Saturday, September 1, 2012

IRS Instructions for Streamlined Procedure for U.S. NonResidents (9/1/12)

The IRS has published the instructions for the program it originally announced for nonresidents in late June.  For the original announcement, my prior blog, IRS Announces Penalty Mitigation for Super Minnow US Taxpayers Living Abroad; RRSP (6/26/12), here.  The new instructions are Instructions for New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers (IRS website), here, and the required questionnaire that must be submitted, titled Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers Questionnaire is here.  The instructions are short but I offer the following in the hope that it is helpful to readers of this blog

Treaty Form 8891 Relief.  The announcement includes the IRS's decision to permit a request for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty.  This will impact most prominently the Canadian RRSPs. This relief will be available also under the Offshore Voluntary Disclosure Program as well.

Eligibility.  The best presentation of the eligibility requirements is on the questionnaire that a taxpayer must submit.  The taxpayer qualifies only if each of the following questions answered No.
1.  Have you resided in the U.S. for any period of time since January 1, 2009?
2.  Have you filed a U.S. tax return for tax year 2009 or later?
3.  Do you owe more than $1,500 in U.S. tax on any of the tax returns you are submitting through this program?
4.  If you are submitting an amended return (Form 1040X) solely for the purpose of requesting a retroactive deferral of income on Form 8891, are there any adjustments reported on the amended return to income, deductions, credits or tax? 
The instructions caution:
Amended returns submitted through this program will be treated as high risk returns and subject to examination, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty.
Compliance Risk Analysis.  The IRS says:
The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.
Submissions not in the low risk category "will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program."

Criminal Prosecution:  The instructions caution:
Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer's particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. For additional information go to the OVDP page. It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. It should also be noted that taxpayers who are ineligible to use OVDP are also ineligible to participate in this procedure.

Required Submissions:  The instructions contain a list of the documents that must be submitted with the package.

JAT Comments:

1.  It appears to me that the eligibility requirements alone limit this relief to a small set of taxpayers who would likely not be at high risk of criminal prosecution and, also, of significant audit activity if they did not come into this streamlined program.  Nevertheless, these taxpayers considering this streamline procedure should consider especially their potential criminal risks; this will likely require that they engage counsel qualified to assess criminal risks.  It seems to me strange that the IRS would adopt a minnow program without more certainty so that minnows could get into the program without having to engage counsel for a risk analysis that could be expensive relative to their situations and the tax revenue involved.

2.  In the same vein, the amorphous compliance risk analysis might give taxpayers some concern because taxpayers will not know how it is applied.

3. The statement that submissions not in the low risk category will be subject to audit in a manner similar to the OVDP opt outs, raises the inference is that the audit process, both in and out of OVDP opt out, is the same; if this inference is correct, this should be considered by those deciding whether to go into OVDP in the first place with the expectation of opting out, in which case they would achieve the same result as an audit without any benefit for having voluntarily opening the kimono in OVDP.

Other Comments:

Shamik Trivedi, Streamlined Procedures for Low-Risk FBAR Filers Might Not Have Wide Application, 2012 TNT 171-4 (9/4/12; appearing 9/1/12).  Here are a few excerpts
Practitioners * * * told Tax Analysts that the criteria determining low-risk status are so narrow that few taxpayers are likely to qualify, and the program may in effect be restricted mainly to those taxpayers owning Canadian registered retirement savings plans (RRSPs). 
* * * *
Practitioners said the streamlined procedures preclude numerous potential applicants to the program, save for those Canadians with RRSPs.
* * * * 
Barbara T. Kaplan of Greenberg Traurig LLP said that in its new procedures, the IRS has "carved out a very narrow exception," adding, "It's probably most useful for those people like Canadians who had deferred compensation arrangements for which they didn't make elections timely. . . . If that's their only noncompliance, this is going to be a very easy way for them to come into compliance and not lose those benefits."
* * * * 
"How many people are going to pop their heads out?"
"If the IRS is trying to bring more people into the system, to get these nonresidents to come into full compliance, I still think you have to make it simpler, and I think you have to make it less costly," Elber [Niles A. Elber of Caplin & Drysdale] said. "I don't really see that coming out of this particular process as it's been set up."
Robert W. Wood, Newest Offshore IRS Amnesty Not for Everyone (Forbes 9/1/12), here:


  1. It would have been really nice if they had had this back in 2009. It would have saved me and the IRS countless hours. Too bad that it took the IRS so long to think of this.

