The IRS offers certain U.S. taxpayers who are delinquent on their U.S. tax filings an opportunity to make a clean break. Those taxpayers who resided abroad since 2009, have not filed their individual income tax returns since then (or earlier years) and owe less than $1,500 for each of those years can now get back in compliance relatively pain free, i.e. without facing penalties or additional enforcement action.

In June of this year, IRS announced that a new procedure, designed for certain U.S. taxpayers who are delinquent on their U.S. tax filings, would go into effect September 1st 2012. In typical IRS fashion, the final details were released August 31st. As a tax practitioner, this much anticipated release provided both relief and disappointment at the same time.

The IRS is well aware that there are many U.S. taxpayers who reside abroad who have neglected to file their individual income tax return or their FBARs (Report of Foreign Bank and Financial Accounts, required if you have a financial interest in or signature authority over foreign financial accounts with an aggregate value of $10,000 or more at any point during the tax year) for the current and past years. Reasons for not filing most commonly include the simple fact that many U.S. taxpayers are not aware that their filing requirement in the U.S. continues even while living and working abroad. Most of them file a tax return in their new home country and believe this is all that is necessary.

The new procedure provides relief in cases for taxpayers whom the IRS deems to pose a “low compliance risk”. This low risk determination fits people who generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years. Taxpayers wishing to take advantage of the new procedure will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent FBARs for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

A downside to the procedure is that you can easily disqualify for the program.  For example, if a 2011 tax return was already filed then it is no longer possible to qualify. Many non-filer taxpayers just started filing again this year because of the all the news regarding FATCA that has been reported. FATCA (Foreign Account Tax Compliance Act) will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers by 2013. Another downside is to the program is that is does not protect the taxpayers from potential criminal prosecution if the IRS and Department of Justice determine that the taxpayer's particular circumstances warrant such prosecution.

The new program is not just beneficial for U.S. citizens who have left the U.S. to live elsewhere but also those who hold a green card or are dual citizens.

Source: Finsens Financial advisers, www.finsens.nl

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