Are you irregular in filing US Individual tax returns? Current guidelines to solve them

It is once or many times US Citizen or permanent residents (Green Card Holders) ring me about the instances of their passport being held up by American embassy officials or being asked about their filing US Tax returns for global income while entering the U.S.A. It is sad but true that if your US passport is held up at the time of renewal of passport at the embassy with little explanation except to contact the Internal Revenue Service, part of the US Federal Treasury Department, you may be shell rocked. I had an instance when the client has not visited the United States recently just applied for renewal of his passport since he had to attend his son’s graduation ceremony at Harvard University, perhaps one of the most important moments of his life. But the officials therein advised him to contact IRS. Shocked beyond imagination, he approached me for a solution. What happened to his case is a personal matter between my client and myself but I decided to explain in detail of current guidelines of the IRS.

Streamlined Filing Compliance Procedures:

The IRS Streamlined Filing Compliance Procedures (SFCP) are a sort of IRS Tax Amnesty. SFCP is a cost-effective and safe method for people who have not previously reported or disclosed their foreign assets, accounts, investments, or income to the IRS in previous years to get into compliance. Let me explain in simple terms with an example as under.

 Amber was born in the USA due to the posting of his father long ago but migrated to India where he held high positions incorporates. So, Amber had no necessity to go to the U.S.A., except that he has a very good income in India. He forgets to file USA foreign global income by the filing of US Tax returns.

Another commonly seen example. An Indian holding US Citizenship but having income from both the countries but living in the USA permanently forgets to account for his huge income from India for whatever reasons.

American citizens or permanent residents holding Green Card are expected to file global income while filing their every year tax returns. Many of them enjoying the benefits of income from everywhere just ignore their legal responsibilities. When IRS corners them with demand letters for tax liability, interest charges for tax arrears, or penalty, the tax wisdom tries to dawn on them. In many cases, even their main bank accounts stand frozen or passport held up.

Pleading ignorance but willing to declare foreign assets, foreign income from all sources, and want to join the mainstream of honest tax paying community, they approached repeatedly IRS to help.

IRS introduced streamlined filing compliance procedures for taxpayers in 2012 to deal with situations such as:

  • terms for resolving their tax and penalty procedure for filing amended or delinquent returns, and
  • terms for resolving their tax and penalty obligations.
  • a streamlined procedure for filing amended or delinquent returns

Perhaps the taxpayers thought of further simplified one reflecting the further broad view of the IRS for accommodating a greater number of them. The original one did not attract the required number of taxpayers who availed the procedure.

IRS introduced new streamlined procedures to include:

  • Elimination of the $1,500 tax threshold, and
  • elimination of the risk assessment process associated with the streamlined filing compliance procedure announced in 2012.
  • extension of eligibility to U.S. taxpayers residing in the United States

Certain salient features of these procedures which attracted nearly 65000 taxpayers afresh are narrated below:

1. The modified streamlined filing compliance procedures are designed only for individual taxpayers, including estates of individual taxpayers.

2. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States.

3. Descriptions of the specific eligibility requirements for the streamlined procedures for both non-U.S. residents (the “Streamlined Foreign Offshore Procedures”) and U.S. residents (“Streamlined Domestic Offshore Procedures”) are available in the following web:

Foreign offshore procedures:1

https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states

Domestic offshore procedures2

https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-in-the-united-states

I get a large number of telephone calls from India and hence this writes up confines itself to foreign offshore procedures. One who wants the other than can easily the web 1 mentioned above.

Let me clarify the queries of my clients who are confused, afraid of consequences, and had been delinquent partially due to ignorance or intentional which no one admits.

IRS specifically advises those taxpayers who want to avail of one of the above procedures to avail the services of CPA who are experienced and had handled similar complex works or lawyers, again experienced and competent to achieve the results.

Just to introduce some information, this article is being written. Please avail of the services of senior professionals to solve your problems. What will you do if your company wants to send you to the USA for solving their problems but you express your ignorance over even your passport?

Streamlined Foreign Offshore Procedures

Taxpayers availing these procedures required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. You need the services of an experienced CPA to get proper advice in this regard.

Eligibility for the Streamlined Foreign Offshore Procedures

I am reproducing the most important portions of the instructions directly from web 1.

“In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must:  (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct.”

Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, 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, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. (Please do read publication 54 for details. Its web is

https://www.irs.gov/pub/irs-pdf/p54.pdf

Non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents is given in the publication of IRS 519.

Description of Scope and Effect of Procedures

Let us get explained the important instructions regarding the tax returns, FBARs, etc. Strict compliance of the following has been sought by the tax authorities.

“U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Foreign Offshore Procedures must

 (1) 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, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and

 (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1).  The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.”

One can easily find out the submission of the last 3 years of tax returns due and the recent 6 years for which FBAR due date has passed.

One taxpayer who is eligible to avail of these procedures expects some benefits. Yes, I have compiled below and simplified it for easy understanding.

  • “A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.
  • Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.”
  • However, previously assessed penalties will not get any abatement. Further, any additional tax deficiency found out by IRS will stand along with penalties if any.
  • For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty.

Specific Instructions for the Streamlined Foreign Offshore Procedures

IRS has decreed strict following of instructions which help them to serve any taxpayer better.

1. “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:

  • if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time, or
  • if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.

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.

Note

Basic failure to follow simple procedures may some times result in undue delay running into months. Recent indications are nearly 9 months even for any paper returns due to unexpected COVID 19. Further, the IRS continues with No 3. Instructions addressed indirect sense to a taxpayer.

3. “Complete and sign a statement on the Certification by S. Person Residing Outside of the U.S.(Form 14653)(PDF)certifying

(1) that you are eligible for the Streamlined Foreign Offshore Procedures;

 (2) that all required FBARs have now been filed (see instruction 8 below); and

 (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

 You must submit the original signed statement and you must attach copies of the statement to each tax return and information return being submitted through these procedures.

 You should not attach copies of the statement to FBARs.

 Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.  Your taxpayer identification number must be included on your check.  You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.”

5. Intentionally, I reproduced the original instructions which are very strict and penalizing in nature if not followed strictly.

6. IRS at the end advises the taxpayer as under:

If the taxpayer seeks relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, he/she must submit:

  • a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
  • a dated statement duly signed by taxpayer under penalties of perjury describing:

1. the events that led to the failure to make the election,

2. the events that led to the discovery of the failure, and

3. if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and

4. for relevant Canadian plans, see SFO FAQ 2 for current information (Form 8891 is no longer required).

7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:

Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn:  Streamlined Foreign Offshore
Austin, TX 78741

Conclusion

Since regularly tax clients telephone me about the above procedures, I am compelled to write this article. Yes, if a taxpayer is eligible as per descriptions given above, one will have to submit 3 years’ recent tax returns and FBARs for 6 years but these procedures are very complex and differ from one taxpayer to another. The clear advice is to engage an experienced CPA from the USA who has handled these complex forms and met the tough conditions imposed by the American tax authorities, namely, IRS.

Disclaimer: In the above article, I have not given any tax advice. The above information/views do not meet any legal or tax advice status. Neither taxguru.in nor the IRS is responsible for my views. As written repeatedly in this article, only an experienced CPA from the USA or any lawyer with vast experience can give suitable tax/legal advice.

Author Bio

Qualification: Post Graduate
Company: subramanian natarajan cpa firm
Location: NEW DELHI, New Delhi, IN
Member Since: 09 May 2017 | Total Posts: 131
A banker with 27 years of experience, a CPA from USA with specialization in US taxation, individual, partnership, S corporation or LLC taxation etc View Full Profile

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