There's been a flurry of activity this week from the Department of Involuntary Servitude, otherwise known as the IRS. On June 26, the IRS released what it calls "New Filing Compliance Procedures for Non-Resident U.S. Taxpayers." The effective date for the new procedures is Sept. 1, 2012.
Separately, on June 26, the IRS also issued new FAQs for its ongoing Offshore Voluntary Disclosure Program (OVDP). The most important change indicates a willingness on the part of the IRS to resolve compliance and tax deferral issues related to certain types of non-U.S. retirement plans, such as Canadian Registered Retirement Savings Plans (RRSPs). This is a major change, because for eligible taxpayers, it will eliminate the "timeliness" requirement to make an election to defer U.S. income tax on undistributed income earned by the plan.
However, it's the new filing compliance announcement that's created a buzz in the international tax world. Basically, if you're a U.S. citizen or green card holder and live full-time outside the United States, you may not face criminal or civil penalties for past non-filing of U.S. tax or offshore account information forms. But naturally, the IRS carrot comes with a stick. The new procedures are only for persons who have what the IRS calls "low compliance risk."
According to the IRS,
"While more details will be forthcoming, taxpayers utilizing 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. 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…
Low risk will be predicated on simple returns with little or no U.S. 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…
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."
And, just to prove the point:
"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."
This type of wording is typical coming from the IRS. It guarantees nothing. Even if you don't owe the IRS any tax from past years, you might be a high-risk taxpayer. For instance, if you're an offshore entrepreneur living in a zero-tax jurisdiction and operate through an offshore company, I suspect you're in this category.
Likewise, if you work for an overseas employer and legally take advantage of the "foreign earned income exclusion" (FEIE), you're probably a high compliance risk as well. After all, the General Accountability Office has said as much—it the IRS has responded with five separate initiatives to crack down on purported abuses in U.S. taxpayers claiming the FEIE.
Only the IRS knows for sure. Fortunately, it has promised additional guidance on the matter before the September 1 effective date of the new initiative.
Still, despite many unanswered questions, this IRS initiative is a welcome one. It marks the first time the agency has acknowledged that many of the non-U.S.-tax-compliant U.S. citizens and green card holders living outside the United States aren't necessarily tax scofflaws. This, despite the fact that the United States is one of only two countries that impose income tax on the worldwide income of its non-resident citizens.
However, what the IRS giveth, it can also taketh away. We'll have to wait until September 1 to learn the full story.
Copyright © 2012 by Mark Nestmann
