these new IRS procedures

The IRS has paved the way for non-resident, non-filing U.S. taxpayers to comply with their unmet U.S. tax filing obligations with minimal administrative burdens.  The IRS unveiled its long awaited and much anticipated streamlined compliance procedure.  The procedure is available for U.S. taxpayers who’ve resided outside the U.S. since January 1, 2009 and who haven’t filed a U.S. tax return during the same period.

Compliance Risk Assessment
The IRS will review all submissions requesting the streamlined procedure but the intensity of the review will vary according to the level of compliance risk presented.  The new procedure is specifically designed for taxpayers who present a “low compliance risk.”  For these taxpayers, retroactive relief for failure to timely elect income deferral on RRSPs/RRIFs (Form 8891) is also available.  Submissions that present high compliance risk aren’t eligible for the streamlined processing procedure and may be subject to a full examination. 

Participation
In order to participate, a taxpayer must: (1) file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past 3 years, (2) file FBARs (Form TD F 90-22.1) for the past 6 years, (3) pay any tax and interest along with the delinquent tax returns, and (4) submit a questionnaire, signed under penalties of perjury, with 20 “yes or no” questions outlining the factors considered in the initial risk assessment.  While each of the factors is relevant, a few are worth noting; they address concerns faced by U.S. taxpayers resident in Canada and are illustrative of the mind of the IRS.  Among these factors are: (1) interests in financial accounts or entities outside the country of residence, (2) reliance on tax advisors, and (3) knowledge of citizenship. 

1. Interests Outside of Canada
   
   Many U.S. citizens have lived and worked in Canada for years or even decades.  As a result, they may have significant financial account balances and prosperous Canadian corporate entities or trusts.  The fact that these same persons kept their money in Canada, rather than a low tax offshore jurisdiction, can provide evidence of a lack of intent to hide assets or income.
    
2. Reliance on a Tax Advisor
   
   Reliance on a qualified tax advisor can provide the foundation of a claim of “reasonable cause” for failure to file returns and an abatement of certain penalties.  A taxpayer’s answers to these questions can provide an examiner with a synopsis of the merit of a taxpayer’s claim for such relief.  Interestingly, the questionnaire specifically asks if the advisor is located in the U.S.  Presumably, this question is designed to determine if the tax advisor was sufficiently qualified in U.S. tax matters to render such advice.
    
3. U.S. Citizenship Status
   
   The question about a taxpayer’s knowledge of U.S. citizenship is probably the most sensible question posed.  In our practice, we’ve encountered many clients and prospective clients who recently discovered their U.S. citizenship status.  These same people have been faced with a myriad of penalties associated with failing to file returns with a country they didn’t even know they were a citizen of.  For these people, a streamlined procedure that acknowledges their lack of awareness may provide welcome relief.

High Risk Returns
Other than amended returns filed for the sole purpose of submitting late-filed Forms 8891, amended returns submitted through this program will be treated as high-risk returns and subject to examination.  For returns determined to be high-risk, failure to file and failure to pay penalties may be imposed.  Reasonable cause statements may be requested during review or examination of the returns determined to be high-risk.  It should also be noted, if “streamlined filing” is requested and the IRS later determines the taxpayer to be high-risk, participation in the “Off-shore Voluntary Disclosure Program” (OVDP) is no longer an option.

Conclusion
Overall, we believe the IRS has presented a reasonable procedure for non-resident non-filers wishing to come forward.  Ultimately, time will tell if the procedure delivers what’s hoped for.  The devil is in the details and, in this case, the implementation.

Thanks to Brian Dennehy, JD, LL.M (US Tax), Shea Nerland Calnan LLP, for providing this information.