New Streamlined IRS Procedures Effective for Non-Resident U.S. Citizens
If you have clients whom you suspect have funds located outside the U.S., you should discuss with them their responsibility for filing the Foreign Bank and Financial Account Report, TD F 90-22.1, more commonly known as the FBAR. If they reside overseas the recent changes in IRS procedures for those who have previously failed to file FBARs may benefit some of them. All U.S. persons who have a financial interest in or signatory authority over foreign financial accounts with a high balance of more than $10,000 at any time during the calendar year must file an FBAR. U.S persons include not only U.S. citizens, but also “green card” holders and those who are physically present in the U.S. for more than 183 days during the calendar year.
An intentional failure to file an FBAR can result in both criminal and civil penalties. The civil penalty is the greater of 50 percent of the account balance, or $100,000. It can be imposed annually. For the last several years the IRS has had several different programs under which errant taxpayers who failed to file FBARs can avoid criminal penalties and pay a reduced civil penalty. The latest iteration known as the 2012 Offshore Voluntary Disclosure Program (OVDP) requires the filing of eight years of amended income tax returns along with numerous other documents, as well as the payment of overdue taxes, a 20 percent “accuracy related” penalty on the taxes pursuant to Internal Revenue Code Section 6662, interest on these amounts, plus a onetime “offshore penalty” equal to 27.5 percent of the highest balance in the offshore accounts. Late filing penalties and late payment penalties (under Internal Revenue Code Sections 6651(a)(1) and (2)) will also be imposed where applicable.
For those account holders whose combined offshore account balances never exceeded $75,000 at any time during the eight year look back period, the 27.5 percent penalty under OVDP is reduced to 12.5 percent, but all other terms remain the same. A 5 percent penalty is available in very limited situations.
The 2012 OVDP is explained on the IRS’ website in a series of over 50 FAQs many with subparts. The IRS also maintains an OVDP hotline to answer the inevitable questions that arise after reading the FAQs. However, for those dealing with the OVDP, and its alternatives for the first time there are myriad pitfalls.
In the waning days of summer, the IRS implemented new “Streamlined” Filing Procedures for non-resident, non-filer U.S. taxpayers who “unknowingly” failed to file FBARs, but became aware of their obligation and wished to comply with the requirement.
Non-residents, including dual citizens, who have not filed U.S. tax returns may be eligible to participate in this new program. Ironically, if tax returns were filed then the Streamlined Procedure is not available.
The new Streamlined Filing Compliance Procedures became effective Sept. 1. Those who qualify under the procedures will only have to file tax returns for three years, instead of the usual eight years under OVDP. The IRS will not impose FBAR or any other penalties on those who qualify. Participants will have to fill out a questionnaire, which includes such potentially incriminating questions as “Did you know you had a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, filing requirement when you failed to file an FBAR?” and “If you used a tax professional, did you disclose the existence of the accounts/entities you hold outside your country of residence to your tax professional?”
In order to qualify, for the Streamlined Procedure taxpayers must have lived outside of the U.S. since Jan. 1, 2009, cannot have filed a U.S. tax return during the same period, and must present a “low level compliance risk.”
In order for a taxpayer to be a low level compliance risk, the tax due for 2009, 2010 and 2011 must be less than $1,500 in each year. However, even if the tax due meets this low level, if any of the following factors are present then the compliance risk rises and the taxpayer may not be eligible to participate. The factors are:
- If there is material economic activity in the U.S.;
- If the taxpayer has not declared all of his or her income in his or her country of residence;
- If the taxpayer is under audit or investigation by the IRS;
- If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
- If the taxpayer has a financial interest or authority over a financial account(s) located outside his or her country of residence;
- If the taxpayer has a financial interest in an entity or entities located outside his or her country of residence;
- If there is U.S. source income;
- If there are indications of sophisticated tax planning or avoidance.
Once a submission is made, if the IRS determines that the Streamlined Compliance Procedure is not appropriate, the taxpayer may not participate in the regular OVDP, and may be subject to a complete audit, and possible imposition of full blown FBAR penalties, as well as potential criminal prosecution. Therefore an attorney should not recommend the Streamlined Compliance Procedure to his clients without explaining the risks.
Many immigrants, as well as U.S citizens living abroad, having accounts which subject them to FBAR filings. The IRS continues to step up its enforcement levels with various international agreements, and increased resources devoted to uncovering unreported foreign income. Because of this, many individuals are subject to potentially confiscatory penalties, and need to consider all of their options.
Dennis Brager is a California State Bar Certified Tax Specialist and a former senior trial attorney for the Internal Revenue Service’s Office of Chief Counsel. He can be reached at (310) 2086200 or the Firm’s website Bragertaxlaw.com.
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