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Streamlined Procedures for Nonresidents of the US — Not as Easy as It Looks

Streamlined Procedures for Nonresidents of the US — Not as Easy as It Looks
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Wednesday, 01 August 2018 10:56 AM Current | Bio | Archive

The Internal Revenue Service’s Streamlined Procedures are a popular means for U.S. taxpayers to come into compliance with U.S. laws concerning foreign financial accounts.

The Streamlined Procedures are appropriate for a U.S. taxpayer whose noncompliance was nonwillful, and who has unreported tax with respect to foreign financial accounts. A U.S. taxpayer who does not owe tax with respect to foreign financial accounts can come into compliance by means of the delinquent FBAR filing procedures or delinquent international information return filing procedures.

A “willful” taxpayer is one who maintained foreign financial accounts for the purpose of evading U.S. income tax. These facts evince willfulness:

  • Transferring funds overseas for the purpose of investing them there, and not reporting the income on a U.S. income tax return.
  • Holding foreign financial accounts in a shell corporation to disguise beneficial ownership of them.
  • Actively managing foreign financial assets while not reporting the income therefrom on a U.S. income tax return.
  • Receiving distributions from foreign accounts, directly, or surreptitiously by means of a credit card.
  • Failing to report income generated by foreign financial accounts on any income tax return, either U.S. or foreign.
  • Filing a U.S. income tax return with a Schedule B on which “No” is falsely checked to the question of whether the taxpayer had a financial interest in, or signature authority over, one or more foreign financial accounts during the year, unless the tax return was prepared by a professional preparer, and the taxpayer did not review the Schedule B before signing the return.
  • Falsely checking “No” to a question on an accountant’s organizer asking whether the taxpayer had a financial interest in, or signature authority over, one or more foreign financial accounts.Accountants’ organizers are not in taxpayers’ best interests, as explained in this post.

A taxpayer who works as a tax preparer or tax adviser is more readily characterized as willful.

Under the Streamlined Procedures, the taxpayer must file FBARs or amended FBARs as needed for the last six years; file U.S. income tax returns or amended income tax returns as needed for the last three years; and pay any tax owing on the income tax returns, and interest owing on the tax.  In addition, the taxpayer must pay a “miscellaneous Title 26 offshore penalty” equal to 5 percent of the high aggregate balance of the taxpayer’s foreign financial accounts over the six-year disclosure period. But there is no penalty for a taxpayer who is a nonresident of the United States.

To qualify as a nonresident of the United States for this purpose, a U.S. citizen or lawful permanent resident (green card holder) must satisfy both a quantitative test and a qualitative test. Under the quantitative test, the U.S. citizen or green card holder must have been physically outside of the United States for at least 330 full days in any one or more of the three most recent years for which the U.S. tax return due date (or properly applied for extended due date) has passed.

Under the qualitative test, the U.S. citizen or green card holder must not have had a U.S. abode in the three most recent years for which the U.S. tax return due date (or properly applied for extended due date) has passed. “Abode” or “tax home” is the same test as obtains under Internal Revenue Code Sections 911(d)(3) and 162(a)(2).  An individual’s tax home for this purpose is “the vicinity of the taxpayer's principal place of employment and not where his or her personal residence is located.” These facts indicate a foreign abode:

  • Foreign employment of indefinite duration.
  • Selling or renting the taxpayer’s home in the United States.
  • Moving the taxpayer’s spouse and children, if any, to the foreign work locale.
  • Establishing banking, medical, dental, and other personal service relationships in the foreign country.
  • Social, cultural engagement in the foreign country.
  • Voter registration in the foreign country, or issuance of a drivers license there.
  • Filing U.S. income tax returns specifying the taxpayer’s foreign residence address.Astonishingly, I have seen filed U.S. income tax returns claiming the IRC § 911(a) foreign earned income exclusion on Form 2555, Foreign Earned Income, specifying not a foreign address but a U.S. address for the taxpayer.

The qualitative test is much tougher to prove than the quantitative test.  It requires the taxpayer to essentially uproot his domicile to a foreign country.

For married taxpayers filing a joint income tax return, each of them must establish that his or her noncompliance was nonwillful, and satisfy both the quantitative test and the qualitative test of nonresidency.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.

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StephenJDunn
The Internal Revenue Service’s Streamlined Procedures are a popular means for U.S. taxpayers to come into compliance with U.S. laws concerning foreign financial accounts.
irs, streamlined procedures, nonresidents, us
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2018-56-01
Wednesday, 01 August 2018 10:56 AM
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