  2. Count me in the skeptical class on this program. Too narrow of criteria for what the IRS determines is low risk, and too much risk that they will define "reasonable cause" differently than the way you do.

    A Minnow abroad is still going to have some very consequential cost in LCUs and professional advice as what to do. Filing 3 years of returns and 6 years of FBARs is not just a weekend project. Nothing is simple or easy with the IRS. They love their technical details, qualifiers and hard-line thresholds. You have to approach this with that nursery rhyme in mind, "come into my parlor says the spider to the fly."
    Also, as a side note, the TAS is now restricting the criteria for the help it can provide in the future. Although item 4 does seem to be directed toward the OVDI "one size fits all" programs, or at least that is how I read the coded language. Hummmm.

  3. If TAS does not help to resolve the difference for me, I am going to take a die-hard action --- all the way to force IRS to take my case to DOJ. Ya, make my day !

  4. Hey Jack, I was pouring through the Questionnaire for IRS’s new
    Streamlined Procedure and question that requires your criminal-tax wisdom:

    Question 12 asks “Did the taxpayer know he had a FBAR filing
    obligation when he failed to file an FBAR?”

    1. 1. This is an especially troubling question because willfully failing
    to file an FBAR can result in criminal sanctions. 31.U.S.C. 5322(a), 5322(b),
    and 18 U.S.C. 1001.

    2. 2. Given the amount of media attention given to FBAR filing
    obligations, it may be difficult to answer this question truthfully without
    incriminating oneself.

    3. 3. This question is even more troubling since participation in the
    streamlined procedure does not include immunity from criminal prosecution.
    Therefore, falsely answering this question “No” could result in a criminal
    perjury charge, but correctly answering this question “Yes” could result in
    criminal charges.

    4. 4. Query whether one could invoke the 5th Amendment right
    against self-incrimination and refuse to answer this question and, if doing so,
    would disqualify the taxpayer from the streamlined procedure. If invoking the 5th
    results in disqualification, is that not tantamount to a presumption of guilt
    (or at least culpability) which is antithetical to the 5th

    Has the IRS created a Morton’s Fork by including this question?

  5. Another "unicorn" program with narrowly defined arbitrary criteria. Why the 2009 cutoff date, or the $1500 amount? What about accounts outside the country of residence? I cannot imagine how anyone changing residence from the US to Country X would have all his money in the US through the last day of residence and all in Country X the first day there. Only someone whose only assets are in his wallet and has no bank account.
    Do they not understand that people can have bank accounts or inherit funds from relatives outside their country of residence? I have relatives in multiple countries, and am not unique. This is really not much different than most people in the US who have bank accounts in a different state than where they reside or could inherit from someone in another state.
    Anyone who meets these vary narrow criteria is probably a forward disclosure candidate in the first place.

  6. What's on the top of form 1040? Checking the box on whether you want $1 to go to the Presidential election. What's at the bottom of Sched B in tiny type? The foreign accounts/FBAR info.

    Which is more prominent? Which is the more important issue?

    Why not make foreign reporting issues clear, as in just one sentence, "FOREIGN INCOME AND ASSETS MUST BE REPORTED. SEE FORM TDF 90-22.1 AND NEW FORM 8938."


    That way honest taxpayers will see it and will have a chance to comply.

    How much publicity has been given to form 8938? Less than the FBAR! Had I not joined OVDI and read this blog I would likely not have found out about 8938 for a few years.

  7. Roy, your comments are quite good. As I said, they create a program which appears to be for minnows, have put sufficient potential land mines in it that the taxpayer needs counsel -- experienced counsel -- to avoid the land mines.

    Thanks for your comments,

    Jack Townsend

  8. Thanks Jack,

    Another troubling question on the questionnaire is #9:

    During the
    above-listed tax years did the taxpayer know that he was a U.S. citizen or
    resident alien? If “yes” did the taxpayer disclose to the tax professional the
    he was a U.S. citizen or resident alien?

    This question appears to be
    probing the taxpayer’s eligibility for the reduced penalty available in the
    OVDI (FAQ 52) and the OVDP (FAQ 52).

    More troubling is the second
    part of this question, which involves confidentiality privilege relating to
    taxpayer communications and which is specifically authorized by 26 U.S.C. 7525
    and which the IRS must allow the taxpayer to assert per LRG 57(16)662.72.

