• Moodys Gartner Blog
  • Our Team
  • Tax well solved

Do you qualify for IRS’s new streamlined procedure to bring US tax returns current?

If you are a US person residing in Canada and are one of the unfortunate few who does not have a graduate degree in US tax and who is not related to a cross-border US tax professional you may have missed filing one of the myriad of tax forms that are required every year (the failure to file of which can carry dire penalties). If this is the case, the IRS may have a new streamlined procedure just for you. The bad news is that few will likely qualify and those who do not qualify face serious consequences just for applying.

The new streamlined procedure went into effect on September 1, 2012. Click here to see the full text of the streamlined procedure. The program is designed for expats with simple returns and little or no tax due. But whether by design or defect, it threatens to entrap most of its likely applicants. For those who qualify, the new program may be a breeze. But for those who do not, and we suspect most expats will not, the streamlined procedure is a lot like a lobster pot – easy to get into, hard to live in, and harder to escape.1

Streamlined procedure for those who qualify

For those who qualify the procedure is remarkably humane:

  1. File all tax returns with appropriate related information returns (e.g. Form 3520, 3520-A, 5471, etc.) required for the past three years (2009, 2010, and 2011);
  2. File Foreign Bank Account Reports (Form TD F 90-22.1, or “FBAR”) for the past six years;
  3. Pay any tax and interest if applicable on the unfiled returns; and
  4. Complete and sign under penalties of perjury a 20-question questionnaire (you will find the full text of the questionnaire by clicking here).

For those who qualify, the IRS will not impose penalties nor conduct an audit. In addition the IRS will provide retroactive relief to defer income accrued inside Canadian registered retirement savings plans (“RRSP”) and registered retirement income funds (“RRIF”)2 where the taxpayer failed to timely file Form 8891.

Who qualifies for the streamlined procedure?

Qualification for the streamlined procedure involves a two part analysis: 1) Eligibility; and 2) Risk Factors.

“Eligibility” for streamlined procedure

The taxpayer is “eligible” for the streamlined procedure if he meets all of the following factors:

  1. The taxpayer has not resided in the US since December 31, 2008;
  2. The taxpayer has not filed a US tax return since 2008;
  3. The taxpayer does not owe more than $1,499 in any of the tax years beginning in 2009 and ending on 2011;
  4. The taxpayer is not submitting an amended return for any of the three years, except to file a late election to defer tax in a Canadian RRSP or Canadian RRIF;
  5. The taxpayer has a valid social security number or taxpayer identification number (“TIN”), or applies for a TIN as part of a submission to the program.

Even if the taxpayer satisfies the foregoing, he will only be eligible to participate in the streamlined procedure if he presents “low compliance risk.” Those who do not present “low compliance risk” will not be eligible to participate and may be subject to full examination and penalties, including criminal prosecution. The description of the procedure states in part:

Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Worse, the IRS will have all of the information the taxpayer submitted under the streamlined procedure and that person becomes ineligible for the Offshore Voluntary Disclosure Program.

“Risk factors”

Based on the questionnaire the taxpayer is required to complete, (the IRS will determine whether the taxpayer is considered “low compliance risk”). According to the IRS, the taxpayer’s risk level may rise if any of the following are present:

  1. Any of the returns submitted through this program claim a refund;
  2. There is material economic activity in the US;
  3. The taxpayer has not declared all of his/her income in his/her country of residence;
  4. The taxpayer is under audit or investigation by the IRS;
  5. FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
  6. The taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
  7. The taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
  8. There is US source income; or
  9. There are indications of sophisticated tax planning or avoidance.

Unfortunately the IRS has not given guidance as to which of the above-listed risk factors or combination thereof, will increase the taxpayer’s compliance risk, and therefore disqualify him from the streamlined procedure. Further, the questionnaire raises a number of extremely serious issues of which every taxpayer considering this procedure should be aware.

Completing the questionnaire, or entering the lobster pot

The questionnaire is divided into four categories: eligibility for the program; interests in financial accounts and other entities; relationship with tax advisors; and the taxpayer’s current tax position.


The first four questions are basic eligibility questions. Presumably, a “Yes” answer to any of them means disqualification from the program.

Question 1: Have you resided in the US for any period of time since January 1, 2009?

