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What Offshore Delinquent U.S. Individual Filers Need To Know! – Part 4



Is acceptance of a streamlined application automatic for those residing in Canada?

Answer

The primary criteria for acceptance into the Streamlined Foreign Offshore Procedure (“SFOP”) is that the reason for the non-compliance was due to non-willful conduct and that you meet a non-residency test.

Non-willful conduct requires you to certify on IRS Form 14653. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

The non-residency requirement is generally met if in any one of the 3 past due years, you were present outside of the U.S. for at least 330 days. The presence test will not be met if you have more than 35 (business or vacation days) in the U.S. in each of the 3 years. In that case you would not qualify for SFOP and may consider filing under the normal assessment procedures with no waiver of civil penalties unless in certain circumstances, a reasonable cause defense is available. Here, you may have to file more than 3 years of returns and applicable international information returns.

What if you don’t qualify for SFOP?

Alternative to the SFOP is filing under normal assessment procedures or applying under the 2014 OVDP (“Offshore Voluntary Disclosure Program”).

The OVDP is generally reserved for taxpayers who may possess higher risk such as those who may have difficulty in determining or be concerned that their conduct may not be non-willful. If one’s conduct was willful then all bets are off causing civil and potential criminal penalties to apply.

The OVDP applies to those who have been non-tax compliant with regards to one’s offshore assets. Non-compliance may include having not reported an element of gross income or filing international information returns. The procedures for filing an OVDP application are more detailed. The disclosure period for the OVDP is 8 years of past due filings. There is now a 50% miscellaneous offshore or OVDP penalty (previously 27.5%) on the highest value of undisclosed foreign assets during the 8-year disclosure period. The OVDP penalty is in lieu of levying the otherwise civil penalties noted above (excluding the accuracy related penalty) and criminal penalties.

The asset base may exclude assets that were purchased with after-tax funds or from funds that were not subject to U.S. taxation if the assets have not yet produced any gross income or there has been no U.S. taxable event or reporting obligation to disclose. RRSPs/RRIFs and pension/retirement plans whose accumulated income is exempt under the treaty or where there is no other reporting requirement may be excluded from the asset base.

Recommendation

Based on your fact pattern, you need to discuss each filing alternative with your accountant or experienced tax attorney. In most cases, the decision will be based on the creditability of the willful conduct certification. The IRS has provided limited guidance on their interpretation of willful conduct.

Presently there is no expiration date for an application under the SFOP or OVDP, however with FACTA in place, there may not be the need for these programs much longer as it will be easier to find delinquent taxpayers to assess unpaid tax, civil and criminal penalties.

Contact your professional advisor prior to implementing any of the outlined strategies.

Next: What Offshore Delinquent U.S. Individual Filers Need To Know! – Part 5 (Final)

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Larry Stolberg, CPA, CA, CPA (South Carolina), has been practicing as a full-time tax specialist for over 30 years, in the Toronto, Ontario Canada and surrounding GTA area with primary emphasis on:

•Corporate restructuring for business owners
•Estate/succession planning
•U.S. expatriate and cross border issues
•Tax efficient planning that will achieve both your short and long term objectives

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