    By answering this question, either in the
    affirmative or negative, could result in a waiver of the tax-preparer privilege
    or even attorney-client privilege.

    I agree with you, although this program purports to be designed for minnows, the uncertainties and traps make it far from a DIY solution.

  9. There seems to be a contradiction in the IRS instructions. They state: “This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 and who have not filed a U.S. tax return during the same period. These taxpayers must present a low level of compliance risk as described below.
    Amended returns submitted through this program will be treated as high risk returns and subject to examination, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty.”
    On the one hand, it says that if one filed a 2009 return, one is ineligible for the program. On other hand, it states that one may file an amended return in order to submit to Form 8891. Is the Form 8891 an exception to the prior rule?
    Also, do you know if there is a number in the IRS which specializes in this program?
    Mark Feldman,
    Tax Attorney at

  10. I am a dual citizen and sold my land overseas, opened an account and deposited the money ( 300k ) in it late 2010. I had no clue about FBAR. I want to enter the OVDI now but why should I be treated and pay a 27.5% penalty like others who had accounts from 2003?

  11. There are some issues you need to be aware of. If you join OVDI, you must include in the "in lieu of" penalty calculation any foreign asset that is U.S. tax noncompliant. Thus, depending upon whether there was noncompliance with respect to your foreign real estate, you will have to include the foreign real estate in the "in lieu of" penalty calculation. Note, in this regard, that, assuming you had no entities involved (so no U.S. filing obligations or associated penalties), the only penalty you could be subject to other than the income tax penalty is the FBAR penalty. So, in a very real sense, the "in lieu of" penalty is practically an in lieu of FBAR penalty. That penalty is quite steep -- as you note, 27 1/2% of the highest year. With a $300,000 high year (if indeed that were the high year), the "in lieu of" penalty would exceed $80,000, quite a penalty to pay on top of the 20% accuracy related penalty on the income tax.

    If you do join the program, you can opt out of the penalty provisions of the program and take an audit where much more nuance can be considered. However, that needs to be done only in consultation with an attorney. You might well be a good candidate to opt out if you get in.

    Then, of course, if going in you know you want to opt out, then you should at least consider whether you should not even get in. This is a nuanced observation, but essentially the reasoning is that, if you opt out, you will be subject to a standard audit and get the results that a standard audit would produce. If you don't get in at all and comply on a go-forward basis, the worst that will happen is that you may be audited (not certain) and if you do you will get the standard audit result. And, if you join, you have to virtually do all the core audit work for the IRS in the submissions you make in the program, whereas if you don't get in, the IRS will have to do a large part of that work and its ability to do such a from the start audit for a lot of taxpayers may be limited. Which means that many people declining to join may end up with a better result with a downside of only the same result as joining and opting out. Of course, the audit can be a substantial negative, but audits really aren't that bad (they are not fun, but they are not that bad).

    Jack Townsend

  12. The more I think about this program, the more I am convinced that it is just a political process, to hold and trumpet that Commissioner Shulman has responded to the concerns of Nina Olson's Directives on the OVDP, and her reports to Congress. This is to deflect criticism as he exits in November. I.E., I have listened and responded.

    However, it is deliberately drawn so narrowly by those on his staff that do these programs, and so full of traps, that it really is not designed to provide amnesty or increase compliance in any measurable manner.

    They just want to say they did something, and especially make it seem to the Canadians that they responded to Minister of Finance, James Flahetry who was pretty vocal about the IRS over reach. Here is something that was just on CTV

    The IRS really wants folks to enter the OVDI, or is it OVDP now, and pay the penalties, rather than actually do this streamline program. It is not something I could recommend, except to the extra super minnow who maybe is just starting out life (young), with nothing complex yet in their financial lives, and very limited assets. Absolutely not a DIY. I bet few, but the hapless naive will apply.

  13. At least, they did remove RRSP from the penalty base. I would have been very happy a year ago --- but still after reading IRS labeling on 30,000 offshore tax cheats -- I don't want be part of it. That is not just money, it is the destruction of minnows spirit who are simply trying to correct their mistakes to become compliance.

  14. If I do not join I get detected in 2014/2015 I run the risk of getting hit by a 50% or 100K which ever larger ( 150k in my case)..did I get it wrong?