It is unclear what is meant by “reside.” Does this include temporary residence in a US vacation home? Alternatively, is residence determined under a standard akin to the “substantial presence” test set forth in Treas. Reg. § 301.7701(b) – 1(c)(1), or possibly the test set forth in Article IV of the Treaty?3

Question 2: Have you filed a US tax return for tax year 2009 or later?

Apparently the filing of a tax return for 2009 or later will disqualify the taxpayer from participation in the streamlined procedure. For example, if a taxpayer filed a 1040 tax return in 2009 but failed to file the related information returns or FBAR, such taxpayer may not be eligible to participate in the streamlined procedures.

Question 3: Do you owe more than $1,500 in US tax on any of the tax returns you are submitting through this program?

The IRS initially set the threshold at $1,000. See the document “Options Available to Help Taxpayers with Offshore Interests” (modified on September 3, 2012 to reflect the new threshold).

Further, it is unclear whether the $1,500 threshold is doubled to $3,000 if the taxpayer is filing a joint return with his or her spouse.

Question 4: If you are submitting an amended return (Form 1040X) solely for the purpose of requesting a retroactive deferral of income on Form 8891, are there any adjustments reported on the amended return to income, deductions, credits or tax?

This section strikes us as unnecessarily punitive because it allows an amended tax return only for late deferral elections of Canadian RRSPs or RRIFs, but not for other types of retirement plans or accounts. That is because other retirement plans or accounts require the filing of Form 8833 to defer income, and not Form 8891. Deferral of income accrued inside of a retirement plan (including RRSPs and RRIFs) is provided under Article XVIII paragraph 7 of the Treaty. The fact that the taxpayer is a beneficiary or participant in a retirement plan that is not an RRSP or RRIF and wishes to elect income deferral under the same Treaty provision available for RRSPs and RRIFs, such taxpayer would be ineligible to file an amended tax return with Form 8833 under the streamlined procedure. Further, if the taxpayer inadvertently omitted income from a Canadian Tax Free Savings Account (“TFSA”) on a past return4, he is unable to declare that income on an amended return and still participate in this new program.

Financial accounts/entities

This section comprises three questions regarding the taxpayer’s financial interests.

Question 5: Since January 1, 2006, have you had a financial interest in or signature or other authority over any financial accounts located outside your country of residence? If yes, are the accounts held in your name? If yes, list the countries where the accounts were/are held.

Reading the question literally, the taxpayer could face disqualification for maintaining a bank or securities account located in the US or having signature authority over such accounts located in the US (for an elderly parent for example).

Question 6: Since January 1, 2006, did you have a financial interest in any entities located outside your country of residence? If yes, do these entities control U.S. investments? If yes, list the countries where the entities were/are located.

It is unclear what the IRS means by using the terms “financial interest” and “entities.” Taken literally all portfolio investments in US companies would constitute a financial interest in an entity. If so, then holding US stocks, either directly or indirectly (e.g., through a Canadian mutual fund), could make a taxpayer “high risk.” This would also be the result if the taxpayer indirectly held US stocks in an RRSP, RRIF, or other pension or retirement plan or fund.

Further, it is unclear how to answer this question if the taxpayer owns a Canadian company that has foreign subsidiaries.

Question 7: Do you have a retirement account located in your country of residence? If yes, are earnings from the retirement account non-taxable in the US under current treaty provisions? If yes, is the retirement account located in Canada and are you filing a delinquent Form 8891 for each year?

Merely having a foreign retirement plan should not disqualify a taxpayer. Indeed, the streamlined procedure acknowledges that many taxpayers have Canadian RRSPs and RRIFs.

The reason for this question is hazy, though perhaps the purpose is to determine which taxpayers have retirement plans other than RRSPs and RRIFs. In addition, Form 8833 and not Form 8891 must be filed to defer accrued income under the Treaty for retirement accounts other than RRSPs and RRIFs. Question 7 does not appear to address this fact.

Tax advisors

In this section the IRS inquires about communications between the taxpayer and his tax advisor and whether the taxpayer relied upon such advice.

Question 8: Did you rely on the advice of a tax professional for not filing required US tax returns? If yes, is your tax advisor located in the US?

A “Yes” answer to the first question is the basis for the “reliance on experts” element of a “reasonable cause” defense against failure-to-file penalties.

It is unclear what the IRS means by the terms “tax professional” and “tax advisor” since the questionnaire uses both terms, presumably the terms have different meanings. Does it mean only those registered with the IRS (i.e., Federally Authorized Practitioners under 26 U.S.C. 7525(a)(3), with valid Preparer Tax Identification Numbers (“PTINs”)) or does it mean anyone who, legally or not, gives tax advice?

In Canada, for example, lawyers, Chartered Accountants, Certified Management Accountants, Certified General Accountants, as well as non-accredited professionals who prepare tax returns often give tax advice. Do such individuals constitute tax advisors or tax professionals?

Question 9: During the above-listed tax years for this submission did you know that you were a US citizen or resident alien? If yes, did you disclose to your tax professional that you were a US citizen or resident alien?

We are concerned about how this question affects privileged communications. Limited privilege of taxpayer communications from disclosure is specifically provided by statute (26 U.S.C. 7525) for Federally Authorized Practitioners. Although the privilege is not absolute because the taxpayer must assert it and the IRS must consent, there is a risk that answering question 9, whether yes or no, could waive privilege under LRG 57(16)662.72.

In addition by answering this question, either in the affirmative or negative there is a risk that attorney-client privilege may be waived.

Question 10: During the above-listed tax years for this submission, have you declared all of your income in your country of residence?

In Canada, for example, certain items are excluded from gross income (e.g., capital dividends, lottery winnings, life insurance proceeds, income accrued inside a TFSA, etc.) and are never reported on the taxpayer’s TI (Canada’s general income tax return), even though such items may be taxable in the US.

So if a taxpayer does not report income on a T1 that isn’t required to be reported, has he “declared” all of his income to Canada?

Question 11: If you used a tax professional, did you disclose the existence of the accounts/entities you hold outside your country of residence to your tax professional?

Just as in question 9, the answer to this question, either in the affirmative or the negative, could result in a waiver of the tax preparer-privilege or even the attorney-client privilege.

Question 12: Did you know you had a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, filing requirement when you failed to file an FBAR?

The answer to this question can be very dangerous. The willful failure to file an FBAR can result in substantial civil (31 U.S.C. 5321(a)(5)) and criminal penalties. 31.U.S.C. 5322(a), 5322(b), and 18 U.S.C. 1001. Thus answering “Yes” may be an admission of guilt.

On the other hand, answering “No” calls for extreme caution as well. The questionnaire must be signed under penalty of perjury and so the answer must be truthful. Therefore, falsely answering this question “No” could result in a criminal perjury charge (26 U.S.C. 7206(1)).

The media attention to this issue makes it harder to claim ignorance of the law, though the specific wording of this question may permit a taxpayer who knew of the general obligation to file an FBAR, but believed the obligation didn’t apply to him, to truthfully answer “No.”

It is unclear whether a taxpayer could invoke the 5th Amendment right against self-incrimination and refuse to answer this question and, if doing so, would disqualify the taxpayer from the streamlined procedure. If invoking the 5th Amendment does result in disqualification, is that not tantamount to a presumption of guilt (or at least culpability) which is antithetical to the 5th Amendment?

Unlike OVDP, the new streamlined procedure does not grant immunity from criminal prosecution. Participation in the program may make some taxpayers face the Morton’s fork of choosing between perjury and self-incrimination.5 In which case, not participating is advisable.

Tax position

This last section asks seven questions about filing history and other matters.

Question 13: Have you ever filed a US tax return?

It is not clear how a past tax return filing affects compliance risk under the streamlined procedure. For example, what if a taxpayer previously filed US tax returns before moving to Canada decades ago and has not filed since? Is such taxpayer considered high risk.

Question 14: Are you currently under audit or investigation by the IRS?

The written instructions make clear that individuals who are under audit or investigation by the IRS are not eligible for the streamlined procedure.

This question is troubling because, unlike OVDI and OVDP, there is no mechanism by which the taxpayer can request “pre-clearance” by the IRS before deciding to participate in the procedure. Thus, the taxpayer could innocently attempt to enter into the program only to learn, when it is too late, that he is disqualified from participation in the streamlined procedures and unable to enter into the OVDP.

Question 15: Have you ever filed an FBAR?

Prior filing of an FBAR might be grounds for disqualification from the new procedure.

This is troubling because the FBAR filing requirements have been in existence since 1970. It is strange that someone who complied with the law in the past faces a harsher result than someone who never did.

Question 16: Have you received an FBAR warning letter for any of the above-listed tax years for failing to file an FBAR?

If you have received an FBAR warning letter you are not eligible for the streamlined procedure.

