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TAX AMNESTY AND US TERRITORIES

July 31, 2022

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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Over the past decade or so, the Streamlined Procedures have become the most successful amnesty program for U.S. expats looking to come into compliance with the IRS.

The program is a perfect fit for delinquent taxpayers who can certify that their failure to previously report all income, pay all tax, and submit all required international tax information returns, including FBARs, resulted from non-willful conduct.

Importantly, however, there are two types of Streamlined Procedures, depending on one’s tax residency – one for U.S. taxpayers residing outside the United States (the “Foreign Offshore Procedures”), and the other for U.S. taxpayers residing in the United States (the “Domestic Offshore Procedures”).

The requirements and results differ between the two programs in certain important ways. Perhaps most significantly, the Domestic Offshore Procedures bear a 5% penalty on the highest aggregate balance/value of one’s foreign financial assets (while the Foreign Offshore Procedures have no such penalty).

The question this blog seeks to answer is – how do the Streamlined Procedures operate in the case of the U.S. territories?

First, some background on the two programs.

Streamlined Foreign Offshore Procedures

Under the Streamlined Foreign Offshore Procedures (taxpayers residing outside the United States), the taxpayer is required to submit:

  • 3 years of tax returns and information returns
  • 6 years of FBARs
  • Non-willful certification (Form 14653)

Under this program, the taxpayer avoids all of the penalties normally associated with delinquency (e.g., failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, FBAR penalties).

Streamlined Domestic Offshore Procedures

The Domestic Offshore Procedures (for taxpayers residing in the United States) have the same submission requirements as the Foreign Offshore Procedures, namely 3 tax returns, 6 FBARS, and the non-willful certification (Form 14654).

The Domestic Offshore Procedures differ from the Foreign Offshore Procedures in two main ways:

  • A domestic resident taxpayer that has failed to file a U.S. income tax return in any of the three most recent tax years cannot participate in the Domestic Offshore Procedures (while a foreign resident taxpayer that has been similarly delinquent can participate in the Foreign Offshore Procedures).
  • Only the Domestic Offshore Procedures bear a 5% penalty on the highest aggregate balance/value of one’s foreign financial assets.

The Streamlined Procedures Residency Rules

For purposes of determining whether a taxpayer resides inside or outside the United States for purposes of the Streamlined Procedures, the following rules apply:

A U.S. citizen or green card holder is considered to reside outside the United States if – in at least one year during the three-year period that tax returns must be submitted under the Streamlined Procedures – he or she both: (1) did not have a U.S. “abode” (generally, one’s home, habitation, residence, domicile, or place of dwelling); and (2) was physically outside the United States for at least 330 full days (meaning, the taxpayer did not spend more than 35 days in the United States).

In contrast, individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the so-called substantial presence test.

Streamlined Procedures in the US Territories

For those living in the U.S. territories, two interesting issues emerge. First, whether or not those born in the territories are considered U.S. citizens and, second, whether the U.S. territories are considered within the United States or without the United States for purposes of the amnesty program.

Regarding the first issue, citizenship will depend on which U.S. territory you were born in. Congress has conferred birthright citizenship, through legislation, to persons born in all inhabited territories (including Guam, Puerto Rico, and the U.S. Virgin Islands), except for American Samoa and Swains Island, who are granted the status of non-citizen-nationals.

Regarding the second issue, the IRS webpage describing the Streamlined Procedures specifically refers to Internal Revenue Code Section 911, and under the Section 911 regulations (Treas. Reg. 1.911-2), the term “United States” includes any territory under the sovereignty of the United States, including the territories of the United States. While this rule makes it more likely that those residing in the U.S. territories would need to utilize the Domestic Offshore Procedures, on the flip side, it means that their local assets shouldn’t be seen as foreign and therefore shouldn’t be subject to certain special international information reporting. For instance, according to the FBAR Reference Guide, a financial account located in any of the U.S. territories is considered a U.S. account and is therefore not reportable on the FBAR.

Given the complexities involved with the IRS amnesty programs, an Expat Tax Professional should be consulted to determine the best path to IRS compliance.

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