IRS introduces new filing compliance procedures
By Martha Myron
New filing compliance procedures for non-resident US taxpayers
Effective September 1, 2012, a new procedure from US Internal Revenue Service will be available for persons listed above who are not aware of, or now seek to come into, compliance with their US tax obligations.
US Internal Revenue Service is aware that some US taxpayers living abroad have failed to timely file US federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1. The Service is announcing a new procedure for current non-residents including, but not limited to, dual citizens who have not filed US income tax and information returns to file their delinquent returns.
Proposed new procedural process: While more details will be forthcoming, taxpayers utilising the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years.
Submission compliance risk guidelines. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.
Tax, interest and penalties, if appropriate, will be imposed in accordance with U.S. federal tax laws based on a review of the submission.
Certain foreign pension plans. In addition, retroactive relief for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.
Compliance risk determination: The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. Low risk will be predicated on simple returns with little or no US tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk.
In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income.
Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.
Requirement for US Income Tax Returns and FBARs.
Taxpayers wishing to take advantage of the new procedure will be required to submit:
1. Delinquent tax returns, with appropriate related information returns, for the past three years,
2. Delinquent FBARs for the past six years, and
3. Any additional information regarding compliance risk factors required by future instructions.
4. Payment of any federal tax and interest due must accompany the submission.
Any taxpayer claiming reasonable cause for failure to file tax returns, information returns, or FBARs will be required to submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for previous failures to file.
Deferred retirement or savings plans permitted by relevant treaty. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit:
l A statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position;
l For relevant Canadian plans, a Form 8891 for each tax year and description of the type of plan covered by the submission; and
l A statement describing:
- The events that led to the failure to make the election,
- The events that led to the discovery of the failure, and
- If the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.
Summary of other significant considerations to be discussed in a future article: Taxpayers who are in a situation where they are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. These taxpayers should consult with their legal advisers regarding the Offshore Voluntary Disclosure Programme (OVDP).
Flexibility or opportunity. Call it what you will, the new IRS procedure appears to recognise that US citizens residing in another country legitimately need to in the normal course of an ordinary life - have offshore bank and investment accounts, foreign life insurance, foreign pensions, foreign trusts, foreign companies and partnerships.
US persons permanently resident outside the United States face more complexity in conducting their financial affairs in accordance with the laws and regulations of more than one country. This new procedure may represent a good opening for those concerned US persons to bring their tax responsibilities into compliance with US law.
It is not known at this time whether there will be a restrictive time frame for this new US IRS compliance procedure. An update will be forthcoming in a future article.
This article is intended for general information purposes only and cannot be used for personal US tax guidance. U.S. tax advice contained within the article is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax laws.
Martha Harris Myron CPA PFS CFP(USA) TEP is Director of Tax Services at Patterson Partners Ltd providing integrated cross-border tax, estate, investment advisory and related strategic planning services through entities in Bermuda and the United States. She is a member of the American Citizens Abroad Professional Tax Advisory Council. www.americansabroad.org. For additional information, please contact email@example.com or call 296-3528 http://www.patterson-partners.com
Nahki makes Bermudian football history
Where are the jobs?
Wells pledges future to the Bantams
Top ten finish for Sims in South Carolina
Parkinson praises Wells display
Nahki inspires Bradford to victory
Stovell shines as Rangers win Belco Cup
Take Our Poll