Streamlined Program Leaves Snowbirds Out in the Cold
For many U.S. expats who are delinquent in their expat tax filings, the Streamlined Procedures offer a great solution for catching up with limited or no penalties. Due to the Streamlined program’s qualification requirements, however, American citizens living in Canada, or other countries, who regularly visit the U.S. may find it particularly difficult to participate in the program.
The Streamlined Procedures
The Streamlined Procedures are designed for delinquent taxpayers who can certify that their failure to previously report all income, pay all tax, and submit all required tax information returns, including FBARs, resulted from non-willful conduct.
There are two types of Streamlined Procedures, 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”).
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).
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). The participant is required to pay only the following:
- Unpaid taxes
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:
1. 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).
2. Further, even if the taxpayers qualify, 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).
Table Summary of Main Amnesty Programs
The Case of the Canadian Snowbird
With these rules in mind, a U.S. citizen who hasn’t been filing but who regularly visits the U.S. will find it very difficult to qualify under either the foreign or domestic Streamlined Procedures and may have to find another solution (for example, the more unfriendly OVDP program).
Take the following example:
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 does not qualify under the foreign 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).
The Takeaway for U.S. Expats
While the Streamlined program qualification rules seem at first to be relatively intuitive, our experience with clients has been that each individual has a unique story to tell, and each story requires a unique interpretation and analysis.
For Canadian snowbirds and other similarly situated U.S. expats, alternative solutions may need to be explored in order to find the best way to catch up with the IRS. If you are a delinquent taxpayer living abroad, a number of options are currently available to you, including and in addition to the Streamlined Procedures. Our experts at Expat Tax Professionals are available to help discuss your options and implement the option that is best for you.
By Ephraim Moss, Esq. & Joshua Ashman, CPA