The Role of Residency In The Streamlined Procedures

Ephraim Moss1

As a U.S. expat, you may have heard about the latest and greatest IRS amnesty program available for delinquent U.S. taxpayers known as the “streamlined procedures.”  What you may not know is that if you continue to spend a significant time in the U.S. each year, your eligibility for the procedures and your ability to obtain penalty-free relief may be in jeopardy.

The key issue here is “residency,” which separates the friendlier “foreign offshore” procedures (available for taxpayers residing outside the U.S.) from the harsher “domestic offshore” procedures (available for taxpayers residing in the U.S.)

For instance, a domestic resident taxpayer that has failed to file a U.S. income tax return in any of the three most recent tax years cannot participate in the domestic offshore procedures, while a foreign resident taxpayer that has been similarly delinquent can participate in the foreign offshore procedures. Further, even if you qualify, the domestic offshore procedures require you to pay a 5% penalty on the highest aggregate balance/value of your foreign financial assets, while the foreign offshore procedures have no such penalty.

Because residency plays such an important role in how the streamlined procedures function, the IRS has provided some guidance explaining the residency concept.[1]  According to the IRS, a U.S. expat qualifies as a non-resident if – in at least one year during the three-year period that tax returns must be submitted under the streamlined procedures – he or she both:

(1) did not have a U.S. “abode” (generally, one’s home, habitation, residence, domicile, or place of dwelling);[2] and

(2) was physically outside the United States for at least 330 full days (meaning, the taxpayer did not spend more than 35 days in the United States).[3]

Keeping these rules in mind, we can analyze the following typical fact pattern of a so-called Canadian “snowbird”:

Each year for the past many years, Mr. Xavier Patrick, a dual U.S. and Canadian citizen, has been physically present and gainfully employed in Canada for 10.5 months out of the year. During the remaining 1.5 months, Mr. Patrick has vacationed in the U.S. with his family. Mr. Patrick, thinking he has no connection to the U.S. other than his temporary physical presence, has filed returns in Canada, but has not filed U.S. tax returns for the past three years.

According to the IRS’s residency rules, Mr. Patrick would not qualify for the streamlined procedures because he has failed the 330-day physical presence test (and therefore would be required to qualify under the domestic offshore procedures) and he has not filed U.S. tax returns in any of the three previous tax years (and therefore does not qualify under the domestic offshore procedures).  Further, even if Mr. Patrick had been filing U.S. returns and qualified for the domestic offshore procedures, he still may be subject to the 5% penalty tax.

If you are an expat considering the streamlined procedures, then it is critically important that you understand the requirements and relief available under your specific circumstances.  Our expat professionals have helped many clients understand and participate in the streamlined procedures, both under the foreign and domestic offshore programs.  We are available to help discuss your options and guide you through each step of the streamlined program. Connect with Ephraim MossConnect with Joshua Ashman.

Original Post By:  Ephraim Moss and Joshua Ashman

Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

One comment

  1. larry stolberg says:

    Same residency problem occurs for those expatriates performing services in the US as consultant directly or indirectly through their Canadian corporations. There are a lot of Canadians although not US CITIZENS, have spent a lot of time in the US and get caught by Article V, Par. 9.

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