I want to update you on the latest IRS pronouncement setting out a new streamlined filing compliance procedure for non-resident, non-filer U.S. taxpayers. It came into effect on September 1.
Here is a link to the latest IRS pronouncement with regard to US persons who have not filed tax returns / FBARs / other information returns (e.g., Form 3520 with regard to foreign trusts or foreign gifts / inheritances).
This “streamlined” initiative is designed for so-called “low risk” taxpayers who may escape all non-filing penalties. Below is a very abbreviated overview of the new initiative. If you think this may be something that can assist in your particular tax situation, you should carefully review the matter with experienced tax counsel. Delinquent tax returns and FBARs will have to be prepared. Only by such preparation will you have an idea whether this initiative can possibly work for you. Please note, if you need to file an amended return to correct previously reported or unreported income, deductions, credits, tax etc, you should not use this streamlined procedure.
HOW WILL THE NEW PROCEDURE WORK?
The IRS announcement provides that only three years of back US income returns plus six years of “FBAR” forms (Report of Foreign Bank and Financial Accounts) will be required as a general rule. A special questionnaire aimed at helping the IRS determine whether a taxpayer is a “low risk” compliance taxpayer must also be submitted.
WHAT ARE SOME OF THE RISK FACTORS IRS WILL EXAMINE?
To qualify, someone must have lived outside of the USA since January 1 2009 and not have had material economic activity in the US. Any US tax payable (after taking into account the so-called “Foreign Earned Income” and Foreign Housing” exclusion benefits and foreign tax credits, such as the UK PAYE) must be less than US$1,500 per year. In addition one must have declared all income in the country of residence. This may possibly be an issue in a country where tax is not assessed, such as in the UAE, where taxpayers don’t need to file tax returns at all. This point would certainly have to be looked at more closely on a case-by-case basis.
According to the IRS, risk levels increase if a taxpayer holds a financial interest in an account or in an entity which is outside of the taxpayer’s country of residence. For example, an individual living in the UAE who once lived in Hong Kong, might still have accounts located in Hong Kong; dual national taxpayers who are married to non-US nationals may have accounts or business entities in numerous countries. The problem with this new streamlined initiative is that the IRS apparently continues to focus on a “one size fits all” approach that is simply not workable in the real world where global transactions are the order of the day.
Many other factors are examined in the risk assessment. A careful examination of the particular facts should be undertaken with professional guidance.
WHAT HAPPENS IF….
If the IRS rejects the idea that a return is “low risk” the IRS has the power to charge statutory penalties and – in the worst case –the IRS can recommend criminal prosecution to the Dept. of Justice. In essence, the new procedure will be helpful to only a handful of taxpayers and the majority will be faced with a situation of uncertainty as to their level of risk and possible penalties. Once a taxpayer enters the streamlined program, he is no longer eligible to enter the IRS OVDP.
LATEST UPDATE — ON FEB 27 2013 — IRS posted to its website Frequently Asked Questions Regarding the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers. They can be accessed here: