The old streamlined procedure was a welcome addition for taxpayers abroad, but it still had its limitations.
On June 18th 2014, the program was greatly expanded and with it, the pool of eligible taxpayers. This article will explain what has changed and most importantly, the expansion of eligibility for those previously excluded under the old streamlined program:
Recently, the IRS announced Streamlined Filing Compliance Procedures in order to encourage U.S. taxpayers residing abroad to come into compliance with their U.S. tax reporting obligations as well as reporting their offshore financial assets. With the onset of the new Streamlined Foreign Offshore Procedure 2014, the criteria for taxpayer qualification for the amnesty program have been revised.
There will be no more acceptance or rejection letters from the IRS. Every taxpayer meeting the non-residency requirements can apply. Then the IRS will either process their returns under the amnesty terms waiving all penalties or they will be processed like regular tax returns with applicable penalties.
Non-Residency requirements are quite generous and limited to physical presence concept. To qualify for the Streamlined Foreign Offshore Procedure: Spending at least 330 days outside of the U.S. within at least one calendar year out of last three is the only condition mentioned in the program description, which is a piggyback off of the rules in I.R.C. § 911, commonly known as the “foreign earned income exclusion”.
Importantly: This requirement also applies to those who are qualified as Bona Fide residents of a foreign country. In the context of the Streamlined Foreign Offshore Procedure Bona Fide status does not eliminate the 330 days outside of the U.S. rule.
Once non-residency eligibility has been confirmed taxpayers can file their tax return under the Streamlined Offshore Procedure umbrella programs. It can be a single year return, multiple year returns, amended returns or informational reports of foreign accounts if all other filing obligations are complete. Every situation now qualifies for the amnesty program – provided that IRS will consider the lapse in filing “non-willful”, which we will now discuss.
Streamlined Foreign Offshore Procedure 2014 does not include the concept of risk factors. Instead of risk factors, the IRS introduced a vague concept of "non-willful" behavior (conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law). Since the definition of"willful" conduct is not provided, determination of whether the conduct was willful or not leaves room for interpretation.
The assessment of a taxpayer’s chances to be treated under the Streamlined Procedure rules is a facts and circumstances inquiry that involves reasonable prediction of the IRS interpretation of client behavior as "willful" or "non-willful".
How does this affect taxpayers applying to the Streamlined Procedure upon receiving the letter from IRS?
Importantly - there are no longer entry restrictions for those who file in response to an IRS notice. However, your tax advisor should perform assessment of your personal situation based on the notice type and timing of the IRS correspondence.
Obviously, taxpayers under an IRS investigation with an outstanding tax assessment should not apply and have to communicate with the IRS outside of the SP program to resolve their outstanding tax issues.
The key, change, however, is in regards to a notice that contains only a reminder regarding missing filing, which is no longer a restriction for applying to the program. Under the umbrella of "non-willfulness", if taxpayers file in response to the recent letters from the IRS (less than 6 months), then their previous non-filing behavior can be reasonably treated as non-willful because it was due to ignorance of the law. It can be reasonably argued that upon receipt of the IRS notice, their awareness of tax obligations has changed.
However - time is of the essence. If the taxpayer received a non-filing notice CP515 a long time ago and began to act only when they IRS sent them more aggressive CP11 notices with the demand to pay tax, then their chances to be treated under the Streamlined rules are slim.
I.J. Zemelman, EA is the founder of Taxes for Expats