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Tax Law

Filing Compliance Procedures Challenge U.S. Taxpayers Residing Overseas

Generally, [the 2012 Offshore Voluntary Disclosure Program] OVDP is designed for those delinquent U.S. taxpayers who

  • have been holding financial assets overseas,
  • have not been disclosing such assets to the U.S. government,
  • have not been reporting the income produced from such assets, and/or
  • have not been paying taxes on that income.

The recently modified SFCP provides certain (not all) delinquent U.S. taxpayers with an opportunity to become current on those filings at a relatively small cost.

Background

On June 18, 2014, ... IRS [Information Release IR 2014-73] announced several changes to the 2012 OVDP and [Streamlined Filing Compliance Procedures] SFCP. Although the overall spirit of the changes is positive for U.S. taxpayers who qualify for the modified programs, and although the IRS announced that the SFCP has been "expanded and modified to accommodate a broader group of U.S. taxpayers," the IRS added several new requirements that are likely to complicate the process of becoming tax-compliant for those taxpayers and quite possibly narrow, rather than broaden, the qualifying group of U.S. taxpayers.

Significantly and as relevant here, to be eligible for the [Streamlined Foreign Offshore Procedures] SFOP, a U.S. taxpayer must, among other things:

  1. Not be under an IRS civil examination or criminal investigation. [Under the prior OVDP, the taxpayer/applicant was not accepted if he were in the "queue"; that is, his file was set aside at the Service to be examined—a status of which the taxpayer would likely be ignorant.] In that respect, if a taxpayer's return is under examination for any taxable year, even though the examination does not relate to undisclosed foreign financial assets or FBAR violations, the taxpayer will not be eligible to use the SFCP.
  2. Submit all tax returns and forms under the SFCP with a valid Taxpayer Identification Number (TIN). Note that the proper TIN for U.S. citizens and green card holders is a valid Social Security Number (SSN). Tax returns submitted without a valid SSN or Individual Taxpayer Identification Number (ITIN) will not be processed under the streamlined procedures.
  3. Certify that the failure to report all income, pay all taxes, and submit all required information returns, including FBARs (FinCEN Form 114, formerly Form TD F 90-22.1), was due to non-willful conduct.
  4. Meet the nonresidency test.

...

1. IRS Examination

The Service's position on the "not under examination" issue has been consistent throughout the OVDP process...

2. SSN Under the SFCP

The program's requirement that an applicant must submit tax returns and forms with a proper TIN makes sense. Virtually everyone has an SSN or ITIN, so that requirement will not be a burden, with few exceptions. The IRS helpfully provided relief to those few U.S. taxpayers residing overseas who do not have ITINs and are ineligible for an SSN. Under the SFCP, those U.S. taxpayers may submit their documents without an ITIN, provided their submission is accompanied by a complete ITIN application.

...

3. Non-Willful Conduct Certification Under SFCP

The SFCP is only available to those U.S. taxpayers whose non-compliance was due to non-willful conduct. Unfortunately, we have rather limited guidance on what constitutes "willful conduct" or a willful violation for FBAR penalty purposes. The respective determination must be made based on all facts and circumstances. In publicly-made comments, the Treasury and the IRS officials referred to the existing law on willful standard and indicated that the IRS does not intend to provide any guidance for taxpayers on what constitutes "willful conduct." The IRS also noted that taxpayers should consult with their tax advisors when making the non-willful conduct determination. (For a discussion of the ''willful'' standard in the FBAR context, see "An Analysis of the Meaning of 'Willful'' in the FBAR Context" by Rufus Rhoades, LexisNexis Emerging Issues Analysis Commentary, September 2013.)

,,,

4. Non-Residency Test Under SFOP

To be eligible under the foreign branch of the SFOP, U.S. taxpayers must also meet the non-residency test.

Unfortunately, whether intentionally or inadvertently, by designing the non-residency test (at least, if it were to apply as originally drafted) the IRS created a "no-man's land" and instead of broadening the group of U.S. taxpayers qualifying for the SFCP, narrowed the group.

Under the non-residency test for U.S. citizens or green card holders, taxpayers or their estates must not have had a U.S. abode and must have been physically outside the United States for at least 330 full days in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed.

...

Conclusion

We and many other practitioners commend the Treasury and the IRS for their continuing efforts to provide viable options for delinquent U.S. taxpayers to become tax-compliant. The modified OVDP and enhanced SFCP are good examples of significant progress the IRS has been making. However, taxpayers and the IRS would benefit from additional guidance — for example, adding a FAQ format for SFCP, and addressing issues discussed [above]...  (especially the non-residency test).

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

...

LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 7 pages)

 

RELATED LINKS: For more on voluntary disclosure and offshore accounts, see:

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