The IRS recently announced that it discontinued a favorable program that permitted certain US taxpayers to correct past foreign tax return information reporting failures. The program was related to the IRS’s Offshore Voluntary Disclosure Program (“OVDP”). The IRS did not provide notice to taxpayers before it discontinued the program and consequently affected taxpayers will need to consider other avenues to resolve their prior year compliance problems.
However, another IRS program called the “Streamlined Compliance Procedure” or simply “Streamlined program,” is still available to qualifying taxpayers. Importantly, it is unknown if and when the IRS might discontinue the Streamlined program, as it did with the other program. Accordingly, US taxpayers having prior year US tax compliance failures should review this newsletter and consider using the Streamlined program while it is still available.
Discontinued OVDP Program
The IRS recently announced (September 2021) that it was discontinuing a favorable program that permitted certain US taxpayers to correct past international tax return information reporting failures. The particular program was connected to the IRS’s OVDP and gave taxpayers the opportunity to participate in OVDP in situations where they had previously been declined admission or had withdrawn. This program was generally favorable because it permitted taxpayers the opportunity to cure past compliance failures with reduced or fully-abated penalties. The IRS discontinued the above-mentioned program without first providing any notice to taxpayers.
Historically, the IRS has offered programs such as the OVDP in accordance with its own internal goals and objectives – typically based on improving tax compliance. Importantly however, there is no legal requirement for the IRS to offer these programs, and the IRS is also not required to give taxpayers notice that it is discontinuing a particular program. When such a program is discontinued, taxpayers need to evaluate what other avenues are available to correct past compliance problems, but it should be emphasized that the other programs might include less favorable terms.
Streamlined Compliance Program is Still Available
Another favorable program is called the IRS “Streamlined Compliance Procedure” or simply “Streamlined program.” For several years, the Streamlined program has permitted US taxpayers to cure past US tax compliance failures on very favorable terms. The program generally requires the taxpayer to take affirmative action by self-correcting mistakes and paying any tax amounts due. However, by following the specific self-correction procedures, the taxpayer typically receives in return significant benefits. First, under the Streamlined program, the taxpayer’s prior year income tax filing requirement might be significantly reduced, such that the taxpayer need only file three prior years’ tax returns, rather than all delinquent prior year returns. Second, under the Streamlined program, the taxpayer might qualify for significant tax penalty relief, including potentially the abatement of all tax penalties.
It is important to note that participation in the Streamlined program is limited to taxpayers having compliance failures attributable to non-willful conduct, and the taxpayer is required to submit a certification about the reasons therefor signed under penalty of perjury. The taxpayer is also required to file six prior years of foreign (non-US) bank account reports (FBAR).
Because the IRS has the legal authority to discontinue the Streamlined program without giving notice to taxpayers, any taxpayer who is currently eligible should carefully consider whether participating would be in his/her their best interest. A taxpayer who loses the opportunity to participate in the Streamlined program would likely be in a far less favorable situation.
A common situation is when a Korean citizen also holds a US “green card,” i.e., when the person has the legal status of a US “permanent resident.” Many individuals do not realize that their US permanent resident status continues after leaving the United States, even if the individual physically and legally becomes a resident of another country, such as Korea. Another common situation is when a Korean citizen or resident also qualifies as a US citizen; for example, because the person was born in the United States or otherwise acquired citizenship later in life.
In many cases, it is understandable that an individual might have unknowingly failed to comply with US tax compliance obligations, particularly when the individual fully complied with Korean tax obligations. However, even though the US failures were non-willful, an individual in this situation faces significant US tax and penalty exposures. For example, where a required US tax return was not filed, the IRS may assess and collect taxes at any time until three years after the return is filed.
Consider Acting Now to Take Advantage of the Streamlined Program
As noted above, the Streamlined program offers taxpayers very favorable terms to resolve prior year US tax compliance problems. After successfully using the Streamlined program, the taxpayer will have essentially cured all prior year US tax compliance problems. Doing so has implications in other aspects of the individual’s life, such as facilitating the opening of a bank account, securing credit from lenders and maintaining the freedom to travel to the US without fearing potential immigration problems.
It is critically important for the taxpayer to take affirmative self-corrective action. If the IRS identifies and contacts the taxpayer first, then the Streamlined program is generally not available, and the taxpayer could be subject to a tax audit. In that regard, it would not be unusual for the IRS identify an individual who has failed to file US tax returns. The IRS routinely receives financial and tax information from many sources, including banks, former employers, partnerships, funds, pensions, trusts, investment managers and many other US-based contacts with whom the individual has financial dealings.
Because it is unknown whether the IRS might discontinue the Streamlined program, as it did with the other program, US taxpayers having prior year US tax compliance failures should review this newsletter and consider using the Streamlined program. As a reminder, the US rules are very strict in terms of classifying who has a return filing obligation. A US citizen or permanent resident, including a “US green card” holder, is required to file US federal tax returns, even if the individual resides permanently in Korea and does not reside in the US.
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