At the end of 2012, the IRS announced a New Filing Compliance Procedures for Non-Resident U.S. Taxpayers.
This announcement is now talked about among many tax return preparers as if it creates some sort of special rights or benefits to a particular type of U.S. citizen residing overseas. The IRS announcement is neither the law, nor purports to be the law. It also does not modify the statute of limitations period or otherwise bar the IRS from commencing an audit against a USC residing overseas who has never filed U.S. income tax returns. See, When the U.S. Tax Law has no Statute of Limitations against the IRS; i.e., for the U.S. citizen and LPR residing outside the U.S. (Posted on March 24, 2014)
The “new filing compliance procedures” is simply a statement of what has always been the practice of the IRS. U.S. income tax returns that are filed are examined under whatever procedure the IRS chooses as part of its audit and review practices. Income tax returns with modest assets, modest income or little to no U.S. income tax liability garner less attention and resources of the IRS than those with lots of assets, lots of income, etc. See, IRS summary of IRS audits.
Some of the key concepts in the 2012 announcement are set out below:
- Compliance risk determination:
- The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. 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.
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- How taxpayers will be able to take advantage of the new procedure:
- Taxpayers wishing to use the new procedure will be required to submit: (1) delinquent tax returns, with appropriate related information returns, for the past three years, (2) delinquent FBARs for the past six years, and (3) any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission. More information about the application process including where submissions should be sent, will be provided prior to the effective date.
- 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. See IRS Fact Sheet FS-2011-13 (December 2011) for examples of reasonable cause.
Does any of the above protect the USC residing outside the U.S. from an audit for any year a U.S. federal income tax return was not filed? The short answer is – NO!
Does any of the above statements in the IRS announcement mean that a USC residing overseas could not be subject to late payment or late filing penalties for not previously filing U.S. tax returns. The short answer is – NO!
Does any provision in the IRS announcement mean the FBAR penalties could not apply for failure to file. The short answer is – NO! See, When does the Statute of Limitations Run Against the U.S. Government Regarding FBAR Filings?
Does any of the above statements in the IRS announcement mean that a USC residing overseas can never be subject to penalties for not filing information returns regarding their non-U.S. international assets and “specified foreign financial assets”? The short answer is – NO! See, USCs and LPRs residing outside the U.S. – and IRS Form 8938
Why then, did the IRS issue such an announcement? Was it an attempt to present a softer message than the IRS announcement in 2011 ( IRS Fact Sheet FS-2011-13 – which enumerates various penalty concepts such as –2. Penalties imposed for failure to file income tax returns or to pay tax; 3. Possible additional penalties that may apply in particular cases; 6. Possible penalties for failure to file FBAR; etc.)?
This is another mixed message from the IRS, which is nothing more than how tax returns have been processed by the IRS over the decades; i.e., a taxpayer files a late tax return and it gets processed by the IRS (and the IRS may elect to audit any particular return, late filed or otherwise).