Americans who haven’t filed U.S. tax returns or reported foreign assets 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 to help achieve this goal. Here are the key changes:
01 The program is broader, so more taxpayers will be eligible.
Previously, applicants 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 the taxpayer has to do is certify that his failure to file was non-wilful. Most people will meet this test.
Previously, the taxpayer 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 2011 to 2013):
- No U.S. abode.
- The person was physically outside the U.S. for at least 330 full days during the year.
A U.S. citizen who acts like a snowbird (spending more than one month a year in the U.S.) isn’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 they 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. Someone who stayed in the U.S. 122 days per year, for three years running, would meet the test.
Taxpayers who have used “quiet disclosure” and not been audited are now eligible. Quiet disclosure is the practice of filing missing returns, or amending returns that didn’t report all of a taxpayer’s 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.
02 Taxpayers using this program have certainty that their penalties will be eliminated.
In effect, the program is an amnesty.
03 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.
04 The program now extends to Americans living in the U.S.
- Those taxpayers will be subject to a penalty of 5% of the foreign financial assets.
- They’ll still have to demonstrate their failure was not wilful (likely a harder test than for Americans living abroad).
Taxpayers 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.)
Returns submitted under the Streamlined Program may be selected for audit, but they’ll be treated like any other return. And taxpayers whose returns are accepted will 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.
Ensure American clients have filed their U.S. tax returns and reported assets.