Understanding IRS Compliance for Expats and Foreign Accounts
Whether or not you are a bank account holder in a foreign nation, the following article will help shed light on how the IRS is now targeting individuals for new compliance measures.
Are you an American expat and haven’t filed a tax return in years? Have you been living overseas and have recently become aware of your filing obligations?
If you are a U.S. citizen or green card holder living abroad and have years of unfiled tax returns, you are not alone. The IRS has recognized that many taxpayers overseas have not timely filed their U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form 114 (formerly TD F 90-22.1) and is offering a special procedure to get delinquent taxpayers back on track.
The IRS presents a very attractive opportunity to come into compliance in a manner that avoids possible IRS enforcement action and the significant penalties that accompany it.
Streamlined Filing Compliance Procedures
The IRS expanded and changed the Streamlined Filing Compliance Procedures first implemented on September 1, 2012. The program now includes not only individual taxpayers who reside outside the United States but also U.S. individual taxpayers residing in the United States.
The Two Key Programs Are:
- Streamlined Foreign Offshore Procedure
- The Streamlined Domestic Offshore Program
Canadians Caught in the FBAR
Canadians caught by the foregoing would be:
- Snowbirds that are consistently present in the U.S. about 120 days in three consecutive years
- Those working in the U.S. on a visa/work permit that fall into residency rules
The FBAR filing requirement does not take a treaty-based disclosure (IRS Form 8833) into account. Only IRS Form 8938 (‘Statement of Foreign Financial Assets’) that came out in 2011 (and is attached to a U.S. tax return if there is a requirement to file that return) has, in its regulations, an exemption from filing as it respects the foregoing treaty disclosure.
Other IRS Information Returns to Consider:
- IRS Form 5471 for your interest in your Canadian corporation
- IRS Form 3520/3520-A for your interests in a Canadian trust
- IRS Form 8865 for your interest in a Canadian partnership
These forms would come under their respective filing requirements. Regulations need to be examined to determine if there is a simplified filing requirement for the information return.
Without a successful reasonable cause defense, a minimum $10,000 U.S. penalty for unfiled information returns may be levied.
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Frequently Asked Questions
What is the Streamlined Filing Compliance Procedure?
The Streamlined Filing Compliance Procedure is a program by the IRS that helps U.S. taxpayers, including expats, become compliant with their tax filing obligations. It allows eligible individuals to file overdue tax returns and FBARs without facing severe penalties or enforcement actions.
Who qualifies for the Streamlined Foreign Offshore Procedure?
This program is for U.S. citizens or green card holders living outside the United States who have failed to file required tax documents. To qualify, individuals must certify that their failure to file was non-willful.
What is the FBAR and who needs to file it?
The FBAR (Form 114) is a required filing for U.S. persons who have financial interests in, or signature authority over, foreign financial accounts exceeding $10,000 in aggregate. This applies even if they reside abroad or share accounts with non-U.S. persons.
Are Canadians affected by IRS foreign account reporting?
Yes, Canadians who meet certain U.S. residency criteria, like snowbirds or temporary workers, may need to file FBARs and other IRS forms such as Form 8938, regardless of Canadian treaty positions.
What are the penalties for not filing required IRS information returns?
If certain foreign asset forms (like Forms 5471, 3520, or 8865) are not filed, and there’s no reasonable cause defense, the IRS may impose a penalty starting at $10,000 per unfiled return. It’s critical to assess obligations early to avoid these fines.