Possible benefits of the coming into U.S. tax compliance through the Streamlined program?

This post originally appeared at the Isaac Brock Society.

Updated November 3, 2014 – Readers are strongly encouraged to read the comments as well. One must remember that Streamlined and OVDP are programs which have been invented by the IRS. They are not found in the Internal Revenue Code. Consequently this post should be read in the context of the following comment to this post:

Commentary on the ‘clarifying rules’:


“……..FAQs are all the rage these days with the IRS, as the government does not take the time or spend the resources to follow the Administrative Procedures Act or similar requirements which are required in order to issue binding rules and regulations. See a previous post regarding these requirements, specifically regarding those who renounce U.S. citizenship or abandon LPR status and have not complied with IRS Notice 2009-85. See,Does IRS Notice 2009-85 regarding expatriation have the “force of law”? Posted on April 14, 2014

Hence, these SFCP are not legally binding on the IRS and they can pick cases as they choose for audit, review and penalty assessment in any manner they think is consistent with the law. Sometimes they do it in a manner that is not consistent with the law.”………….

Americans abroad are getting special attention from the IRS




During the last week the IRS has been paying special attention to Americans abroad. First we have the new bulletin which relieves Canadians of the need to file the Form 8891 in order to “legitimize” their RRSPs and RRIFs. This was the subject of considerable discussion at the Isaac Brock Society. As noted in a insightful post by Roy Berg, many Canadians will NOT be eligible for the “8891 Relief”. The “effective date” of the RRSP announcement is December 31, 2014. Some Canadians had been using the “Streamlined Compliance” program to fix the “problem of having used an RRSP for retirement planning in Canada” (talk about “tax evasion”). Brave Canadians had “come clean” about their RRSPs in OVDI or either Streamlined Compliance 1 (September 1, 2012 – July 1, 2014) or Streamlined Compliance 2 (July 1, 2014 and continuing). Streamlined 2 appeared to be a “good faith” attempt by the IRS to relieve Americans abroad from penalties on information returns that they didn’t know they had to file. This appeared to be a “step forward” by the IRS. It even appeared to be an attempt to reverse some of the “ill will” generated by “IRS Penalty Abuse” in OVDI and OVDP. As Robert Wood notes, the relationship between the IRS and Canadians is NOT good. It looks like the relationship is about to go from bad to worse. For new readers, it’s important to note that the “clarifications” announced by the IRS in October of 2012, must be understood in the context of the evolution of the so called “IRS Amnesty” programs that began in 2009. As a reminder to all, here is the progression and evolution of these programs:

2009 – The Reign of Terror Begins:

Obama, Geithner and Shulman equate the offshore accounts of Americans abroad with the offshore accounts of Homeland tax cheats. The “reign of terror” begins.


2009 – IRS creates the OVDP program of 2009. Half way through the program, they engaged in the “bait and switch”. Tax lawyers had believed that people could enter program and argue “reasonable cause”. IRS “shuts” down “reasonable cause arguments. Also, IRS discovers PFICs giving them a new vehicle to terrorize Americans abroad.

2010 – In March of 2010 Mr. Obama signs FATCA legislation in law. The stage is set for “FATCA Hunt” – the hunt for Americans abroad.

2011 – IRS remakes OVDP as OVDI making it clear there is no “agent discretion” in calculating penalties without an “opt out”.

Tax lawyers, accountants and media encourage innocent Americans abroad to enter OVDP.

OVDI ends in September 2011.

December 2011 – IRS release the infamous December 2011 FS. For the first time since 2009, the IRS notes that “reasonable cause” arguments are available. A Christmas present from the IRS that was ignored by the “cross border professionals”. At this point, it was difficult to know what to do. Americans abroad had a compliance problem and not a tax problem.

January 2012 – IRS brings back the OVDP. Basically the same as the 2011 OVDP with higher penalties (25% to 27.5%). Isaac Brock Society writes press release warning Americans abroad to stay away from this program. “Just Me” write the OVDI Classic: “OVDI Drudgery for Minnows“.  In January of 2012, desperate Americans abroad wrote about how “their lives had been stoled from them by the IRS“.