  15. I think your analysis should go something like this (answering each question and proceeding as indicated by the answer):

    1. Do you have material criminal risk? You may need an attorney to help you assess that risk. If the answer is yes or you don't want to take the ris, get into the program. If the answer is no or you do want to take the risk, then go to question 1.

    2. For each foreign bank involved, has the bank involved either (a) notified you that they are turning over your information or (b) there are news stories that the IRS has targeted the bank for its extreme attention. There are a number of Swiss banks who fit the (b) profile. If the answer is yes, get into the program. If the answer is no, then go to question 3.

    3. Do you want certainty as to the result. If the answer is yes, get into the program. You will later have an opportunity to opt out of the civil penalty structure in the program and take an audit if, based on the information then available, you think you can get a better audit result. In the meantime, you will have locked in the maximum cost. In this regard, you should note that, even in the worst cases that DOJ Tax has prosecuted, the FBAR penalty has been 50% for the highest year. The difference between what you pay in the program and if you had a bad enough profile to be prosecuted is 22.5%. Since, you have reached this question, you have already determined that you do not have material criminal risk, so it is not clear at all that you are at real risk of being assessed a 50% FBAR penalty. On audit, you would likely get less. So, if you are willing to live with uncertainty and without the guaranteed lock-in of 27.5%, go to item 4.

    4. At this point, you have chosen not to get into the program. You then must for all future filings be scrupulously accurate and complete, including filing each future FBAR on or before the date due. (Remember again timely mailing is not timely filing for the FBAR.) This way, your only exposure is for past filings. You then have to make the decision as to whether to file amended returns and delinquent FBARs for some number of years or whether to do nothing about the past. That is not an easy choice for some people who just want to correct the past within the statute of limitations period. (Determining the statute of limitations requires some work because of exceptions to the 3-year rule that may apply.) But, using amended returns and delinquent FBARs to salve the conscience would likely increase the audit risks. And, the IRS appears to offer no benefit or encouragement to those without material criminal risk to join the program or file amended returns and delinquent FBARs. But, again, this is not an easy choice.

    There are several key points in this decision process that I recommend you seek counsel and refer you to the list in the right hand column for names of attorneys who competently do this work. Those points are: (1) whether to join the program; (2) if you do join the program, whether to opt out of the program; and (3) if you don't join the program, which is the better strategy for you -- i.e., either file some number of amended returns and delinquent FBARs or do not correct the past, in either case scrupulously meeting your obligations in the future.


    Jack Townsend

  16. Jack,

    I am deeply grateful for the time you spent clarifying these options. I will seek counsel asap. Thanks again

  17. Good luck to you, and I should also say good decisions to you!

    Jack Townsend

  18. In the case in which you are in a position to decide whether to do forward compliance or fix some or all past years, one consideration (which is secondary to the legal aspects which Jack has listed) is the cost of preparing amended returns which can be substantial.

  19. The criteria are so stringent and for those who are obviously minnows, that anyone eligible for this program could quite likely be better off with quiet or forward disclosure.

  20. I suspect that is right. But, of course, they may have to undergo audits. Then again, they may not.

    Jack Townsend

  21. Jack:
    Which 6 years of FBARs are they asking for? Is it 2005 to 2010 + 2011, OR, is it 2006 to 2011?

  22. Hi Jack. I am thinking about this procedure. One question I have is what years would be included in the 6 years of FBARs that are required. Could you clarify whether it would be 05-2010 inclusive PLUS 2011, or just 06-2011 inclusive?

  23. The questionnaire asks if you're claiming a refund. My understanding is that if you are claiming a refund, the IRS will disqualify you from this streamlined process. Some returns for 2009 and 2010 may show a refund is owed to the filer as a result of the economic stimulus program. How can the filer demonstrate on the return that you are not asking for the refund that the calculations demonstrate and show as owed to you?

  24. What I find bizarre about the streamlined process is that it's not available for those who *did* file tax forms, and didn't file FBARs. So filing a tax form and trying to be compliant actually makes the situation worse for you.

  25. very depressed expatOctober 21, 2012 at 12:40 PM

    Jack, your thoughts greatly desired re:
    Trying to become compliant, I had filed the 2011 FBAR timely this year, in order not to become further delinquent, while awaiting the final details of the streamlined procedure to be released. Did not file a return for '09-'11, but did file an request for an extension to file the 2011 return - pending the details of the streamlined process - which were not made available until late August 2012.

