On June 18, 2014 the IRS announced major changes to the IRS Streamlined Program for Offshore Compliance for US expats.
The IRS expanded the streamlined filing compliance procedures to help taxpayers residing abroad and those residing in the United States. This update is especially welcome in the light of the FATCA development.
Additionally, the Internal Revenue Service introduced important modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP).
2012 IRS Streamlined Program was created to assist delinquent taxpayers to become compliant with the US tax obligations and undisclosed offshore accounts. The new changes to the Streamlined Filing Compliance Procedures give thousands of US expats living overseas time to catch up on their US tax return obligations and FBAR filing requirements. The streamlined tax rules, issued in July of 2014, are a win-win situation for Americans who are behind on their taxes due to misunderstandings or lack of knowledge of the US filing obligations. Research has proven that the largest reason for US non-compliance in taxing matters is the lack of knowledge on how to comply with the IRS requirements when living overseas.
Who is eligible to participate in the new IRS Streamlined Program for Offshore Compliance?
Eligibility has been expanded for those who were previously unable to file under the original IRS Streamlined Program for Americans living overseas. Per 2012 streamlined classification, the following taxpayers were not eligible to participate in the streamlined filing:
- High-risk applicants
- Expats who owed $1,500 or more of unpaid tax per year
- US taxpayers with amended returns
However, the Internal Revenue Service removed the above restrictions in 2014. With the recent announcement from the IRS in regards to the 2014 Streamlined Offshore Procedure, more taxpayers will be able to become compliant and to pay their taxes without complicated paperwork and accompanying stress.
2014 streamlined filing compliance procedures include:
- Extension of eligibility to taxpayers currently living in the United States.
- Elimination of a requirement that the taxpayer has $1,500 or less of unpaid tax per year;
- Waiver of all penalties for late filing by US expats living overseas.
- Every taxpayer who meets the non-residency requirements can apply without fear of a rejection letter. Returns will be processed under the amnesty terms.
Do American expats living abroad face any penalties under the Streamlined Filing Program?
If an American living overseas is eligible to file under the Streamlined Filing Compliance Procedures, then s/he will not face penalties for delinquent taxes and FBARs.
All penalties are waived for those US taxpayers who lived abroad when the new IRS Streamlines Program went into place. Eligible taxpayers residing in the United States and who own offshore accounts, however, will still occur penalties for non-filing. These penalties are considered miscellaneous offshore penalties, and equal to only 5 percent of the foreign assets that created the tax compliance issues. This penalty limit is considerably lower than previous offshore penalties for non-compliance.
What is the nonresidency requirement under the new IRS Streamlined Procedures?
Nonresidency requirements are limited to physical presence eligibility under 2014 IRS Streamlined Program for Offshore Compliance. The key issue is that an American lives for at least 330 days outside of the United States during one calendar year. To learn more about the definition of “abode”, please refer to the I.R.C. # 911.
Once non-residency eligibility has been confirmed, delinquent tax returns can be filed under the IRS streamlined compliance procedures. Taxpayers can file one-year, multiple years, amended returns, or informational report of foreign accounts. Every taxpayer qualifies for the IRS Streamlined Program as long as the lapse in filing is considered non-willful or unintentional.
Expat tax returns submitted under the Streamlined Foreign Offshore Procedures will be processed like any other tax return. The IRS will not acknowledge the receipt of the returns. The streamlined filing process will not require signing of closing agreements with the IRS.
Are expat tax returns submitted under the Offshore Streamlined procedures subject to audit?
Audits will not be automatically conducted on tax filings from US citizens living abroad who submit expat tax returns under the IRS Streamlined Program. These returns may still be selected for audit under the existing audit selection processes that are applicable to any IRS tax return. Forms filed from overseas will also be subject to verification procedures for accuracy and completeness. This information will be checked against banks, financial advisors, and other financial sources. If it is found that a return is fraudulent, the US taxpayer will be subject to civil penalties and criminal liability irrespective whether the return was filed from abroad or in the USA under the IRS Streamlined Program.
Are there additional risk factors under the IRS Streamlined Filing Compliance Procedures?
The streamlined tax filing procedures do not include additional risk factors. There are no risk factors defined by the vague concept of “non-willful” behavior. Non-willful behavior is considered as actions due to negligence, inadvertence, mistakes or conduct that is the result of a good faith misunderstanding of the requirements of the law.
If a US expat receives a letter from the IRS, how do the new streamlined procedures work?
The IRS has stated there are no longer filing or entry restrictions for those who file due to a notice or letter from the IRS. Make sure to review your situation carefully and contact your accountant or tax advisor before proceeding under the IRS Streamlined Program.
American expats must rectify their tax issues quickly. If an American expat living abroad receives more than two IRS letters reminding of delinquent taxes or non-filing, you will probably miss the window of opportunity to file under the streamlined rules.
How many years of expat tax returns and FBARs must be filed under the 2014 IRS streamlined compliance procedures?
American expats must file only 3 recent years or past-due returns and 6 years of FBAR to become compliant. FBAR is the Report of Foreign Bank and Financial Accounts or FinCEN Report 114. Since most US taxpayers residing abroad have not filed a US expat tax return for multiple years, 3-year requirement facilitates the compliance process under the IRS Streamlined Program.
Conclusion
The idea behind the IRS Streamlined Program is to encourage expats and offshore account holders to come forward and resolve their tax issues. Expats can get caught up on their taxes without the fear of incurring huge penalties, jail time, or other government censure. Previous tax restrictions forced delinquent taxpayers to file under the Offshore Voluntary Disclosure Program. The Offshore Voluntary Disclosure Program was specifically designed for taxpayers who were subject to criminal penalties and willful non-filing.
The IRS does listen to taxpayers around the world and it is trying to ease the burden of tax compliance and high penalties. This will be an ongoing relief for those who choose to live abroad and still maintain citizenship ties with the United States.
Proper guidance from international tax experts is required to ensure the full compliance under the latest IRS Streamlined Program for Offshore Compliance. If you need help with the program, please let us know.