After years of treating every American abroad like a high-rolling tax cheat for simply having a normal financial life, it has finally dawned on the IRS that not everybody with an offshore bank account is a tax cheat. Janet Novack explains:
The IRS said today that beginning Sept 1., those expatriates, dual citizens and green card holders living abroad who owe less than $1,500 a year on unfiled 1040s will be eligible for special relief. They will only have to file three years of back tax returns. And while they’ll have to file six years of back FBARS, they won’t get hit with an FBAR penalty. Moreover, participants in certain foreign tax deferred retirement plans such as the Canadian RRSPs ( like IRAs) will be able to exclude the deferred income from their back returns. In the past, these foreign residents were stuck because they hadn’t applied for income tax deferral on a timely basis.
This is long overdue. Many expatriate citizens lived a normal life, marrying overseas and opening bank accounts like they would at home, with no idea that they were required to file form TD F 90-22.1 if their account balances exceeded $10,000. There are severe financial penalties for non-filing, but honest citizens — most of whom owed little or no tax — found themselves treated like international money launderers when they signed up for the so-called amnesties for international non-filers. The IRS, caught be surprise at the wide interest in the program, sadly understaffed it and enforced it with what I call a “shooting jaywalkers” mentality.
Ms. Novack passes on a story of how the new rules will help:
Robert E. McKenzie, a tax partner at the Chicago law firm of Arnstein & Lehr and a Forbes contributor, offered an example of one of his clients who he believes will be helped enormously by the new relief. She is a retired widow, has lived in Canada for 30 years, has $150,000 in an RRSP and another $150,000 or so in other Canadian accounts. Under the 2011 OVDP, the IRS had demanded a $75,000 FBAR penalty from her. Now, she should be excused from any penalty.
Why the IRS didn’t have a program like this from the start of its offshore enforcement pogrom is beyond me. Better late than never, though. Still, they have yet to set up a similar program for U.S. residents with similar FBAR problems, such as green card holders who didn’t realize that they needed to tell the IRS about their bank accounts back home, or American citizens who have inherited bank accounts from foreign relatives. I guess when it comes to providing relief to innocent taxpayers, the IRS feels that it has to dispense justice with an eyedropper.
The details of the new program are in IR-2012-65, taking effect on September 1. The IRS will apparenly announce ahead of that time details, like where and how to file under the new program. Meanwhile, Americans abroad with offshore accounts can breathe easier and watch for the additional details to emerge. Meanwhile, remember that 2011 Form TD F 90.22-1 is due June 30, and that a bunch of new offshore reporting requirements for financial assets not in bank accounts also took effect for 2011 1040s.
Prior Tax Update coverage: