For US persons that have not been fully compliant, I always believe that legal advice is helpful. Nevertheless, there are typically 3 options to consider.
Firstly, there are those who believe that quiet disclosures are appropriate. This is where a client comes clean without the potential protection of any amnesty program. Unless someone has had proper advice, I would be extremely careful when considering this option
Secondly, there are streamlined procedures which require among other things, 3 years of returns and 6 years of FBARs. This is discussed in greater detail below (you may also want to check our Guide on US Streamlined Tax Amnesty).
Thirdly, there was the OVDP but this has been discontinued. Read more on it here
Streamlined compliance procedures are premised on a taxpayer being “non-willful” in their non-compliance. Nevertheless, the streamlined procedure was modified in June 2014 in a way that appears to make it an even more appealing option to US taxpayers residing outside of the US.
Taxpayers Residing Outside of the US
Publicity around FATCAhas effectively reminded many taxpayers of their responsibilities to the US government. In our practice, we deal primarily with US taxpayers who reside outside of the US – that is, in South East Asia, Europe and the Southern Caribbean. In many cases, the streamlined foreign offshore procedures are applicable – http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States
Individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures must:
(1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and
(2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR(FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. 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.
One area of confusion is the issue of residency. Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States. For more information on the meaning of “abode,” see IRS Publication 54.
As mentioned in this week’s Federal Tax Crimes blog, other considerations for the streamlined are as follows –
1. The IRS will not offer for the streamlined programs any analog to preclearance that is offered in the full-blown OVDP. Taxpayers thus, theoretically, are at risk until they make the submissions required by the streamlined programs.
2. The IRShas not yet developed statistics on the streamlined program (taxpayers joining and those rejected). The IRS representative said that it was too early for such statistics, but expects that they will be available eventually.
3. The flagging of streamlined cases with at least 5 foreign information returns. The IRS representative “said the initial examination referred to in the IRM is more for completeness and coherence, labeling it a ‘sanity check.'” See New IRS Internal Guidance on Processing Streamlined Submissions (Federal Tax Crimes Blog 8/29/14; 8/30/14), here.
4. Practitioners complained and the IRS acknowledged its awareness of the long delays for some long-time foreign residents without Social Security Numbers (SSNs). The problem is that those taxpayers, often prime candidates for the streamlined solution, cannot pursue the solution until they get SSNs, but have significant difficulty and time delays in getting SSNs. This is a recurring theme: Report on ABA Criminal Tax Fraud and Tax Controversy Conference (Federal TaxCrimes Blog 12/18/14), here. There is no solution in sight, but the IRS says it is continuing its discussions with the Social Security Administration. The taxpayers’ concerns are related to the phenomenon noted above in paragraph 1 that there is no preclearance procedure to give taxpayers some assurance that, despite delays not of their making, they may not be able to complete the submissions until after these difficulties and long delays.
5. The IRSrepresentative said that the IRS will not issue additional guidance on the meaning of willfulness in the streamlined program.
Once a decision has been made to follow the streamlined foreign offshore procedures, the process is as follows –
Description of Scope and Effect of Procedures
U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Foreign Offshore Procedures must
(1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938)
(2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1). The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.
A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.
For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty. The proper deferral elections with respect to such plans must be made with the submission. See the instructions below for the information required to be submitted to make such elections.
Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
1. For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed:
- if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040had the taxpayer filed on time, or
- if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040had the taxpayer filed a complete and accurate original return.
2. Include at the top of the first page of each delinquent or amended tax return and at the top of each information return “Streamlined Foreign Offshore” written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.
3. Complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S.certifying (1) that you are eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 8 below); and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct. You must submit the original signed statement and you must attach copies of the statement to each tax return and information return being submitted through these procedures. You should not attach copies of the statement to FBARs. Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. Your taxpayer identification number must be included on your check. You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
5. If you are not eligible to have a Social Security Number and do not already have an ITIN, submit an application for an ITIN along with the required tax returns, information returns, and other documents filed under these streamlined procedures. See the ITIN page on www.irs.gov for more information.
6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:
- a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
- a dated statement signed by you under penalties of perjury describing:
- the events that led to the failure to make the election,
- the events that led to the discovery of the failure, and
- if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
- for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission.
7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:
Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn: Streamlined Foreign Offshore
Austin, TX 78741
This address may only be used for returns filed under these procedures. For all future filings, you must file according to regular filing procedures.
8. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. You are required to file these delinquent FBARs electronically at FinCen. On the cover page of the electronic form, select “Other” as the reason for filing late. An explanation box will appear. In the explanation box, enter “Streamlined Filing Compliance Procedures.” If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.
It is possible to file streamlined which includes a year which was timely filed. You just need to write “Fully Compliant” on the top of the 1040 for the return already processed normally: read more here.