What was formerly implied is now stated directly — there is now penalty relief for most US citizens residing in Canada or overseas who failed to file Treasury Forms 90-22.1.
By way of background, there are untold numbers of US citizens who have lived outside the US (primarily in Canada) for many years. Typically, they have not filed US income tax returns and owe no US tax (because of the US foreign tax credit). Nor have they filed Treasury Department Forms TDF 90-22.1 to report their “offshore” accounts. As a result, absent reasonable cause, they might owe FBAR penalties of $10,000 per account per year, or even larger penalties if the violation was willful.
Fortunately, many of these non-filers will qualify for relief under Internal Release 2012-65, as issued June 26, 2012, which clarifies that they will owe no FBAR penalties if they comply with the following requirements and satisfy the following criteria:
● File Delinquent Income Tax and FBAR Forms. Taxpayers first must submit delinquent IRS Forms 1040NR (along with full payment of income taxes and interest due) for the prior three years, and delinquent Forms 90-22.1 for the prior six years. (Only the past six years of Forms 90-22.1 are necessary because the statute of limitations for unfiled FBAR forms is six years.)
● Delinquent Income Tax Liability Does Not Exceed $1,500 Per Year. For “low compliance risk” submissions, the IRS will perform an expedited review and will not assess penalties; “low compliance risk” generally means submissions by those taxpayers who have simple returns with less than $1,500 in US tax due for each delinquent year. For submissions with a higher compliance risk, the IRS will perform a more detailed review and might require additional year returns. Higher compliance risk factors include (i) a greater amount of income or assets of the taxpayer, (ii) indications of sophisticated tax planning or tax avoidance, (iii) material economic activity in the US, (iv) any history of noncompliance with US tax law, or (v) certain types and amounts of US source income.
● Reasonable Cause Explanation. IR-2012-65 goes on to say that a taxpayer having reasonable cause for delinquent Form 90-22.1 filings should submit a dated statement signed under penalty of perjury that explains why there is reasonable cause. Query: Why does reasonable cause matter? IR-2012-65 states that the IRS will not assert penalties against taxpayers having “low compliance risk,” without any mention of reasonable cause. Presumably, then, such reasonable cause relief is intended for those submissions not qualifying as “low compliance risk.” Perhaps another unstated intent is to deny IR-2012-65 relief to taxpayers who intentionally ignored the requirement to file Forms TDF 90-22.1.
● Relief for Delinquent Form 8891. IR-2012-65 also provides relief for late filing of the election on Form 8891 to defer income on offshore retirement plans, such as a Canadian RRSP or RRIF.
● No Relief to US Residents. IR-2012-65 applies only to nonresidents. Thus, the relief is inapplicable to US persons (i.e., citizens and green card holders) living in the US, who are relegated to seeking relief by demonstrating reasonable cause or enrolling in the 2012 Offshore Voluntary Disclosure Program (see below).
● Summary. The key significance of IR-2012-65 is that full FBAR penalty relief is available to many (or most) nonresident US citizens who were delinquent on filing both US income tax returns and Forms TDF 90-22.1 and who owe little or no income tax. Prior IRS guidance (such as FS-2011-13) hinted at this result, but was not definitive.