The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). Some of these taxpayers have recently become aware of their filing obligations and now seek to come into compliance with the law. The Service is announcing a new procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure will go into effect on Sept. 1, 2012.

Note: On September 30, 2013, FinCEN posted, on their internet site, a notice announcing FinCEN Report 114, Report of Foreign Bank and Financial Accounts (the current FBAR form). FinCEN Report 114 supersedes TD F 90-22.1 (the FBAR form that was used in prior years) and is only available online through the FinCEN Report 114.

Description of proposed new procedure:

While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years.  All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission.  For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.  Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Tax, interest and penalties, if appropriate, will be imposed in accordance with U.S. federal tax laws based on a review of the submission.  For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13 (December 2011) for examples of reasonable cause. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit:

• a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position;
• for relevant Canadian plans, a Form 8891 for each tax year and description of the type of plan covered by the submission; and
• a statement describing:

♦ the events that led to the failure to make the election,
♦ the events that led to the discovery of the failure, and
♦ if the taxpayer relied on a professional adviser, the nature of the adviser’s engagement and responsibilities.

Other considerations:

Taxpayers who are in a situation where they are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution.  Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Social Security Number (SSN).  For individuals that are not eligible for an SSN, an Individual Taxpayer Identification Number (ITIN) is a valid TIN. Tax returns filed without a valid SSN or ITIN will not be processed.

Original Post By:  Dan Gordon