On March 10th, 2014, we had an opportunity to hold a follow up telephone discussion with the IRS about the Steamlined Filing Compliance Procedures for Non-Resident, Non-Filer US Taxpayers (SCP) introduced in June 2012. Readers of our firm blog will recall that we voiced several concerns about the SCP in a letter addressed to David Horton last August. One of our major criticisms was that qualification for SCP concentrated on the amount of tax owed and the kind of tax return (only “simple” – undefined – returns were covered). We argued that the test should focus on the likelihood that the taxpayer knew he or she was delinquent in the first place. Even sophisticated, high-income individuals are unaware of the unique citizenship taxation of worldwide income that the US adopted when it introduced the income tax in 1913. Thus, many people who have failed to file US tax returns and bank account reports simply did not realize that they had to do so.
Our letter to Mr. Horton recommended that the focus of the SCP shift or a new program be designed for this special group of delinquent taxpayers who are “innocent” non-filers. We provided an alternative approach with a questionnaire that the Service could use that to identify a taxpayer’s length of residence outside the US as well as the nature and extent of his or her contacts with the US since moving abroad. In other words, a program designed for “accidental Americans” who are often US citizens in name only. During a call with the Service in September to discuss the contents of our August letter, the IRS seemed genuinely interested in the proposal and said it was looking at revisions to the SCP.
Following the call we have kept in touch with the Service regarding the kinds of issues our clients encounter with its administrative processes, including non-receipt of notices, inconsistent application of the assessment of failure to file and failure to pay penalties, and applying interest from the wrong filing deadline. We have copied Mr. Horton on our submissions to various IRS Service Centers and offices.
One of these submissions resulted in a request for a follow up telephone conversation during which the Service clarified which taxpayers could use the SCP. We were asked why we did not use the program for the specific taxpayer that was the subject of our submission. We responded that the Service had not yet changed any of the guidance, most particularly the warnings about the amount of tax and the “simple” return criteria that appear in the questionnaire that must be submitted with an SCP filing.
In a nutshell, the telephone conversation confirms that the Service has heard us. It will be providing updated guidance that will confirm more clearly that the SCP is available to all truly innocent delinquent non-filers even regardless of the amount of their tax liability and the complexity of their returns. Based on this discussion and the genuine interest expressed by the Service to broaden the reach of the SCP, we are now comfortable enough that our standard practice from now on will be to use the SCP. Essentially, we will recommend that clients file US tax returns for the most recent three years and foreign bank account reports for the most recent six years. All clients seeking to file under SCP will be required to complete and sign a Reasonable Cause Statement that will form the basis of the submission of their returns to the IRS under the SCP.