September 2012 – IRS introduces the “Streamlined Compliance” program for ONLY Americans abroad. People were and continue to be wary of the program.

June 2014 – IRS introduces modifications to both Streamlined Compliance and OVDP. The bottom line appears to the that penalties but not tax will be waived.

“Not Willful” – A Necessary Condition To Use Streamlined

A “necessary condition” to use the June 2014 “Streamlined Compliance” is that the failure to file the U.S. tax and information returns was “not willful”.  The IRS states that:

Taxpayers must certify that conduct was not willful. Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, will be required to certify, in accordance with the specific instructions set forth below, 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.


The Practitioner view of “non-willful” – The issue of what constitutes “non-willful” conduct has been given much considerations by practitioners. A recent article by Charles Rettig was referenced here. There is a great deal of “practitioner commentary”on the meaning of “non-willful”. Although well intended, the effect has been to create anxiety and uncertainty. One would think that “non-willful” would simply mean conduct that does NOT meet the “standard of “willful”.

The IRS view of “non-willful”  – University of San Diego International Tax Conference – If it’s not “willful” then it’s “non-willful”

In addition the IRS spokesperson:

said the Service’s goal is to direct willful individuals with true criminal liability to OVDP and non-willful individuals to the streamlined program.”


October 2014 – On October 10, 2014 – as reported by Jack Townsend and others – the IRS released some new “clarifying” information for International Taxpayers. What follows is some “initial commentary”.

The commentary begins …


Laura Saunders reports on the “clarifications” that the IRS has made to the Streamlined Compliance program which was introduced on June 18, 2014.

Ms. Saunders reports on  “clarifications” that affect both U.S. residents and Americans abroad. The article includes:

Experts say the clarifications contain good news and bad news for U.S. taxpayers concerning the streamlined program. “The clarity is good, but some people who think they don’t deserve harsh treatment will wind up on the wrong side of the fence the IRS has erected,” says Phil Hodgen, an international tax lawyer in Pasadena, Calif.

The IRS issued the guidance in question-and-answer format. Seven new questions are for U.S. residents and clarify what assets are and aren’t subject to the 5% penalty. For example, the penalty doesn’t apply to assets, such as a bank account, for which the taxpayer had “signature authority” but not beneficial ownership—that is, the right to use the assets.

One new question applies to U.S. taxpayers residing outside the U.S. and clarifies details of residency regarding the program. In effect, says Stow Lovejoy, a lawyer with Kostelanetz & Fink in New York, it holds that many Canadian “snowbirds” who regularly spend several months a year in the U.S. and are delinquent U.S. taxpayers—even if they didn’t know it—won’t qualify for a zero penalty.*

Another clarification raises the bar for people who hope to avoid a penalty in the streamlined program. U.S. taxpayers who don’t owe taxes but haven’t filed paperwork will have to explain why they didn’t, and the IRS will have to accept the excuse, in order to escape a penalty.

Although the IRS’s streamlined program offers a welcome option for some people, there are other ways to cope with past noncompliance. Mr. Hodgen and others say that many taxpayers with smaller accounts—say, under $500,000—who weren’t aware of their noncompliance may be able address it simply by amending past tax returns and complying going forward.

The clarification of most interest to Americans abroad is:

Another clarification raises the bar for people who hope to avoid a penalty in the streamlined program. U.S. taxpayers who don’t owe taxes but haven’t filed paperwork will have to explain why they didn’t, and the IRS will have to accept the excuse, in order to escape a penalty.

So, what exactly does this mean?

Let’s begin with “people talk”. Phil Hodgen, (writing as a “Jello Shot” from “rarified air”) describes it this way:

The IRS seems incapable of simple clarity. Just this week they yet again updated their idea of “here’s an easy, simple, and safe way to fix things” procedures. They call it the “Streamlined Procedures”. This week’s update made the rules more complicated and the requirements subtly treacherous.

