It all started with the announcement of the FATCA (Foreign Account Tax Compliance Act) going into effect, then the new streamlined compliance procedures were announced in 2012 to go into effect on September 1st, 2012.
They were implemented in recognition that some U.S. taxpayers living abroad had failed to timely file U.S. federal income tax returns or FBARs, Form TD F 90-22.1. These delinquent taxpayers may have recently become aware of their filing obligations and now seek to come into compliance with the law.
The new procedures are for non-residents including but not limited to dual citizens who have not filed U.S. income tax and other related information returns.
As the Internal Revenue Service envisioned it, this procedure is designed for those taxpayers who are considered a “low compliance risk”. Having said that, the IRS still is the one to decide the intensity of the review and that will vary according to the level of risk presented by the submission.
• For those presenting a low compliance risk, the review will be expedited and no penalties will be asserted or follow-up actions will be pursued.
• For those submissions that present a higher compliance risk, as determined by the IRS, the taxpayers will not be eligible for the streamlined process. Not only so, they will also be subject to a thorough review and sometimes full examination. The examination may then include more than 3 years of tax returns.
Eligibility: This procedure is available for:
1. Non-resident U.S. taxpayers who have resided outside of the U.S since January 1st, 2009.
2. These taxpayers must not have filed a U.S. tax return during this period.
3. Amended tax returns submitted through this program will be considered “high risk” except in certain cases where the amended return was filed to submit a Form 8891.
4. The taxpayers must have a valid Taxpayer Identification Number (TIN) or a Social Security Number (SSN). Those who do not have a TIN & are eligible for one may apply for it along with the submission made through this program.
The Procedure: The actual process of submission goes like this:
• The taxpayers will be required to file delinquent tax returns.
• With appropriate informational returns like Forms 3520 or Form 5471 for the past 3 years.
• Or to file delinquent FBARs (TD F 90-22.1) for the past 6 years.
• Any applicable tax & interest has to be paid along with the delinquent returns filed.
• The submissions must include any income deferrals elected by the taxpayer where permitted by a relevant treaty.
How the IRS determines Compliance Risk: The level of compliance risk is based on the returns filed & the additional information provided as per the responses to the Questionnaire which is an integral part of a submission.
• Those returns which are “simple” and carry very little or no U.S. tax will have low compliance risk. Or if the submitted returns and application show less than $1,500 in tax due in each of the years filed, will be treated as low risk.
• The risk level may rise if any of the following are present: refunds claimed on returns filed; tax returns not filed in country of residence; taxpayer is under audit or investigation; FBAR penalties previously assessed against taxpayer etc. (Complete list provided on irs.gov under instructions for the procedure)
Other Considerations: Please note that the above information is only to jump start your streamlined process & is not exhaustive. Taxpayers considering going down this route are advised that there is a risk of prosecution if the IRS & the Dept of Justice warrant it. In such cases, taxpayers should consult with their legal advisers and explore other means of disclosure such as the Offshore Voluntary Disclosure Program (OVDP). More about OVDP in my post here. Readers should also note that those taxpayers who are ineligible to use the OVDP cannot use this streamlined procedure as well.
Bibliography: irs.gov; Instructions for Streamlined Filing Compliance; IRS Fact Sheet FS-2011-13; IRM 4.26.16; Form TD F 90-22.1; Notice 2011-55
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