IRS issues guidelines for tax compliance

In late June, after the IRS announced it will be helping U.S. and dual citizens overseas, the U.S. tax agency suggested it would publish guidelines by September 1 for a new procedure meant to encourage those who haven’t been filing U.S. tax returns to get on the road to compliance.

True to its word, last Friday afternoon, when everyone else was getting ready to leave for Labour Day weekend, the IRS released New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers.

The new process requires people to submit and complete U.S. income tax returns (IRS Form 1040 with all requisite schedules and forms) for the past three years, along with six years of FBARs (Treasury Department form TD F 90-22.1, also called the Report of Foreign Bank and Financial Accounts). Taxpayers must also submit and sign off on a two-page questionnaire.

To catch up on IRS’s changes for U.S. taxpayers residing in Canada, check out these articles:

New U.S. tax rule fuels frustration

Tax laws chasing funds across borders

U.S. stands firm on tax law changes

Tax cheats beware

Residency rules snowbirds need to know

Tax preparation opens doors with clients

Once the returns, FBARs and questionnaire are submitted, IRS will determine the level of compliance risk the taxpayer could face. It describes a low-risk taxpayer as one with less than $1,500 in tax due in each of the tax years. Such taxpayers would be able to opt for the streamlined processing.

However, IRS says risk level for the taxpayer could rise if it sees any of the following:

• Any of the returns submitted through the program claim a refund;
• There is material economic activity in the United States;
• The taxpayer has not declared all of his or her income in his or her country of residence;
• The taxpayer is under audit or investigation by the IRS;
• FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
• The taxpayer has a financial interest or authority over a financial account(s) located outside his or her country of residence;
• The taxpayer has a financial interest in an entity or entities located outside his or her country of residence, and outside the U.S.;
• There is U.S. source income; or
• There are indications of sophisticated tax planning or avoidance.

Read: Does your client have U.S. tax risk?

Further, to be eligible for the new procedure, a taxpayer must also answer No to the following questions:

• Have you resided in the U.S. for any period of time since January 1, 2009?
• Have you filed a U.S. tax return for tax year 2009 or later?
• Do you owe more than $1,500 in U.S. tax on any of the tax returns you are submitting through this program?
• If you are submitting an amended return (Form 1040X) solely for the purpose of requesting a retroactive deferral of income on Form 8891, are there any adjustments reported on the amended return to income, deductions, credits or tax?

Taxpayers who submit amended returns through the program will be treated as high risk and subject to further examination. But, the IRS does provide for amended returns related to late filing of IRS Form 8891 – U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans.

In all, it appears the days of quiet disclosure with respect to the past filing of US tax returns are over. The IRS has never had a Notice of Assessment process like we have in Canada. However, it would appear the eyes of the IRS will look closely at each submission for opportunities to poke and prod a little more.

Read: Ask clients about cross-border activity

The IRS indicates that taxpayers would be able to opt out of the program, similar to those under the current Offshore Voluntary Disclosure Program (OVDP). He or she would then likely face much greater scrutiny by the IRS. However, reasonable cause submissions would appear to be available.

So what’s the non-compliant American to do? Given the two prior Offshore Voluntary Disclosure Initiatives (OVDI) and the current OVDP program, your situation should be reviewed on a case-by-case basis with either a qualified tax attorney or U.S. Enrolled Agent to determine the best filing procedure.

If this program was developed to encourage more folks to enter the program, given the potential level of greater scrutiny, I think more people will sit back and wait to see what happens. However, the days of cutting corners and keeping your head in the sand will soon be coming to a close with the implementation of Foreign Account Tax Compliance Act on January 1, 2014.

Terry F. Ritchie, CFP (U.S.), RFP (Canada), TEP, EA, is co-founder of Transition Financial Advisors Group Inc. and co-author of several books on cross-border financial issues.