Published On: Sun, Jun 22nd, 2014

IRS lifts US tax fines for many Americans abroad

Share This

If you are a US citizen taxpayer living abroad, and have been on the fence about whether to become compliant with your US tax obligations, your procrastination may have saved you a tremendous
amount of money.

To the surprise and relief of many overseas Americans, the new IRS commissioner, John Koskinen,  18 June  announced an expansion to the new streamlined procedures for overseas Americans to become tax compliant. For eligible taxpayers living outside of the US all US penalties will be waived!

This means no nasty FBAR penalties on retirement accounts, bank accounts etc. Just get your tax returns in for the last 3 years, your FBARs for the last 6 years and pay any back taxes due (with interest) and there will be no FBAR penalties, again as long as you are eligible.

Editor’s note: shortly after this was posted the IRS revamped its website completely, and the links posted here no longer work. The good news is that the new web site is far easier to navigate and search, and it has a useful area dedicated to offshore assets. Start here for details and be sure to check the links at the bottom of the page.

Eligibility for the new streamlined procedure

There are two eligibility requirements for the new streamlined programme:

  1. Non-residency requirement: US Citizens, lawful permanent residents or estate of either of these meet the applicable non-residence requirement if in any one or more of the most recent three years for which a US tax return due date has passed, the individual did not have a US abode and the individual was outside the United States for at least 330 full days. Neither a temporary presence in the US nor maintenance of a dwelling in the US necessarily mean an abode. IRS Publication 54 gives more details on the definition of abode. For joint return filers, both spouses must meet the non residency requirement.
  2. The taxpayer has failed to report income from a foreign financial asset and pay tax as required by US law and may have failed to file the FBAR (Fincen 114 previously the TD F 90-22.1) with respect to a foreign financial account and such failures resulted from non-willful conduct.

This is an enormous change from the previous streamlined procedure and as long as the taxpayer meets the requirements, and regardless of how large the financial accounts and how much in back taxes are owed, there will be no penalties. If you are a US taxpayer who has been out of the US tax system, been living overseas for a while and have been afraid to come back into the tax system due to fear of losing a large part of your savings, this is exactly the programme you have been waiting for. The IRS has not only started to listen to the National Taxpayer Advocate and organizations like American Citizens Abroad (based in Washington DC and Geneva, Switzerland) but it has stopped presuming all overseas Americans are willful tax-evaders. Perhaps the angriest US taxpayers will be the ones who lined up first to try to do the right thing and have already paid large fines and legal bills under the Offshore Voluntary Disclosure Program (OVDP).

Overseas Americans Rejoice – partially

Now that the IRS has taken one huge step to make peace with overseas Americans and to reconcile past tax compliance and reporting issues, perhaps it is not too much to ask them to consider the future. One of the biggest flaws in most US income tax treaties that also affects overseas Americans living in non-treaty countries is the double taxation of employee and employer contributions to qualified retirement plans in the country of employment. The IRS takes the position that these are “non-qualified plans” and so imposes US taxes in the year contributions are made; the host country then taxes the income generally in retirement.

Instead of waiting for many acts of Congress the IRS could immediately publish a list of countries whose employer-sponsored retirement plans, if compliant in the country of the employer, would also be considered qualified plans in the US. The list could further be refined to include specifically named voluntary retirement plans for bona fide overseas residents.

There has been a surge of American citizens giving up their US citizenship In the past several years and while officially the reasons for expatriation are rarely stated as being tax-driven, the correlation of the OVDP and increased focus on overseas/international issues cannot be overlooked. The new “Streamlined Procedure” is akin to a truth and reconciliation process between the IRS and its American diaspora; addressing double taxation of overseas retirement savings will ensure a lasting peace.

And if the US government wants to be really bold, it could even provide a path to repatriation. Many middle-class overseas Americans who felt compelled to expatriate [often due to family and employer pressures] due to the harsh although largely unintended persecution by the mind-numbingly complex US international tax code could be given a path back home. This is path I am sure many would follow.

What if I am already in the OVDP?

