Opportunity for US Non-resident Non-filers, Persons with Foreign Retirement Plans

By Jon Golub

As promised by the Internal Revenue Service (“IRS”) notice, dated June 26, 2012 (see IR-2012-65) (the “June Notice”), it has created a new program to both (i) help United States taxpayers residing overseas to come back into tax compliance and (ii) assist United States taxpayers in cleaning up foreign retirement plan issues. The new program was made effective as of September 1, and on August 31, 2012, the IRS published a notice (the “August Notice”) containing more details on the plan along with a questionnaire (the “Questionnaire”) that participants in the new program are required to submit.

According to the August Notice, United States taxpayers with a “low compliance risk” will be eligible for a streamlined procedure to come back into tax compliance. To be eligible, the United States taxpayer must have (i) resided outside of the United States since January 1, 2009 and (ii) not filed a United States tax return during the same period. The “low compliance risk” determination requires that the taxpayer have less than $1,500 in tax due in each year and no “high risk factors.”

If eligible, the United States taxpayer is required to file tax returns (including information reports) for the last three (3) years, include payment of the tax and interest due on such returns, and submit FBARS (i.e. Form TD F 90-22.1) for the last six (6) years. Beyond the tax and interest due, taxpayers using the streamlined procedure are not asked to pay any additional penalty. So that the IRS may determine the level of compliance risk, the United States taxpayer participant must also submit the Questionnaire.

Certain tax treaties between the United States and foreign countries (i.e. Canada permit a United States taxpayer to make an election to defer payment of United States income taxes on income earned in a foreign retirement plan. The deferral election for Canadian plans is ordinarily made on IRS Form 8891. Because many United States taxpayers were unaware of the availability of such election, they have since fallen into tax noncompliance with respect to United States taxation of the earnings in such foreign retirement plans. According to the August Notice, any taxpayer seeking relief for the failure to make the election can make a late election to defer such income by submitting (i) a statement requesting an extension of time to make the election and identifying applicable treaty provisions allowing for such election, (ii) a Form 8891, if applicable, (iii) a signed statement including specific information on the failure to make the election, and (iv) an amended tax return for the year in which the deferral is made effective, if applicable.

The August Notice further warns taxpayers that the streamlined procedure does not provide protection from criminal prosecution and may not be appropriate for many taxpayers with foreign income and reporting issues; such taxpayers may want to consider the Offshore Voluntary Disclosure Program (OVDP) announced on January 9, 2012.

The August Notice and a link to the Questionnaire can be found at: http://www.irs.gov/uac/Instructions-for-New-Streamlined-Filing-Compliance-Procedures-for-Non-Resident-Non-Filer-US-Taxpayers

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City. Read My Full Bio

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