Monday, July 2, 2012

Whoever Said The IRS Lacked Common Sense?

New Filing Procedure For Americans Abroad; Too Little, But Not Too Late

On June 26, 2012, the IRS announced a new filing compliance procedure for non-resident U.S taxpayers. The procedure provides that current non-residents including dual citizens, who have not filed U.S. income tax and information returns, may file three years of delinquent tax returns and six years of delinquent FBAR's without fear of IRS punishment. Provided the delinquent returns are (a) "simple returns," (b) the IRS determines that the taxpayer’s package presents a "low level of compliance risk" (c) and the returns show less than $1,500 of tax due for each year, the taxpayer can expect an expedited review process possibly resulting in no assertion of penalties or further follow up procedures. The notice makes it clear that this new procedure is not a substitute for a voluntary disclosure nor the more formal OVDI 27.5% tribute program and that if a taxpayer has a well-founded worry about the risk of criminal prosecution he better consult a lawyer.
The new program is a good idea and is perhaps more notable for what it says between the lines rather than in its explicit details: the program says to me that the IRS has the ability to use common sense and good judgment in culling out the "no brainer" situations where the "one size fits all" approach of the OVDI program just doesn’t make sense. Also, it is an admission on the part of the IRS that they didn’t think the OVDI program through carefully enough to anticipate what must be an overwhelming flood of OVDI applications which are now clogging the system, many of which really do not belong in the program in the first place.

There is clearly good news here because it is a great chance for some people with simple returns to get an almost free pass to the world of future compliance assuming they really care about their status with the IRS.

The problem is the new program will only apply to a tiny fraction of the Americans abroad with real tax issues. Moreover, many of the folks who qualify to file "simple returns" with little tax due already have one foot out the door when it comes to American tax compliance and could care less about what the IRS thinks. Also many should feel some sense of vindication because (1) it is an IRS admission that its menacing public pronouncements notwithstanding, its OVDI "bluff" has been called and (2) it is a public acknowledgement that the IRS has known all along that it "just had to do something" to tell the world that there should be, and can be a mechanism available for low level IRS workers to use common sense and good judgment when they process simple cases.

But the IRS is fooling itself if it thinks that many people are going to jump on the band wagon as a result of the June 26 announcement. Many Americans abroad will read the new program as a better chance to argue "reasonable cause" or "no tax avoidance motive" at some time in the future, if and when the IRS ever catches up with them. The reason is, the IRS will find it hard to argue that the publication of an obscure announcement in tiny print on its web site is sufficient notice to the entire world-wide expatriate community that they are now on notice that they better act now to get into compliance or risk a heavy hammer if they don’t develop a healthy fear of what the IRS could possibly do to them.

It should be clear to even the most paranoid expatriates that ignoring the new program will in no way increase their chances of the IRS opening a criminal investigation against them, nor should anyone believe that the failure to elect the "simple returns" procedure or the draconian 27.5% tribute program will result in the IRS throwing the penalty book at them in the face of the remote possibility that they will get caught by the IRS at some time in the future.

The new procedure is "too little" because my guess is when the IRS announces the details, "simple returns" are likely to include those with only a schedule A and B and not much more. If there is a small amount of "economic activity" in the United States, if a taxpayer is doing business abroad through a corporation or partnership, if there is a relatively small amount of US source income, a legitimate trust or foundation to support an elderly relative, a foreign mutual fund or PFIC, a residency or filing status issue, or any complication at all which would cause a return to require a regular revenue agent’s attention (as opposed to a lower level office auditor) those taxpayers will have to go through the rigors of the OVDI 27.5% tribute program or a noisy disclosure outside the program if the practitioner has the guts to stand fast and look the IRS straight in the eye.

The new notice is also a fresh reminder to all the "back door" professionals who have been suborning the use of quiet disclosures to knock it off now because there is simply no excuse for a quiet disclosure in light of the notice’s invitation to just write the IRS a letter and explain where the client has been for the past several years.

The new program is not "too late" because it says finally, that (1) there is in fact a de minimus amount of unreported income which will be excused contrary to the OVDI FAQ’s, (2) a noisy disclosure outside the 27.5% tribute program will be ok to show reasonable cause for failure to file income and information returns AND FBAR's, and (3) legitimate retirement and savings plans are not at risk for IRS abuse or confiscation.

The new program is a good start. We hope that in the future the IRS will continue to issue further guidance and be a bit more broad-minded when defining "no brainers."


  1. Interestingly enough I came across an old revenue ruling from the early 1990s that dealt with expats behind in filings. Phil Hodgen was able to affirm that it was still in force and posted it on his website. In one sense this recent announcement could be seen just as re-affirmation of a still in force but forgotten policy. However, we return to the problem of Mr. FBAR which there was no mention of back in 1992. One thing that is notable is that legally FBAR did exist back in 1992 but the service of that day appeared to care very little about. I would argue again from reading the Commissioner's statement closely FBAR continue to remain the elephant in the room(i.e. Three years of back returns but six years of FBAR's).

