2014 Changes to Streamlined Program spells trouble for Canadian “Snow Birds”
On June 8th 2014, the IRS announced updates to the Streamlined program that will help many Americans achieve tax compliance with their U.S. tax filling requirements. There are now two different Streamlined programs. The Streamlined Foreign Offshore Procedures (SFOP) for taxpayers meeting the non-residency requirements and the Streamlined Domestic Offshore Procedures (SDOP) for tax payers who do not meet the non-residency requirements under the SFOP rules.
Gone are the requirements to owe less than $1500 of US tax in any year and complete a questionnaire as prerequisitse to entering the Streamlined program. Now in order to be eligible to participate in the SFOP, taxpayers must:
- Meet the non-residency requirements (if married taxpayers want to file joint tax returns, both spouses must meet the applicable non-residency requirement). The taxpayer will meet the non-residency requirement if in any one or more of the most recent three years for which the U.S. tax return due date has passed they meet the following two tests;
- the taxpayer did not have a U.S. abode and;
- the taxpayer has been physically outside the United States for at least 330 full days. This means that the individual did not spend more than a maximum of 35 days (36 days in a leap year) in the United States.
- have failed to report income from a foreign financial asset and pay U.S. tax, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) report of foreign bank and financial accounts or an international information return regarding the foreign financial asset; and
- certify under penalty of perjury that the failure resulted from non-willful conduct
Non-willful conduct is 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.
Participating in the SFOP means the taxpayers will not be assessed any penalty for delinquent or amended tax returns, accompanying information returns and FBARs.
Taxpayers, who cannot participate in SFOP due to the inability to meet the non-residency requirement, may be able to file under the SDOP to disclose foreign investment income or to file deliquent FBAR’s, but only if they have previously filed tax returns. However unlike the SFOP, under the SDOP a taxpayer will be required to pay a 5% penalty on the foreign financial assets they failed to report on either Form 8938 or their FBAR.
In order to be eligible to participate in the SDOP, taxpayers must meet the following conditions:
- fail to meet the applicable non-residency requirement under the SFOP above (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement)
- have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;
- have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law and may have failed to file an FBAR or one or more international information returns with respect to the foreign financial asset, and
- such failures resulted from non-willful conduct.
A major concern for taxpayers living close to the border who frequently travel to the US to shop or buy gas and for Canadian “snowbirds” who spend much of their winter months in the US, is that they will generally not meet the new non-resident requirements under the revised SFOP. As these Americans living in Canada will often not be compliant with their reporting history, the SDOP generally not be an option either. This leaves a delinquent taxpayer who wants to get caught up on their tax filings, but who doesn’t meet the residency test, little choice in how to do so. The only remaining options are to resort to using a “quiet disclosure”, perhaps with a letter accompanying the returns trying to establish reasonable cause, or to file their delinquent returns under the Offshore Voluntary Disclosure Program (OVDP).
The downside to these two options is that a quiet disclosure offers no protection against possible penalties for failure to file tax and information returns or worse, and the OVDP program carries with it 20% accuracy-related penalties and a miscellaneous 27.5% penalty on the aggregate balance of an undisclosed foreign financial accounts.
The problem posed here demonstrates that the IRS one-size-fits-all approach does not work in the international setting. Hopefully IRS will go back and amend the rules but as of now taxpayers wanting to become tax compliant will have to keep a close watch on their days spent in the US.