The United States Internal Revenue Service announced a plan to help American citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues.
The new approach will help US residents residing abroad, who have not been filing tax returns, with an opportunity to get current with their tax obligations, said IRS Commissioner Doug Shulman.
The IRS said it is aware of US taxpayers abroad who want to comply with the law but have failed to submit US federal income tax returns or reports on foreign bank and financial accounts. New IRS procedures will allow these taxpayers to get current with their tax requirements without facing penalties or additional enforcement action. The measures apply to American citizens with simple tax returns and $1,500 or less in tax owed for any of the covered years.
The new procedures are “a positive for any US persons living in Cayman, or other foreign countries, who have not filed all their required US tax returns, provided they meet the qualification requirements,” said David Conen, tax director with KPMG in the Cayman Islands. “I would describe this as a notable softening of the IRS’ approach on this issue.”
Taxpayers using the new procedures will need to file delinquent tax returns along with appropriate related information returns for the past three years, and delinquent FBARs for the past six years.
This is a significant reduction by the IRS of the amount of back year filings required to catch up on delinquent filings, Mr. Conen said.
Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years. With the new procedure the IRS has distinguished between low risk Americans, who have not properly reported on their foreign income and assets but whose taxes owed are small, and high risk cases who may have done so deliberately to evade significant tax payments.
The five to six million American citizens, who are living abroad, are required to file a federal income tax return, as well as report on bank accounts with a balance of more than $10,000 at any time and foreign-held assets each year.
Because compliance with these complicated filings has been low, US tax authorities have targeted US taxpayers living abroad who did not pay taxes on foreign earned income with successive offshore voluntary disclosure programmes with reduced penalties, in return for a full declaration and the payment of back taxes, penalties and interest.
The IRS announced it had so far collected more than $5 billion through the 2009 Offshore Voluntary Disclosure Program, the 2011 Offshore Voluntary Disclosure Initiative and the 2012 Offshore Voluntary Disclosure Program, which opened in January.
The new streamlined rules will also eliminate concerns over the treatment of certain foreign retirement plans. Tax treaties often allow for income deferral, but taxpayers have to elect this on a timely basis. The streamlined procedures for low-risk Americans abroad will allow those who have foreign retirement accounts to make a late election, thus allowing them to get back into the tax system without the potential of losing their retirement savings to tax penalties.