the Offshore Voluntary Disclosure Program to be too punitive. We suspect most persons will qualify for this program but the Internal Revenue Service should clarify its position on non-residency requirements. As noted above, where the IRS initiates contact requesting US income tax returns or disclosures, the US taxpayer may no longer be qualified for the Streamlined Foreign Offshore Procedure.
The changes are effective July 1, 2014 and are available for an indefinite period of time until otherwise announced. A taxpayer making a submission under the Streamlined Foreign Offshore Procedures may not also participate in the Offshore Voluntary Disclosure Program.
Further detail can be found at the IRS website:
Written by Steven Flynn, CA, CPA and Sidhartha Rao, JD, LLM