So many individuals leave the U.S. to reside in Canada or elsewhere thinking they are free from filing a U.S. tax return with uncle Sam. They move along with their lives not realizing that even though they are not living in the U.S., they may still need to file a tax return there.
Then there is the “accidental American” – a fascinating group for many reasons. They have been born in another country to U.S parents, but find themselves with U.S. citizenship. As they grow older, eventually these individuals are faced with questions about their U.S. status and need to open up a bank account in another country – but it’s not as easy for them!
This failure to comply with U.S. international requirements is a serious issue and generally falls into three categories:
- The failure to report income, including income on assets held outside the U.S.;
- The failure to file a FinCEN 114 (FBAR); and
- The failure to file an International Information Return (IIR).
If you’re in IRS trouble, there are options to help get yourself out of it. Some may be so good that when taken advantage of can lead to an individual not paying income tax or penalties by simply choosing to be compliant.
OPTIONS FOR BECOMING COMPLIANT
Depending on the circumstances, there are many options for you to become compliant.They include:
- Amended Return Procedures;
- Delinquent FBAR Procedures;
- Delinquent International Information Return Procedures; or
- Streamlined Filing Procedures.
Amended Return Procedures
The IRS realizes that humans sometimes make errors. If you need to change an item such as your income or credits, or even if you made a filing mistake, the amended return procedures may work for you. It depends on the type of error that was made.
If you choose to use these procedures, a 1040X would be filed after the original return, along with any forms or schedules that were omitted, or are being changed. Keep in mind that for a credit to be applied or a refund received, you generally need to file the Form 1040X within three years after the date you timely filed your U.S. tax return, or two years after you paid the tax, whichever is later. Interestingly, in the case of foreign tax credits, you may have as many as ten years to file an IRS claim.
Delinquent FBAR Procedures
If you don’t have any missing income or information forms and don’t owe any tax, but failed to file a required FBAR, the Delinquent FBAR Submission Procedures may be your best option. If IRS has already contacted you about delinquent or past due form in connection with an examination of civil or criminal nature then these procedures will not work anymore – so do take care!
But if the income has been reported on a U.S tax return and you paid all of your owing taxes, then the delinquent FBAR submission procedure may work for you to meet your obligations under U.S. law.
A taxpayer utilizing this procedure would file delinquent FBARs electronically with FinCEN and include a statement explaining why they are late.
Delinquent International Information Return Procedures
Filing a U.S. taxpayer’s taxes can be complicated and time-consuming, so it is crucial to file all the correct forms with your return! In addition to the main individual Form 1040, there may be other information returns that you need for this process such as form 3520 or 5471 which could have consequences if not filed properly. In fact, missing any of these tax reporting obligations will likely result in significant penalties.
The Delinquent Information Return Procedures are a way to get back on the right track with your tax situation if you’re not under examination by the IRS. The procedure can only be used by U.S citizens or residents that have reasonable cause for their failure to file an information return.
Under this procedure, you may not necessarily avoid penalties. In fact, the IRS has noted penalties may be assessed in accordance with existing procedures using this approach. However, if penalties are assessed, they may be abated if a taxpayer provides a “reasonable cause” for omitting the information return and include a certification that any entity for which the information returns are being filed was not engaged in tax evasion.
Streamlined Filing Procedures
Both individuals residing in and outside the U.S. may be eligible to use the IRS Streamlined Filing Procedures. This is an amnesty program initiated by the IRS to encourage taxpayers to voluntary catch up on their tax returns. They key things to note include:
- You must certify your conduct was not wilful, but due to things such as negligence, inadvertence, mistake or a good faith misunderstanding of the law;
- The IRS must not have initiated a civil or criminal examination of your return for any tax year;
- You need a valid Taxpayer Identification Number; and
- If you previously filed delinquent or amended returns, you may have to pay previous penalty assessments.
The IRS has both Streamlined Domestic Offshore Procedures (SDOP) and a Streamlined Foreign Offshore Procedures (SFOP). If you live in Canada and meet a non-residency test, you may be able to use the SFOP.
The good thing about the SFOP is that although you would pay any taxes owed and interest owed, no penalties are asserted for those who qualify. You would file original or amended returns for the most recent three years for which a tax return due date has passed, as well as any information returns. If applicable, six years of FBARs would also be e-filed and you would complete and submit a Form 14653.
Voluntary Disclosures
While the Streamlined Filing Procedures would be used for non-wilful conduct, individuals who wilfully engage in fraudulent activities may choose the Voluntary Disclosure Procedure to come into compliance with the IRS.
This involves submitting a preclearance certificate, receiving confirmation from the IRS of submitting the preclearance certificate and timely submitting the Part II of the Voluntary Disclosure Application.
Key Things to Note
Even if you have “fallen off the rails” the IRS provides several options for individuals to come into compliance with their U.S. tax obligations.
It is usually best to get to the IRS, before they get to you!
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Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.