STREAMLINED PROCEDURES – THE ROLE OF RESIDENCY
As a U.S. expat, you may have heard about the latest and greatest IRS amnesty program available for delinquent U.S. taxpayers known as the “streamlined procedures.” What you may not know is that if you continue to spend a significant time in the U.S. each year, your eligibility for the procedures and your ability to obtain penalty-free relief may be in jeopardy.
The key issue here is “residency,” which separates the friendlier “foreign offshore” procedures (available for taxpayers residing outside the U.S.) from the harsher “domestic offshore” procedures (available for taxpayers residing in the U.S.)
For instance, 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. Further, even if you qualify, the domestic offshore procedures require you to pay a 5% penalty on the highest aggregate balance/value of your foreign financial assets, while the foreign offshore procedures have no such penalty.
Because residency plays such an important role in how the streamlined procedures function, the IRS has provided some guidance explaining the residency concept. According to the IRS, a U.S. expat qualifies as a non-resident 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).
Keeping these rules in mind, we can analyze the following typical fact pattern of a so-called Canadian “snowbird”:
Each year for the past many years, Mr. Xavier Patrick, a dual U.S. and Canadian citizen, has been physically present and gainfully employed in Canada for 10.5 months out of the year. During the remaining 1.5 months, Mr. Patrick has vacationed in the U.S. with his family. Mr. Patrick, thinking he has no connection to the U.S. other than his temporary physical presence, has filed returns in Canada, but has not filed U.S. tax returns for the past three years.
According to the IRS’s residency rules, Mr. Patrick would not qualify for the streamlined procedures because he has failed the 330-day physical presence test (and therefore would be required to qualify under the domestic offshore procedures) and he has not filed U.S. tax returns in any of the three previous tax years (and therefore does not qualify under the domestic offshore procedures). Further, even if Mr. Patrick had been filing U.S. returns and qualified for the domestic offshore procedures, he still may be subject to the 5% penalty tax.
If you are an expat considering the streamlined procedures, then it is critically important that you understand the requirements and relief available under your specific circumstances. Our expat professionals have helped many clients understand and participate in the streamlined procedures, both under the foreign and domestic offshore programs. We are available to help discuss your options and guide you through each step of the IRS streamlined program.
- The IRS guidance can be found at the following link: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States
- See generally IRS Publication 54 for a further discussion of the term. The publication can be found at the following link: http://www.irs.gov/pub/irs-pdf/p54.pdf
- It is interesting to note that for a time, many suggested that the reference in the IRS streamlined procedure guidance to Section 911 of the Internal Revenue Code (which deals with the foreign earned income exclusion) meant that there was a third prong of the residency requirement, namely the “bona fide residence test.” This test, which is based on facts and circumstances, would potentially broaden the scope of expats that could qualify under the foreign offshore procedures. However, the IRS has since clarified in a FAQ publication that Section 911 only applies for purposes of determining a taxpayer’s abode, and that satisfaction of the bona-fide foreign residence test does not result in a non-residency classification for purposes of the streamlined procedures. See http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures-for-U-S–Taxpayers-Residing-Outside-the-United-States-Frequently-Asked-Questions-and-Answers