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IRS Offers Resolution for U.S. Citizens Living Abroad

In IR 2012-65, released on June 26, 2012, the IRS announced new procedures that offer U.S. citizens living abroad an opportunity to catch up on their filing obligations without incurring the substantial penalties imposed by the various Offshore Voluntary Disclosure programs. Similarly, streamlined procedural options will be made available to taxpayers with issues related to certain foreign retirement plans.

The new procedures, which are still being drafted, will go into effect on September 1, 2012. They will be available as an option to both U.S. citizens who are current non-residents and dual citizens. Taxpayers will be required to file delinquent income tax returns for the past three years and delinquent Report of Foreign Bank and Financial Accounts (FBARs) for the past six years.

The IRS has stated that the penalty waiver will not be granted to all taxpayers simply for complying with the new procedures. Each submission will be analyzed for compliance risk and, if the IRS determines that the risk is low, the submission will then be expedited for processing without penalties. On the other hand, submissions that are determined to have a higher compliance risk will be subject to a more thorough review, a potential full examination, and a full imposition of penalties in accordance with U.S. federal tax laws.

Though the factors that will determine the level of compliance risk have yet to be outlined in full, the IRS has stated that, absent other high risk factors, taxpayer returns that show less than $1,500 in tax due in each year will generally be considered low risk. High risk factors will include a large amount of tax due, high value in the taxpayer's income and assets, indications of sophisticated tax planning, the source of income, material economic activity in the United States, and a history of non-compliance.

This announcement is significant because it demonstrates that the IRS may no longer be taking a hardline, zero-tolerance approach to non-compliance reporting of offshore accounts. These procedures are likely intended to encourage compliance by those taxpayers who may have previously opted for "quiet disclosure" or opted out of a voluntary disclosure. Though these new procedures do offer some penalty relief for taxpayers who felt that the penalty structure of the Offshore Voluntary Disclosure programs were too harsh or extreme, it is important to point out that the new procedures do not offer any protection from criminal prosecution. Any taxpayer concerned about this risk should consider participation in the disclosure program instead.

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