Question 17: Do you have a treaty-based position for your country of residence that reduces your US tax liability?

This question is especially troubling because many US persons residing in a country that has a treaty with the US will have treaty-based positions that reduce his US tax liability.

For example US persons residing in Canada frequently enjoy reduced US tax liability because of the Treaty’s treatment of: dividends, interest, gains from the sale of stock, Social Security payments, Canada Pension Plan payments, and retirement plan payments (and accrued income and contributions).

Further, Article IV of the Treaty addresses “residency” of the taxpayer for tax purposes. If a taxpayer relies on the residency tie breaker rules under Article IV of the Treaty for residency determination, could he be disqualified?

Why the existence of a treaty between the expat’s adopted country of residence and the US, and the concomitant applicability of that treaty to the taxpayer matters is hard to say.

Question 18: Were you employed by a US company or entity during any of the above-listed tax years?

This question appears to address the risk factor in the instructions that may increase the taxpayer’s risk level (and therefore qualification for the streamlined procedure) if “there is US source income.”

This question is not clear if such employment is direct, indirect, or where the employment services or duties are physically performed.

This question does not address the situation where an individual was employed by a non-US company with operations in the US, or if the individual was employed by a foreign subsidiary of a US parent company.

Question 19: During any of the above-listed years, did you receive income from any of the following income sources in your country of residence: rental income, sales of property, inheritance?

This question is really tough on taxpayers because many people who live abroad will eventually have income from the sale of property (e.g., sale of a home, sale of marketable securities) in his country of residence. And yet it is Americans who have long called a foreign country home who are most in need of this program.

Oddly, the question includes “inheritance” with “income.” That is not the way inheritances usually work in the US and Canadian tax systems – they are not income to the beneficiary of the decedent’s estate.

Question 20: Are you claiming a refund on any returns you are submitting through this program?

This is another troubling question. Sometimes more tax is withheld than is actually owed, which entitles the individual to a refund. For whatever reason, if more tax has been paid than is ultimately owed, the taxpayer is entitled to a refund. It seems unfair to disqualify these individuals from the streamlined procedure just because they wish to get their money back.

Even taxpayers who are not claiming refunds of withholding tax may be eligible for a refund. Under the Obama administration’s economic stimulus program6 many expats received, or should have received, stimulus payments of $400 during 2009 and 2010.7 And expats who normally owed no US tax because of the foreign-earned income exclusion and other provisions might still be entitled to a stimulus payment. Taxpayers who may otherwise be low compliance risk may be forced to forego their stimulus payments in order to participate in the streamlined program.


The streamlined procedure is certainly a step in the right direction and is tacit acknowledgement that many “minnows” have been ensnared by the broadly cast net designed for bigger fish. However there is great uncertainty as to who will qualify for the procedure and the questions asked in the questionnaire pose serious risks to the uninformed taxpayer. Further, the IRS has retained the right to be the arbiter of qualification standards and risk assessment, which results in great uncertainty to applicants. If the procedure were properly tailored for these hapless minnows it would contain greater degree of certainty and not require the taxpayer to engage counsel to assess “risk level” before entering into the program. Until the IRS clarifies these issues, however, it appears they have missed the mark.

1. For the astute reader, this is a tortured paraphrase of a clever phrase from Bittker & Eustice’s seminal treatise on corporate tax law.

2. Income deferral on foreign retirement accounts is allowed under many US income tax treaties. But only if the taxpayer makes a timely election. This new procedure allows taxpayers to make a late income deferral election.

3. The Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed at Washington, DC, on September 26, 1980, as amended by the protocols signed on June 14, 1983, March 2, 1984, March 17, 1995, July 29, 1997, and September 21, 2007 (herein referred to as the “Treaty”).

4. Notwithstanding that income accrued inside of a TFSA is tax-free for Canadian tax purposes, such is not the case for US tax purposes.

5. A Morton’s Fork is a situation involving choice between two equally undesirable outcomes and is eponymous of John Morton (c. 1420-1500), archbishop of Canterbury, who was tax collector for the English King Henry VII. To him is attributed Morton’s Fork, a neat argument for collecting taxes from everyone: those living in luxury obviously had money to spare and those living frugally must have accumulated savings to be able to pay.

6. American Recovery and Reinvestment Act of 2009.

7. The Making Work Pay provision (26 U.S.C. 36A) provided a refundable tax credit of up to $400 ($800 for married individuals filing jointly).