Hint: you are offered relief from tax penalties that could bankrupt an ordinary person. In order to get that relief, you have to give the IRS a “this is why I should not have any penalties” essay. They call it a “reasonable cause” statement.

The IRS can accept or reject what you say in that statement. If the IRS likes what you wrote, it’s all rainbows and unicorns. No penalties for you.

But if the IRS woke up on the wrong side of the bureaucratic bed that morning, or is cranky because of a fight with Mrs. IRS before coming into work that morning, or is exceedingly diligent in following checklists, or is exceedingly slack and just wants to go to lunch, then your application for penalty relief can be rejected.

Just like the cop shows on TV. “What you say can and will be used against you in a court of law.” That’s the downside of that “reasonable cause” statement the IRS wants you to submit. It will be Exhibit A in the government’s program to claim that you should pay penalties because you were (in its eyes) unreasonable.

Canadian Snowbirds: Speaking of making the “rules more complicated and the requirements subtly treacherous”.

The more complicated the rules, the more likely the rules will generate “unintended consequences”. “Canadian Snowbirds” (spending more than 35 days per year in the United States) are not eligible for Streamlined compliance. (I can’t imagine a Snowbird even considering coming into U.S. tax compliance, but anyway …) In a nutshell the reason Canadian Snowbirds cannot use “Streamlined” is because:

1. Spending more than 35 days per year in the U.S. makes them ineligible for Non-Resident Streamlined Compliance; and

2. Note having filed U.S. tax returns makes them ineligible for Domestic Streamlined compliance.

*Bubblebustin comments that:

The IRS is lowering the hammer on so called snowbirds, but a snowbird remains a snowbird regardless of how long he’s been in the US unless he neglects to file in a timely fashion both the closer connection” form 8840, or failing that, the “tie-breaker” election under the tax treaty. Snowbirds who are meeting the conditions of the substantial presence test are getting penalized for not knowing about the forms in time! This hardly seems fair for the snowbird that the difference between a taxpayer and a snowbird is knowing about a piece of paper, when non-resident US person’s are rightfully getting a pass on penalties for not knowing about their tax filing obligations.

What this tells me is that the IRS is putting a lot of emphasis on residency. This is terrible for snowbirds who get caught in this, knowing that The CRA under the same circumstances would not penalize a Canadian resident in this fashion if they made a good faith effort to be tax compliant with offshore accounts.


Now for the “IRS Talk” – Clarifying Information In The Language Of The IRS

Delinquent Information Returns (were dealt with under the old OVDP FAQ 18) whether or not tax is owed

The information on the IRS website (as of today October 12, 2014 is):


Delinquent International Information Return Submission Procedures Frequently Asked Questions and Answers

Effective On or After July 1, 2014

Q1. Are the Delinquent International Information Return Submission Procedures announced on June 18, 2014 different from the procedures described in 2012 OVDP FAQ 18 (in effect prior to July 1, 2014)?

Yes. The IRS eliminated 2012 OVDP FAQ 18, which gave automatic penalty relief, but was only available to taxpayers who were fully tax compliant. The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

Delinquent “INTERNATIONAL information returns  (whether or not tax is owing) will NOT be subject to penalties if the IRS determines they meet the “reasonable cause” test. Examples of “International Information Returns” include: Form 3520, 5471, 8938, etc. An interesting discussion of the principles of “reasonable cause” is here.

FBAR Delinquency for those who have filed their tax returns and are otherwise tax compliant

So far this post has focused on those who enter the Streamlined Compliance program. What about those who do NOT owe tax, have been filing their U.S. tax returns, but have not filed their FBARs? In other words, they have done their best to comply with U.S. tax laws but didn’t know about the FBAR requirement. There is a “special procedure” for them.

