If you are a United States Expat who has been living and working in a foreign country for a number of years, it’s possible you’ve misfiled your US expat tax return by either forgetting required forms or forgetting to file a US tax return altogether. If this is the case, there may be an opportunity for you to become current on your US taxes via a new streamlined procedure the IRS introduced on September 1, 2012.
Before you get too excited about this new streamlined procedure, keep in mind that not everybody will qualify. The most likely candidates for qualification are those who have either no tax or minimal tax due. These are considered to be low risk taxpayers to the IRS. If you have complicated tax returns and have had previous years of unpaid balances, you will be facing stiff penalties and may not be eligible for this new streamlined catch-up procedure.
Before we get into the various levels of qualification, we will first take a look at what this new streamlined procedure offers to delinquent taxpayers.
Goal of Streamlined Procedure
The goal of this procedure is basically to get you caught up with any past due taxes. The IRS has 3 primary objectives, and they are to get you to:
File all delinquent US expat tax returns with all required forms for the previous 3 year period;
File all FBARs (Foreign Bank Account Reports) for the previous 6 year period; and
Pay all taxes due including accrued interest.
If you qualify for this streamlined procedure, the IRS agrees not to assess any late penalty fees and not to conduct an audit for any of the years for which you are filing back taxes. Additionally, the IRS agrees to offer retroactive deference of income for qualifying Canadian retirement plans such as the RRSP (Registered Retirement Savings Plan) and RRIF (Registered Retirement Income Fund).
Qualification for the Streamlined Procedure
In order to see if you qualify for the streamlined procedure, you will be required to fill out a questionnaire with 20 questions. The answers are all geared toward evaluating your eligibility for the program and the level of risk you pose the IRS as a taxpayer. You will be under penalty of perjury when submitting this form, so make sure all the information you provide is correct.
In order to qualify for the new streamlined procedure, the minimal qualifications are:
You must have resided outside of the United States since at least December 31, 2008;
You must have unfiled US expat tax returns since 2008;
You do not have a balance owed to the IRS for any of the previous 3 years in excess of $1,499 per year;
You are not submitting an amended return for the previous 3 years, unless you are filing a late election to defer tax in a qualified Canadian retirement plan; and
You must have a valid Social Security Number or TIN (Taxpayer Identification Number) or be applying for a TIN.
It’s important to understand that – even if you meet the above qualifications – you may still not qualify for the streamlined filing procedure offered by the IRS. Once the IRS determines your initial eligibility, it will then determine your risk factor. While it’s impossible to know exactly how you will appear to the IRS, there are a few areas which are known to increase your level of risk. They are:
If you’re claiming a refund on any of the previous years’ expat tax returns;
If you have a large amount of economic activity in the United States
You are claiming income outside of your host country
You are currently being audited or are otherwise under investigation by the IRS
If you have previous FBAR penalties or you have received and FBAR warning letter
You either own foreign financial accounts or have interest in foreign financial accounts outside of your host country
You either own foreign property or have an interest in foreign property outside of your host country
You have US income
You demonstrate a sophisticated level of tax planning or avoidance
Important Update About $1,500 tax due limitIn new FAQ released by the IRS, the agency discusses how stringently they will follow the $1,500 limit:
One of the risk factors listed in the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers Questionnaire is a tax liability below $1,500 for each of the three years submitted under the Streamlined Procedures. If my tax liability exceeds $1,500 for any of the three years, am I ineligible?
No. The $1,500 per year tax limit will not disqualify you from admission to the Streamlined Procedures, but exceeding that limit may result in your submission being treated as higher risk. The instructions for the Streamlined Procedures state that low risk will be predicated on simple returns with little or no U.S. tax due. Submissions with tax due of $1,500 or less will be considered low risk absent any risk factors. Submissions with tax due in excess of $1,500 or the presence of other risk factors may be treated as higher risk.
Streamlined Procedure Questionnaire
In order to determine your overall eligibility for the streamlined procedure, the IRS has broken the questionnaire up into 4 sections. We will take a brief look at each section below.
This section covers the qualifications indicated previously in this article
Financial Entities and Accounts
This section gives the IRS an idea of how what types of foreign accounts or properties you own or have an interest in.
This section gives the IRS an idea of the help you’ve been receiving and whether or not you’ve relied on the advice you were given.
Current Tax Position
This section provides details to the IRS about historic reporting habits and other information to assess your current tax situation.
This new streamlined procedure offered by the IRS is going to help scores of US expats become current with their US tax obligations without severe penalties. While this seems like a great opportunity for some, it is nothing short of a trap for others.
Why is it a trap for some expats?
If you submit all of your information to the IRS along with the questionnaire which deems you ineligible for the new streamlined procedure, you will be facing punitive financial penalties and you may even have criminal charges filed against you. Additionally, once the IRS has received your information about foreign accounts, you become ineligible for the OVDI (Offshore Voluntary Disclosure Initiative). The purpose of the OVDI is to help you avoid stiff penalties for not previously reporting your qualifying foreign accounts; and if you become ineligible, you may be facing thousands of dollars in fees and possibly a federal prison sentence.
Before you take a chance and apply for a program for which you won’t qualify, make sure to contact one of our expert tax advisers at Taxes for Expats. We will help assess your current situation and do our best to help you file back taxes with the IRS with fewer penalties and offer you guidance in how to get current on all of your US expat tax obligations.