[authors: Sherwin P. Simmons II
, Jonathan Gopman
, Barbara Ruiz-Gonzalez
, and Leanne Reagan
On June 26, 2012, the Internal Revenue Service (“IRS”) released IR 2012-65
(the “Release”) announcing a proposed new procedure for U.S. citizens living abroad including, but not limited to, dual citizens who have not filed U.S. income tax and informational returns to file their delinquent returns. This procedure will go into effect on September 1, 2012.
A brief description of the procedure was provided, but more detailed information is expected. The procedure is intended to help those taxpayers with simple tax returns and owe $1,500 or less in tax for any of the covered years. Taxpayers wishing to use the new procedure will be required to submit: (1) delinquent tax returns with appropriate related information returns for the past three years; (2) delinquent Foreign Bank Account Report (“FBARs”) for the past six years; and (3) any additional information required by future guidance. Payment of all federal income tax and interest due must be included with the submission.
According to the Release, all submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. Those taxpayers presenting low compliance risk (i.e., $1,500 or less in tax for any of the covered years), the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, similar to opting out of the Offshore Voluntary Disclosure Program.
It appears the Release is a follow-up to Fact Sheet 2011-13 issued by the IRS in December, 2011 (the “Fact Sheet”) which provided information for U.S. citizens living in Canada and dual citizens. The Fact Sheet stated that penalties for noncompliance will not always be applied. See our previous Practice Update: “IRS Summarizes Reporting Requirements and Penalties for Dual Citizens Residing Outside the United States.”
In addition to announcing the proposed procedure for compliance, the Release announced retroactive relief for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.
Finally, on June 26, 2012, the IRS also released IR-2012-64
which updates information on the new Voluntary Disclosure Program
and published new Frequently Asked Questions and Answers (“FAQs”). The new FAQs incorporate the Release and the Fact Sheet into the potential penalty framework. Additional analysis needs to be completed to ensure how this modification is applied, but it appears that U.S. citizens living outside the U.S. will be given some penalty relief.
The advantages and disadvantages of the proposed new procedure and how it applies to each U.S. citizen living abroad and dual citizens should be carefully analyzed based upon each person’s facts and circumstances. If you or anyone you know has outstanding U.S. income tax or informational returns, or you are concerned about the recent IRS offshore scrutiny, we strongly suggest you acquire immediate assistance.