Insight / 2 July 2016

Compliance for us taxpayers residing outside the united states

The purpose of this primer is to briefly outline key considerations for participation in the US Internal Revenue Service (‘’IRS’’) Streamlined Foreign Offshore Procedures, a compliance program available to U.S. taxpayers residing outside the United States. Many US taxpayers living abroad have been unaware of their US tax filing obligations and for many of these, the Streamlined Foreign Offshore Procedures is the best way of resolving outstanding tax non-compliance.

In considering whether to participate in the Streamlined Foreign Offshore Procedures (or other means of resolving outstanding tax non-compliance), US persons should be mindful of the US “Foreign Account Tax Compliance Act” or FATCA. Under FATCA, non-US financial institutions that either have entered into an agreement with the IRS or are subject to an agreement between the US and a foreign government are required to report information relating to accounts held by US persons. This information will be reported directly to the IRS or indirectly through a foreign government intermediary. Accordingly, FATCA will expose US persons with undeclared non-US accounts and assets, whether or not they voluntarily choose to disclose.

We urge US taxpayers in a non-complaint situation to consult with a US tax attorney to understand their various options. We strongly recommend that you consult first with a US attorney to ensure confidentiality of the information under the attorney-client privilege, which does not apply to non-attorneys. We have prepared this primer as an aid to understanding the Streamlined Foreign Offshore Procedures. But please note that this primer does not constitute legal or tax advice and may not be relied upon except for discussion purposes.

The Streamlined Foreign Offshore Procedures offers a waiver of most penalties for late filings and late payments of tax in exchange for filing three years of late US tax and information returns, six years of Foreign Bank Account Reports (widely known as “FBARs”), payment of late tax and interest, and a statement by the taxpayer, certifying that his or her non-compliance was non-willful.

What particularly distinguishes the Streamlined Foreign Offshore Procedures from other prior IRS compliance initiatives (besides its more generous terms) is this requirement of non-willfulness. Non-willfulness is defined here as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

[1] Belying the apparent simplicity of this definition is nearly one hundred years of tax jurisprudence deciding what is “willful conduct” and what is not. Because willfulness is a question of fact and dependent upon the taxpayer’s motivations, determining willfulness or its absence does not lend itself to formulaic approaches. A qualified lawyer can assist a US taxpayer in this regard.

In addressing US tax compliance issues, many US citizens are prompted to take stock of their relationship with the US in a broader context. Some dual nationals decide that renouncing US citizenship is for them. If you are considering renouncing your US citizenship, you should be aware that the US has an exit tax regime applicable to former citizens and certain other individuals. The rules of the exit tax regime are beyond the scope of this primer, but for some individuals the exit tax regime can be avoided if the person has been US tax compliant for the past five years (in addition to meeting other requirements). One common strategy is to file five years of tax returns under the Streamlined Foreign Offshore Procedures (instead of the three years of tax returns required by this program) and then to renounce US citizenship.

[1] IRS Form 14653, “Certification by U.S. Person Residing Outside the United States for Streamlined Foreign Offshore Procedures” .
(February 2016)

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