U.S. taxpayers living abroad are subject to annual U.S. filing obligations and are liable to substantial financial penalties if they fail to comply. The Internal Revenue Service (“IRS”) has recognized that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns, but have recently become aware of their U.S. filing obligations and seek to become compliant with the tax laws. In order to help U.S. taxpayers living abroad, the IRS has released new streamlined filing compliance procedures that became effective on September 1, 2012.
The streamlined procedure is available for U.S. taxpayers who satisfy the following:
- Have resided outside of the U.S. since January 1, 2009;
- Have not filed a U.S. tax return during the years 2009-2011;
- Have a valid Taxpayer Identification Number; and,
- Present a low level of compliance risk based upon an IRS risk assessment.
The new streamlined procedure requires taxpayers to file delinquent FBARs for the previous six years, delinquent tax returns for the previous three years, and any applicable related information returns. All filings will be reviewed by the IRS; however, the intensity of review will vary according to the level of assessed compliance risk. Filings that are treated as low risk will be processed in a streamlined manner. Filings that are treated as higher risk are not eligible for the streamlined processing and will be subject to a more thorough review, and possibly a fully examination. Generally, a filing is low risk if the tax return shows less than $1,500 in tax due in each of the years and no factors are present that would cause the risk level to rise. Alternatives to the new streamlined procedure are available should a taxpayer not qualify under the qualifying criteria for the streamlined voluntary disclosure process.
This procedure is ideal for those taxpayers presenting low compliance risk because the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. This procedure is not appropriate for taxpayers who are liable for criminal prosecution. Taxpayers seeking protection from criminal prosecution may want to consider the 2012 Offshore Voluntary Disclosure Program.