TOO MUCH TIME IN THE U.S. CAN JEOPARDIZE IRS AMNESTY
Currently, over 9 million U.S. citizens are living outside the United States. More and more expats are beginning to realize that their U.S. tax obligations did not end upon their move abroad. Many believe, correctly, that their past delinquency was an honest mistake, a result of non-willful conduct. If this is the case, the IRS tax amnesty program known as the Streamlined Procedures offers a great way to clean up a non-compliant history.
The Streamlined amnesty program has two major advantages for expats who have not been filing with the IRS:
First, importantly, the eligibility standard for the program is quite low. The IRS has to find that your conduct was merely “non-willful.” This contrasts with the general “reasonable cause” standard for defending against penalties, which requires a positive showing of cause for not filing, rather than an explanation of how the non-filing was not intentional.
Second, if you qualify for the program, the IRS will potentially waive all penalties that would otherwise apply to your late filings.
The rules for participating in the Streamlined Procedures can be tricky, however, and spending too much time in the U.S. can jeopardize your eligibility. In this blog, we review the Streamlined program’s eligibility rules and share with you a typical fact pattern where too much time spent in the U.S. can be a deal breaker.
THE STREAMLINED PROCEDURES – OFFSHORE VERSUS DOMESTIC PROGRAMS
According to the IRS, a U.S. citizen living abroad qualifies for the foreign offshore procedures 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).
If you do not pass the above tests, then under the domestic offshore procedures, you cannot participate in the Streamlined Procedures if you have failed to file a U.S. income tax return in any of the three most recent tax years. In contrast, under the friendlier foreign offshore procedures, a person that has been similarly delinquent can participate in the program.
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.
THE EXPAT WHO SPENT TOO MUCH TIME IN THE U.S.
With these rules in mind, we can analyze the following typical fact pattern of a so-called Canadian “snowbird”:
For a number of years, Mr. Jones, a dual U.S. and Canadian citizen, has lived in Canada for ten and half months out of the year, and during the remainder of the year, has vacationed in the U.S. with his family.
Mr. Jones has filed returns in Canada, but has not been filing U.S. tax returns, mistakenly believing that he has no requirement because he primarily lives and solely works in Canada.
Under this fact pattern, unfortunately, Mr. Jones does not qualify for the Streamlined amnesty program 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).
Mr. Jones does, of course, have the option of simply late filing outside the Streamlined program in order to catch up with his filing obligations. But keep in mind that Mr. Jones, in that case, would not benefit from the lower “non-willful standard” to combat penalties and therefore should expect to be penalized unless he has a strong reasonable cause defense that is accepted by the IRS.
THE TAKEAWAY FOR U.S. EXPATS
For expats looking to come clean with the IRS, the Streamlined Procedures are a terrific option for those who qualify. Expats should keep in mind, however, that other amnesty options may be available as well, depending on your situation. Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances.
Our experts at Expat Tax Professionals are available to help discuss your options and guide you through each step of the disclosure process.