Details of the new September Voluntary Disclosure procedure
As we posted on 27th June 2012, the IRS has announced a new procedure to “streamline” the process for US taxpayers living overseas to bring their US tax compliance up to date. This took effect on the 1st September 2012.
It is available to US taxpayers who have resided outside the US since 2009 and who have not filed a US tax return during this period — and who the IRS view as presenting a “low level of compliance risk.”
Under this new procedure eligible taxpayers must file delinquent income tax returns, including all required informational returns, for the last three years, delinquent FBARs for the last six years and pay all tax and interest due when they submit their return. (This option is not available for filing amended returns.)
The level of compliance risk will be based on various factors. These will include:
- If any of the returns submitted through this program claim a refund;
- If there is material economic activity in the United States;
- If the taxpayer has not declared all of his/her income in his/her country of residence;
- If the taxpayer is under audit or investigation by the IRS;
- If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
- If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
- If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
- If there is US source income; or
- If there are indications of sophisticated tax planning or avoidance
Taxpayers will also have to fill out a “Questionnaire” (sample shown at the bottom of this page). The answers to the Questionnaire, combined with an analysis of the risk factors listed above will determine whether the taxpayer does, or does not represent a low level of risk.
Generally, if the tax owed is less than $1,500 for each of the three years, the taxpayer will be treated as low risk. If the taxpayer owes more than the $1,500, he or she will have to wait for a review and determination by the IRS as to whether the taxpayer is or is not “low risk”.
If the IRS determines the taxpayer is not “low risk”, the taxpayer will be subject to a more in-depth examination by the Service; and more than likely will result in the Service review up to eight back tax years.
Finally, this program does not offer protection from criminal prosecution as offered by the current voluntary disclosure program.
There are many ways to become tax compliant. If you do not think you qualify for this program, there are several other approaches, including the 2012 Overseas Voluntary Disclosure Program which took effect in January. The bottom line is that the IRS is ramping up and you have an obligation to invest the time in your tax affairs. Contact us to discuss your options.