Ines Zemelman, EA 15-Jun-13
As the IRS forges on in its efforts to acquire as many unrealized tax dollars as possible, it continues to update procedures and notify the public of such updates. One of the most recently updated services of the IRS is the Streamlined IRS Back Taxes Filing System for American Taxpayers in Canada.
The IRS has identified 3 major areas of concern for US Taxpayers living in Canada and has released explanations of each. In case you’re an American Expat living in Canada and you missed these updates, here is a brief recap for you.
Take Time to Understand the $1,500 Filing Threshhold – You Are Not Necessarily High Risk
The most important thing the IRS wants you to understand is that the filing instructions for this Streamlined Procedure are ambiguous and misleading, at best. While the instructions offer an example of more than $1,500 worth of tax debt as a possibility for being determined a high risk taxpayer by the IRS, this amount of tax liability alone won’t necessarily place you in a high risk category.
The fact that you have $1,500 or more in tax liability will not disqualify you from becoming current with your US expat taxes via the IRS Streamlined Procedure. It might, however, cause the IRS to view you as a high compliance risk taxpayer – which could result in any number of determinations by the IRS. You may find that you are still able to file your back taxes through the Streamlined Procedure with the understanding that the IRS representative in charge of your past due tax returns may scrutinize your returns more than he/she would for a low risk taxpayer.
AFter you submit your application for the Streamlined Procedure along with your past due returns and your risk level is assessed, an IRS representative may very well decide that your high level of compliance risk increases your penalties and interest to a point that you do not qualify to have your returns processed as efficiently as possible in the Streamlined Procedure.
Yes, many will be denied based on certain criteria; but your returns may be accepted by the IRS once you file them through the Streamlined Procedure.
Taxpayers Have the Choice of ‘Opting Out’ of OVDI to Take Advantage of Streamlined Procedure in Canada
The original IRS instructions and Frequently Asked Questions about the Streamlined Procedure and the legal ability to Opt out of a previously-entered-into-OVDI are also somewhat confusing (to say that least) and not at all representative of the position of the IRS.
At first glance, a taxpayer may be led to believe that he/she is unable to submit an application to file a past due tax return through the Streamlined Procedure if he/she already submitted past due tax returns as a condition of an Offshore Voluntary Disclosure Initiative. This is because the original documentation posted by the IRS clearly stated that – in order to qualify for the Streamlined Procedure – your last tax return should have been filed no later than January 1, 2009.
Based on new information offered by the IRS, your ‘opting out’ of the OVDI into which you had entered basically revokes your tax return and allows you the opportunity to potentially save even more in reduced penalties by filing your back taxes via the Streamlined Procedure.
Opting Out of OVDI
Taxpayers who are considering opting out of an OVDI in order to file past due returns through the IRS Streamlined Procedure need to carefully weigh their options and total liability through each ‘mode of catch up.’ It’s important to understand that opting out of OVDI is an irrevocable decision. Fortunately, the IRS has been very forthcoming with information specific to each taxpayer’s case which enabled many of them to make the best decision with the least amount of backlash.
In order to opt out of OVDI, you need to submit a written request to the IRS. Before doing this, however, it’s recommended that you speak directly with your representative to ensure that that you don’t terminate your OVDI agreement only to find that you don’t qualify for the Streamlined Procedure or to find yourself facing a variety of other unfavorable situations.
You May Qualify to Have Your Tax Situation Re-assessed via Streamlined Procedure Even if You’ve Completed an OVDI in the Past
According to new literature posted by the IRS, the new Streamlined Procedure allows taxpayers to opt out of former OVDIs retroactively. If you have taken advantage of an OVDI in the past and you believe you could benefit from the new Streamlined Procedure, you should contact the IRS explaining your case. You will need to provide a brief description of how the Streamlined Procedure will benefit you along with your contact information, the name and or ID number of the IRS agent in charge of your case, and a copy of Form 906 – the closing agreement used to document your involvement.
For lack of a better phrase, this allowance is an extremely gracious step by the IRS considering the fact that qualification for the Streamlined Procedure means you are exempt from the very penalties with which you were assessed through the OVDI. As such, qualifying taxpayers will be entitled to a full refund of all penalties paid through the OVDI agreement. Submitting proper documentation is the first step. Once your package is received by the IRS, an examiner who will be responsible for determining your Streamlined Procedure eligibility will be assigned to your case.
Determining the Best Option for Your Tax Situation
The ambiguity of the original FAQs and instructions to the Streamlined Procedure that were posted by the IRS and the continued confusion about qualifications and other terms leave a great many taxpayers feeling uncertain about the safety of the Streamlined Procedure. There is one fact that remains, however, and it’s the fact that after this year, the IRS will rely very little on the forthcoming nature of American Expats and US Taxpayers. Instead, it will depend on other countries, increased manpower, and more tracking ability than ever to locate international tax evaders and hold them accountable to the full extent of the law.
Even if the Streamlined Procedure is a way to ‘get information early and stick taxpayers with penalties later,’ it still holds a ray of hope that this is the best way out from under the fallout of international borders become even more faint in this technological new world.
While the stated goal of the IRS Streamlined Procedure is to allow qualifying taxpayers with unfiled tax returns and opportunity to escape hefty fines, not everybody will qualify. Taxpayers who expect a refund from previous years, American Expats in Canada with significant financial activity in the United States or significant financial interest in foreign accounts, US Expats with US –sourced income, individuals who have been notified by the Department of Treasury or against whom FBAR violations have been assessed, and US Expats who demonstrate a sophisticated tax avoidance or tax planning scheme may be viewed as having increased compliance risk and will be among the primary groups of American Taxpayers who may not qualify for the IRS Streamlined Procedure.