  2. Would appreciate your opinion on the absence of specific identification of Permanent Residents (Green Card holders) in the new (August 31, 2012) IRS Procedures for Non-Resident, Non-Filer etc. In the June 26 2012 announcement, Commissioner Shulman said that the plan was to help US citizens overseas, including dual citizens.
    Then in the Instructions for the new Procedures, in the section on TINs, it states that "For U.S. citizens," a TIN is an SSN and that for individuals that are not eligible for an SSN.......
    The only explicit reference to "resident alien" is in the TAX ADVISOR SECTION of the Questionnaire. A Forbes September 1 2012 article identifies a US/dual citizenship eligibility requrement for the procedure.
    Yes, perhaps paranoia. But I am wondering if the IRS is trying with this mechanism to offer different treatment for US citizens/dual citizens from that for resident aliens (Green Card holders).

  3. Steven, I have been waiting to see what your thoughts are now that the new guidelines are here. What do you think of them, given your past experience working for the IRS? Is this really the outcome of a good faith attempt to help the bulk of those abroad become compliant? For example, there seem to be many angles to this that make it in some ways even more problematic than before:
    I have been reading Roy Berg's comments to Jack Townsend, as well as his blog entries

    Why can't we just get some real, good faith, commonsense methods for compliance that don't require the average person to either bankrupt themselves with legal/accounting fees first, or fall into even deeper IRS pitfalls they couldn't anticipate as ordinary laypersons. We're not millionaires evading US taxes. We're fully tax compliant where we live. We can't use any of the tax incentives the US offers residents, nor those offered by our home governments - where we are in many cases duals born abroad. We can't save for our children's college, because the IRS calls our savings plans trusts. We can't have ordinary bank accounts for our paychecks and mortgages. We can't afford to remain US citizens. We have to get rid of US citizenship for our own protection, and the protection of our non-US families if we can afford do so - the US continues to treat us as criminals and adversaries, not as welcome citizens and brethren. The US and IRS is forcing us to renounce by refusal to treat us in any ethical or just way - and now has concretely demonstrated that they didn't really intend to offer any additional MEANINGFUL assistance. Thus confirming that the US and IRS doesn't really want 'compliance', because they know that it won't bring much in the way of actual US taxes owed by us from abroad, and since only non-compliance brings them significant revenues - through layered FBAR, FATCA, and other penalties. How many non-resident individuals and households do you think can pay the 500-750. per hour for US crossborder legal assistance and accounting expertise STILL required for using this new compliance method - IF anyone except unicorns can manage to qualify? All the statements by Douglas Shulman and Timothy Geithner were intended to scare and threaten us to file in order not to fall afoul of the FATCA laws, but now, anyone who did, won't qualify under the new guidelines. And likewise for any good faith amendments. And there are so many conflicts with the tax systems of other countries, that people will be excluded just because of systemic incompatabilities - which is the logical outcome of forcing the rest of the world into something designed to work in the US. It can't. And so we suffer and pay - and if we lose thousands to lawyers, with 0 US tax actually owed, does that help the US? No, only the penalties on our legal post-tax savings will help the US. So there is no incentive for the IRS and US to change the way they design or enforce the laws that are binding all of us who were born, live and work outside the US. We derive no assistance, no benefit, and have no representation - but we certainly are subject to enforcement and punishment.

  4. The thing is - you can't really use this procedure if you FILED taxes, but didn't know about the FBAR, which is the situation most folks are in.

    It actually penalizes the folks who made a good-faith effort to file taxes every year, but didn't know about the FBAR requirements.

    You may have less than $1500 of tax due, and you may meet all the requirements above, but if you filed a tax form, you aren't eligible!

  5. Steven, could you offer a comment directed to those who otherwise would have qualified, but who filed the 2011 return, and the 2011 FBAR, this June 2012? If we did that pending the IRS release of the streamlined guidelines, not wanting to become further delinquent, that was a good faith attempt to come into compliance - while awaiting the details we needed to address past years. Since the IRS chose not to release those details until the June deadlines were well past, why penalize those minnows who tried to do the best they could while awaiting more guidance?

    And for those who already timely filed the 2011 FBAR, in fear of becoming further delinquent, but who filed an extension for the actual return - until October; which 6 years of FBAR are now required? They've already filed the 2011 one. The SOL for the 2005 FBAR is now expired. So which years of FBARs would they offer with their streamlined package to make up the 6 years total?
    Thank you very much, from
    desperate minnow abroad


Note: Only a member of this blog may post a comment.