    So, 2011 FBAR filed timely. And if correct, 2005 FBAR SOL is now expired? So which FBARs to submit with the streamlined package? 2006-2010, with copy of the 2011 FBAR already submitted (or with note re the timely 2011 FBAR?)? It is unclear as to which 6 FBARs to file in this streamlined process - as only 5 'open' years still outstanding for me. Can/would they still want 2005 even though it has expired?

    As no returns filed for 2009-2011 (only application for extension to file the 2011), it looks as if I would qualify for this process as low risk. But, don't know which FBARs to include?

    Advice/comments much appreciated.

  26. Jack,
    Is there a method of transferring from the OVDI, for minnows and shrimp, into the streamlined compliance process, without going through the full opt-out procedure? If the IRS can see that the individual is a shrimp who jumped into OVDI because the IRS kept saying that they did not approve of quiet disclosures, and that they'd come after those they discovered doing a quiet disclosure - why make them go through an elaborate and costly opt-out? If this streamlined option had existed a year ago, many people would not have chosen OVDI.

  27. I don't know the answer to the question. I would think that if the taxpayer qualifies for the streamlined procedure and can demonstrate that, the IRS would let them use that procedure. I suggest that you ask your agent.

    Also, I hope that if others know the answer to the question, they will post it here.


    Jack Townsend

  28. A practitioner just emailed me that he is advised by the IRS "that, if a taxpayer is in 2009 OVDP or 2011 OVDI, it is necessary to opt out to pursue the Streamlined Program."

    Jack Townsend

  29. We called the OVDI Hotline within the past month and were told that if an OVDI participant wants to be considered under the Streamlined Program, it is possible. While the words "opt out" were never mentioned, the instructions we were given appear to be equivalent to opting out. We were told the following two ways to request consideration under the streamlined program, plus we were told another factor that is very important. I list these below:

    1) Someone in OVDI who has not yet been assigned to an examiner can request that their case be considered in the Streamlined Program by writing a letter to the OVDI program. There was no information on how this letter would be handled or when it would be handled. Our personal view is that given the lack of coordination evidenced thus far with other parts of the IRS, it might be risky to assume any automatic transfer to this program on the basis of the letter sent before an examiner is assigned.

    2) Once an OVDI participant has an examiner, they may request that they be moved into the Streamlined program by writing a letter to the OVDI examiner.

    3) Since OVDI participants "voluntarily" gave information about 8 years of taxes, if anything is owed for the 8 years, these 8 years will also be considered as part of the Streamlined Procedure and expected to be paid. The years under consideration will NOT be reduced to 3 years. The OVDI Hotline gave no guidance regarding if all requirements, especially the $1500 yearly limit owed on taxes applied to all 8 years, or only the last three years, as is in the Streamlined program. It appears, as more years could be taken into consideration for OVDI conversions to the Streamlined Program, that the requirements for someone in OVDI to switch to the Streamlined program are a lot harder than for someone who waited until 2012 to try to become compliant. It would be good if there could be some clarity on this.

  30. anon5percent, bless you for sharing information here.
    , and,


    there any guidance that says that taxpayers in similar circumstances
    should be treated similarly? It is very clear that those with no
    criminal risk or very bad facts are much better off applying to the
    streamlined program than they were in OVDI - just in terms of cost, and
    years to submit up front. 3 years returns in streamlined, vs. 8 in OVDI.
    And why should those minnows who went in OVDI ill-advisedly or through
    panic, still have it harder (8 years) than those minnows who waited -
    and either used the December 2011 factsheet (6 yrs returns, 6 FBARs) or
    the streamlined (3 years returns, 6 FBARs)? It seems very unfair now
    that the IRS is tacitly agreeing that there is a problem with one-size
    fits all, but will continue to be more stringent with those that came
    forward earlier - and will not extend the same terms to them as to those
    who are just now applying to the streamlined process. Why not just say
    - okay, same terms for all?

  31. Jack,

    You laid the analysis very well with points 1, 2 ,3 and 4.

    - Since your analysis 2 years ago the GAO report has come out. Does that change how you feel about QD/GF?

    - Hypothetically if an old client with no criminal risk who had gone QD/GF were to come to you today, would you err on the side of recommending OVDP because IRS has made grave threats against QD/GF filers?

    Thank you.


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