If you are already in the OVDP and think that this procedure applies to you and your case has not been settled, contact your advisor immediately to see if qualify to switch to this new procedure. It could save you thousands of dollars in unnecessary fines. The IRS announcement states:

“Transition rules for taxpayers who made submissions under the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers: The risk assessment process associated with the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers has been eliminated for all streamlined filers. A taxpayer who has initiated participation in the 2012 Streamlined Filing Compliance Procedures prior to July 1, 2014, and has not already been notified of a high or low risk determination will not receive correspondence related to their risk determination and the returns will be processed without regard to that risk assessment.”

The streamlined procedure certainly looks easy enough to comply with if you have the assistance of a CPA or enrolled agent who is specialized in working with overseas American tax issues; which might be a disappointment to the many law firms working on OVDP cases, since the process for the non-willful filer seems much tamer.

The Streamlined Foreign Offshore Procedures – An 8 Step Process to Recovery

The 8-step process is summarized below:

  1. For each of the 3 most recent years for which a US tax return due date has passed, file a 1040 (or 1040x if amending previously filed returns) and include relevant information only, forms such as the 3520, 5471 and 8938.
  2. Include at the top of the first page of each delinquent or amended tax return and at the top of each information return “Streamlined Foreign Offshore” written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.
  3. Complete and sign a statement (on a special form, see instructions) certifying:
    • That you are eligible for the Streamlined Foreign Offshore Procedures
    • All FBARs have now been filed (see 8 below)
    • That the failure to file returns, pay taxes and submit required info was non-willful conduct.
    • See instructions for more details.
  4. Submit a payment for all tax due and applicable statutory interest with respect to late payment amounts. Include your taxpayer ID on your check.
  5. If you are not eligible to have a Social Security Number and do not have an ITIN, submit an application for an ITIN with the returns.
  6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty then submit additional information as per the instructions.
  7. The documents must all be submitted in paper form (no electronic submissions accepted) to Internal Revenue Service, 3651 South I-H 35, Stop 6063 AUSC, Attn: Streamlined Foreign Offshore, Austin, TX 78741
  8. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. You are required to file these delinquent FBARs electronically at FinCen. On the cover page of the electronic form, select “Other” as the reason for filing late. An explanation box will appear. In the explanation box, enter “Streamlined Filing Compliance Procedures.” If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

If you are looking for a tax advisor to help you comply, American Citizens Abroad has now published a Tax Return Preparers directory to help overseas Americans find tax preparers who are specialized in working with overseas Americans:  The directory also contains a list of international law firms who can help those taxpayers who have more complex needs.

Overseas Americans, their “local” Swiss banks & the future

The Swiss banks in categories 2-4 [ed. note: those not under investigation by the US Department of Justice) should also find this streamlined programme interesting since it should encourage more US taxpayers who are resident overseas to enter the OVDP programme.

Now that we have seen the IRS become more reasonable with American taxpayers living in Switzerland, it would be great if the executives at Swiss financial institutions would be reasonable, too, and stop the widening discrimination against US taxpayers living in Switzerland; far too many financial institutions are asking their US taxpayer clients, even if they are fully US tax compliant and/or if they are dual nationals holding Swiss citizenship, to leave their institutions. Being a US taxpayer living in Switzerland is hard enough when complying with the US regulations. It should not be a further burden for law-abiding citizens due to the reactions of overzealous compliance departments.

It is not often over the past decade that the Overseas American community in Switzerland has had a lot to cheer about with respect to the IRS. Let’s hope that this change to the streamlined process is the first of many where the IRS and ultimately Congress show that they truly understand the burdens they have been unnecessarily placing on the diaspora and the international business community with a tax code that is in dire need of reform. Many thanks should go to the overseas Organizations, such as American Citizens Abroad, Members of Congress in the American Abroad Caucus led by Representative Carolyn Maloney, the National Taxpayer Advocate led by Nina Olson and the US Embassy staff in Bern to
name a few, all of whose input has certainly helped to shape this new revision of IRS procedures and all without any change in legislation.

Let’s encourage the IRS to go even further to make peace with overseas Americans and their retirement plans…while all Americans wait patiently for real tax reform from Congress.
P.S. Should the new Fincen 114 e-filing really be reported through the Financial Crimes Enforcement
Network? Just a thought…


Mexico Travel Care




Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>