Recent publicity regarding the efforts of the United States tax authorities to crack down on U.S. persons with undisclosed foreign bank accounts has caused great concern for U.S. citizens who reside outside the U.S. or are dual citizens of both U.S. and another country. Many of these individuals were previously unaware of the fact that they are required to file United States tax returns and disclose certain financial account information. All U.S. and dual citizens, regardless of current residence, must annually file federal income tax returns and report their foreign bank and financial accounts. These rules apply even if the taxpayer pays taxes to a foreign authority, although a foreign tax credit and foreign earned income exclusion may be available in the U.S. in this case, to mitigate double taxation. The penalties for failing to follow these rules can be substantial.
In response to this issue, the IRS recently created a Streamlined Filing Procedure (SFP) for non-resident U.S. taxpayers. It is intended to entice current non-residents and dual citizens who have not filed U.S. income tax to file delinquent returns and become compliant.
The streamlined procedure is designed for taxpayers who present a low compliance risk. The new procedures are for non-residents, including, but not limited to, dual citizens who have not filed U.S. income tax or Reports of Foreign Bank and Financial Accounts (FBARs). Taxpayers who believe they are low-risk account holders should consult an expert to determine if they are an appropriate candidate to apply to the program.
The IRS will determine the level of compliance risk presented by the submission based responses to the questionnaire required for the submission, as well as on information provided on the returns filed. The IRS has indicated that the review of the submission will be expedited and the IRS will not assert penalties or pursue follow-up actions for those taxpayers who present a low compliance risk. Submissions that present higher compliance risks are not eligible for the new procedure and will be subject to a more thorough review and possibly a full examination.
Taxpayers utilizing the streamlined 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. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns. Additionally, taxpayers must file a new questionnaire identifying the taxpayer’s financial interests in foreign financial accounts, including interests in and signature authority over financial accounts outside their country of residence and other questions relating to their foreign interests. The questionnaire must be signed under penalty of perjury.
The new Streamlined Filing Procedure may be an excellent alternative to the Offshore Voluntary Disclosure Program (OVDP) for Non-Resident U.S. Taxpayers. The OVDP was originally announced in January 2012, requiring submission of income tax returns and FBARs for eight tax years. This program is modeled after the 2011 Offshore Voluntary Disclosure Initiative (OVDI),but it increases the maximum FBAR-related penalty from 25% to 27.5%. Also, there is no set deadline for people to apply, but the terms of the program could change at any time.
The voluntary disclosure program is part of a wider effort by the IRS to stop offshore tax evasion and ensure tax compliance. This effort includes criminal prosecution and third-party reporting under the Foreign Account Tax Compliance Act (FATCA). FATCA was signed into law in 2010, aimed at Foreign Financial Institutions (FFIs), to prevent tax evasion by U.S. citizens and residents through use of offshore accounts. Under FATCA, an FFI may agree to report information on U.S. accounts. FFIs that choose not to enter into this agreement with the IRS are subject to a 30% withholding tax on all U.S. sourced payments.
RotenbergMeril is dedicated to helping clients resolve complicated international tax issues, navigate FATCA and other tax-related regulations, and gain tax compliance. The advantages and disadvantages of the OVDP and Streamlined Filing Procedure should be carefully examined based on your client’s facts and circumstances. If your client has an undisclosed foreign asset or is concerned about IRS offshore scrutiny, we encourage you to contact the experts at RotenbergMeril today.
- IRS Resources for the 2012 Offshore Voluntary Disclosure Program
- Instructions for New Streamlined Filing Compliance for Non-Resident, Non-Filer U.S. Taxpayers
- Download our Report: Dual Citizenship and Taxes: What you and your clients need to know to be compliant and avoid investigations
- Learn more about RotenbergMeril’s International Services
Download our article on understanding compliance and disclosure of foreign bank accounts.