Application of the non-residency rules under the Streamline Foreign Offshore Procedure
The Streamline Foreign Offshore Procedure provides U.S. taxpayers that are delinquent on certain foreign filings an avenue to become compliant. For certain taxpayers, those deemed to be U.S. taxpayers residing outside the United States, this corrective measure can be accomplished without subjecting the U.S. taxpayer to a penalty. This article discusses the application the the non-residency rules as applied under the Streamline Foreign Offshore Procedure.
Streamline Offshore Procedure - Generally.
Prior to analyzing whether a taxpayer is a U.S. Person Residing within the United States or a U.S. Person Residing Outside the United States under the Streamline Offshore Procedure, a taxpayer must determine whether they meet the general requirements of the Streamline program.
First, and most critically, the taxpayer must be able to certify that the conduct that caused the delinquent filing is not willful. This certification will be required to be made under penalty of perjury, and will require the taxpayer to certify that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to non-willful conduct. For these purposes, the general definition of "non-willful" that applies in case law is applied. Specifically, 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.
In addition, in order to be eligible for the Streamline Foreign Offshore Procedure, the IRS cannot have initiated a civil examination of taxpayer's returns for any taxable year. If the taxpayer is already under audit, the taxpayer is ineligible for the program.
U.S. Taxpayer Residing Outside the United States.
A taxpayer that is deemed to be a U.S. Taxpayer Residing Outside the United States under the Streamline Offshore Procedure may be eligible to become compliant without being subject to a penalty. However, the taxpayer must first meet the non-residency requirement. A different non-residency test applies depending on whether the taxpayer is a U.S. citizen or a lawful permanent resident (i.e., "green card" holder).
For an individual who is a U.S. citizen, they must be able to show that they, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.
A couple of notes about this test. First, the Streamline procedure refers us back to Section 911 and its regulations, which general deal with the foreign earned income exclusion. The Streamline procedures incorporate the Section 911 rules by reference. However, note that the application of the Section 911 rules are related only to the application of the number of days test only, and not for other purposes of Section 911. In determining the total number of days spent under the 330 day test, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.
With regard to the Streamline Program's 330 day, one other important fact to note. The 330 day test must be met only for 1 year in the previous 3 years. In other words, the taxpayer is not required to be outside the U.S. for 330 days in all the years in which the tax is wishing to file a streamline application.
For individuals who are no U.S. citizens or lawful permanent residents, they can meet the non-residency test under the Streamline Foreign Filing Procedure if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3).
Under Section 7701(b)(3), the determination of the substantial presence test is met if the taxpayer is in the United States for 31 days in the current tax year, plus sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days, taking into account the following: (1) total number of days in the current tax year; (2) 1/3 of the days in the preceding tax year; (3) 1/6 of the days in the second preceding tax year.
The determination of whether a taxpayer is a residing in the U.S. under the Streamline Offshore Filing Procedure may be critical in determining the potential penalty exposure of the taxpayer. Careful application of the rules should always be considered.
IRS CIRCULAR 230 NOTICE: ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY ATTORNEYS AT HARLOWE & FALK LLP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.