Delinquent FBARs (Were dealt with under the old OVDP FAQ 17) where no tax is owed

This situation is summarized by Stephen J. Dunn in a recent Forbes article as follows (I do recommend the complete article):

“Delinquent FBAR Submission Procedures,” published by the IRS on June 18, 2014, provides that taxpayers who do not need the Offshore Voluntary Disclosure Procedures (“OVDP”), or the new Streamlined Filing Compliance Procedures, to file delinquent or amended income tax returns to report and pay additional tax, but who:

1. have not filed a required FBAR,

2. are not under civil audit or criminal investigation by the IRS, and

3. have not already been contacted by the IRS concerning delinquent FBARs,

should file their delinquent FBARs according to the electronic FBAR filing procedures, including a statement of why the FBARs are filed late. There is a dropdown box of explanations for late filing on the FBAR form; the most likely explanation is, “I did not know I had to file.”

Delinquent FBAR Submission Procedures continues, “The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign accounts reported on the delinquent FBARs and you have not been previously contacted regarding an income tax examination or a request for the delinquent returns for the years for which the delinquent FBARs are submitted.”

Conclusion: Those who use the Streamlined program must still certify that their omissions were “not willful”. In addition they may have to meet the “reasonable cause” standard to not be assessed penalties for failure to file information returns. To put the question another way:

Must the “non-willfulness” that is the pre-requisite for “Streamlined Compliance” also meet the standards of “reasonable cause”? In other words, must the “non-willfulness” be reasonable? Presumably this becomes an issue only in the event of an audit.

Speaking of audits, the IRS advises that (irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures):

Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisers, and other sources

What are chances of an audit?

With the high standards required for “Streamlined Compliance”, the question becomes:

What exactly is the benefit of specifically using the “Streamlined Program” to fix past compliance problems, when as Laura Saunders notes:

Mr. Hodgen and others say that many taxpayers with smaller accounts—say, under $500,000—who weren’t aware of their noncompliance may be able address it simply by amending past tax returns and complying going forward.

Writing from “rarified air” Mr. Hodgen notes that if you enter the Streamlined Compliance program:

You are giving the government the club with which they can choose to beat you. Is it any wonder that people are . . . wary?

I agree with Mr. Hodgen. With the “threat of penalties” clearly on the table, Streamlined Compliance will be a “hard sell”. Pity those poor Americans abroad. Many of them desperately want to come into U.S. tax compliance. It’s just that the IRS doesn’t make it easy for them.

Prediction: One way or the other Americans abroad will be relinquishing U.S. citizenship. The most brave and most “moneyed” will renounce at the Consulates and get the CLN. The rest will simply simply vanish – they will opt for the “Do it yourself relinquishment”. Based on the October 2014 IRS “clarifications” to Streamlined 2, fewer and fewer Americans abroad will bother to attempt U.S tax compliance.

The Tragedy: The United States is “burning bridges” with Americans abroad. It’s clear that the Obama administration doesn’t care. What the administration doesn’t grasp is that Americans abroad have traditionally been “unofficial ambassadors” for America abroad. They have been patriotic. They have been loyal. They have been “the first line of defense in minimizing resentment of America”.  Americans abroad, because they are generally likeable, are able to make American a “likable nation”. Americans abroad have been effective in diffusing the growing hatred and resentment of America.

On the issue of the growing hatred and resentment of America, see:

In Cook v. Tait, the Supreme Court of the United States ruled that that taxation of Americans abroad was justified because:

“that (U.S.) government by its very nature benefits the citizen and his property wherever found”

Actually, it’s the opposite. The U.S. Government does NOT benefit its citizens abroad. In fact, renunciations of U.S. citizenship are soaring as Americans abroad take steps to defend themselves from the Obama administration.

Although the U.S. government does NOT benefit its citizens abroad, it’s certainly true that:

“U.S. citizens abroad, by their very nature, benefit the United States wherever they may be found.”

Perhaps Americans abroad should “tax the U.S. government”!


Yet, the Obama administration treats them this way. As Forrest Gump would say:

“Stupid is as Stupid Does.”

Note the results from the poll referenced in this tweet:


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