The inflexibility of the IRS in the offshore area is starting to get some professionals down. I am one of them, but there are some others voicing similar frustration.

Taxpayers and professionals alike, were very pleased when the IRS announced the new Streamlined procedures in mid-June. You can learn more about the new Procedures here.

It seemed that sensibility and reason were beginning to prevail over at the IRS! Finally, “benign actor” (as opposed to “bad actor”) taxpayers with undisclosed offshore assets, could obtain relief and come into tax compliance without driving themselves into both fiscal and physical bankruptcy.

Terms of the new Streamlined Program require that “for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, a taxpayer must file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938).”

Just last week, I sought clarification from the OVDP Hotline on the meaning of the underscored language concerning the “most recent 3 years.” I posed some questions hoping to bring many more taxpayers into full compliance. Unfortunately, I was recently advised by the Hotline that the New Streamlined Program is not available in the situations set out below; and I was further advised that the IRS had indeed considered these questions at length at an earlier time. The IRS’ refusal to permit such cases into the Streamlined Program makes no sense to me. Perhaps readers of my blog can enlighten me?

Question Posed to OVDP Hotline re New Streamlined Program

My question was whether the new Streamlined Program strictly applies only for the past 3 years of troublesome tax returns. By this I mean – only for years 2011-2013 and that under the Program you cannot amend (or file) say, a tax return from 2010 or earlier. I was thinking of certain of my clients who fall into two general categories.

Category A would involve someone such as Mr. R, a naturalized American living abroad for decades. He timely filed income tax returns but filed them all incorrectly; sadly Mr. R believed in self-medicating and had done all of his tax returns himself. Part of his problem was that he believed only his overseas salary and US source income was taxable; he omitted significant offshore income. While the general Statute of Limitations (SOL) is 3 years, in Mr. R’s case the statute could be extended to at least 6 years because Mr. R had omitted a lot of income from his returns (25% or more).  (Criminal tax matters involve different statute of limitation rules. See my earlier blog post on this topic). Mr. R did not go back and amend his returns fearful of the high penalties that would be involved.

Category B would involve someone such as Mr. S who had not filed tax returns for over 20 years while living and working abroad. He did not want to enter OVDP, and he could not fit within the parameters of the old Streamlined Program. He filed going forward and has been fully tax compliant since 2010. Returns for all older tax years remain unfiled. The SOL remains open indefinitely when tax returns are not filed and Mr. S fears a knock on the door someday about his past tax transgressions.

Sadly, the definitive answer from the OVDP Hotline is that neither of these types of cases can use the new Streamlined procedure.

Original Post By:  Virginia La Torre Jeker, J.D.