The U.S. tax system generally requires that U.S. citizens and green card holders file a U.S. income tax return and certain information returns annually, regardless of where the U.S. citizen or green card holder lives. The Foreign Bank Account Reporting (FBAR) form is specifically targeted under this program and other voluntary disclosure programs. Because many U.S. citizens/green card holders living abroad (including those with dual citizenships) may not be aware of their U.S. filing requirements, the IRS announced this new program for non-compliant U.S. citizens/green card holders who have lived abroad for the entire time from January 1, 2009, to the time of filing.
Since 2009, the IRS has announced three voluntary disclosure programs that have focused on all non-filers – whether resident or non-resident, citizens, or aliens. The recently announced program applies only to U.S. citizens/green card holders who have lived out of the U.S. since January 1, 2009, and have only recently become aware of their requirement to comply with U.S. income tax and/or information return filing requirements. Many U.S. citizens/green card holders living abroad owe little or no U.S. tax due to foreign tax credits or income exclusions allowed on their U.S. income tax returns, but they may face significant penalties related to the non-filing of information returns.
As a result of uncertainties related to the penalties assessed on non-filed information returns reporting foreign financial assets, many U.S. citizens/green card holders living abroad have been unaware of, or have delayed participating under, any of the three prior voluntary disclosure programs. This new program will provide lower (or no) penalties and will provide greater certainty of treatment for U.S. citizens/green card holders living abroad who are deemed to be “low-risk.” Low-risk U.S. citizens/green card holders living abroad will have an easier process to file late income tax and information returns that will, in most cases, also be free from the penalties associated with the other voluntary disclosure programs.
Getting Into the Program and Filing Delinquent Tax Returns
As of September 1, 2012, non-compliant U.S. citizens/green card holders living abroad may use the new program if they meet certain requirements and follow the prescribed procedure. As noted above, the new program is an addition to other voluntary disclosure options. Non-compliant individuals may choose any available program for which they qualify. Instructions for the new program can be found at Streamlined Procedure.
A description of all voluntary disclosure options for disclosure of offshore assets can be found at IRS Options.
The new program was first announced on June 26, 2012, and indicated that U.S. citizens/green card holders living abroad could bring their filing requirements up to date by filing income tax returns for three prior years and FBARs for six prior years. Low-risk taxpayers will have no penalties in most situations. In addition, the IRS will allow certain elections to be made retroactively, for example, Americans living in Canada will be allowed to defer income earned by a Canadian RRSP, RRIF, or LIF accounts. Qualifying participants are required to pay any tax and interest due when the returns are submitted.
While it is important to understand that most taxpayers will not be subject to penalties, the IRS has not guaranteed that penalties will not be assessed if you use this procedure. A key requirement of the program is a submission of a two-page questionnaire that discloses information on sources of income, foreign income tax filings, ownership of U.S. and foreign assets, and a statement regarding why U.S. returns have not been filed.
Low-risk or High-risk Filer?
As noted above, the program will identify filers as low-risk or high-risk filers. This determination will factor into the IRS’s determination of whether a penalty will be assessed or what additional documentation will be requested.
A low-risk filer is an individual whom the IRS does not suspect of having unreported income or underpaid tax liabilities on returns filed under the program. Low-risk filers will not be subject to penalties or further requests for information.
A high-risk filer is an individual whom the IRS does suspect of having unreported income or underpaid tax liabilities on returns filed under the program. Factors that may lead to a determination of a high-risk filer include:
- Returns submitted through this program that claim a refund
- Material economic activity in the United States
- Taxpayer has not declared all of his/her income in his/her country of residence
- 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/her country of residence
- The taxpayer has a financial interest in an entity or entities located outside his/her country of residence
- Taxpayer has U.S. source income
- There are indications of sophisticated tax planning or avoidance
FBARs and Other Information Returns Only
If a U.S. citizen/green card holder living abroad has filed all required U.S. income tax returns (reporting all income and with no understated U.S. tax liability), but has failed to file FBARs or other information returns, the program covers the filing of any unfiled FBARs or information returns. The IRS has indicated that no penalties will be assessed in these situations as all U.S. income taxes have been paid. Information returns include (1) forms that report transactions with foreign corporations (Form 926), (2) forms reporting formation or activities of foreign trusts (Forms 3520 and 3520-A), and (3) elections and reporting of Canadian retirement plans (Form 8891).
The procedure is silent on the periods when information returns will be required to be filed. We believe that the FBAR returns will be required for the same six years required for the general filing procedures and that information returns for the three years required for the filing of income tax returns will be sufficient.
Offshore Voluntary Disclosure Program (OVDP)
As noted above, the IRS has announced three prior OVDP programs. The current program, announced earlier in 2012, is the third voluntary disclosure program and targets U.S. citizens, U.S. resident aliens, or green card holders with offshore financial assets and with unpaid U.S. tax liabilities. The 2012 OVDP requires filing of FBARs from 2003 forward and requires a questionnaire more onerous than the questionnaire required under the new program. Due to the size of the program (and the submissions under the prior programs) the IRS has a specialized team that processes and handles each submission under the OVDP. Filing returns under the OVDP is cumbersome, expensive, and time-consuming and is necessary only when there are unpaid income taxes.
Non-compliant taxpayers should consider all available options when filing late tax returns due to exposures for penalties or additional scrutiny. In our view, this new procedure is a significant step in the right direction that will allow many U.S. citizens/green card holders living abroad to file past tax returns without the significant costs of other programs.
If you have any questions regarding this alert, please contact your Plante Moran client services representative.
The information provided in this Alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.
This article was co-authored by three members of Praxity North American firms – Kevyn Nightingale (Toronto office of MNP LLP), Michael Schwartz (New York office of WeiserMazars), and Jerry Jonckheere (Grand Rapids office of Plante Moran). This Alert has been provided to North American member firms of Praxity and to its clients and prospects as part of the group’s collaborative efforts that illustrate how Praxity members share the same desire to deliver professional excellence and high service standards. Praxity, AISBL is the largest global alliance of independent accounting firms and the world’s eighth largest accounting association. (www.praxity.com)