IRS streamlines its streamlined reporting program

If you’re an American who hasn’t filed U.S. tax returns or reported foreign assets, you can make good with the IRS through the Streamlined Program. Practitioners and taxpayers have pleaded with the agency to make the process simpler, and the IRS announced changes in June 2014 to help achieve this goal. Here are they are:

1. The program is broader, so more taxpayers are eligible.

Previously, you had to owe less than $1,500 in U.S. tax per year, and the rules made it easy to fail this test. This was especially true of Americans in Canada with mutual funds, family trusts, investment corporations or flow-through tax shelters.

Now, all you have to do is certify that your failure to file was non-wilful. Most people will meet this test.

Previously, you had to be resident outside the U.S. for all years since 2009. Under the new rules, a U.S. citizen or Green Card holder abroad must meet the following two tests for only one of the previous three years for which the return due date (including extensions) has passed (for most people this means 2012 to 2014):

• You had no U.S. abode.
• You were physically outside the U.S. for at least 330 full days during the year.

If you’re a Canadian snowbird with U.S. citizenship, and spend more than one month a year in the U.S., you aren’t eligible for the Streamlined Program. This is an important consequence of the changes.

The program is now available to non-Americans, as long as there’s one year in the past three during which you didn’t spend too much time in the United States. This threshold is called the Substantial Presence Test. A person meets the test if she’s in the U.S. at least 30 days in the current year, and if the following equals or exceeds 183:

• Days in the U.S. during the current year; plus
• 1/3 days in the U.S. during the prior year; plus
• 1/6 days in the U.S. during the second prior year. If you stayed in the U.S. 122 days per year, for three years running, you’d meet the test.

If you’ve used “quiet disclosure” and haven’t been audited, you’re now eligible. Quiet disclosure is the practice of filing missing returns, or amending returns that didn’t report all of your income, without going through a formal program like the Streamlined or Offshore Voluntary Disclosure Program.

Estates are eligible. Under the old program, it was unclear whether they were.

2. Taxpayers using this program have certainty that their penalties will be eliminated.

In effect, the program is an amnesty.

3. The risk assessment that was part of the previous program has been eliminated.

That’s the case not just for new filers, but also for those who previously filed under the Streamlined Program.

4. The program now extends to Americans living in the U.S.

• You’ll be subject to a penalty of 5% of the foreign financial assets.
• You’ll still have to demonstrate your failure was not wilful (likely a harder test than for Americans living abroad).

You still have to file three years of returns and six years of FBARs. And that’s expensive. (I’ve charged at least $8,000 for simple disclosures. More complicated ones can be tens of thousands of dollars.)

Returns submitted under the Streamlined Program may be selected for audit, but they’ll be treated like any other return. And if your return is accepted, you’ll have the same communication with IRS as any other person. If there’s no change to the return and no tax or refund owing, there will be no communication.