Non-Residency Requirement of the Streamlined Foreign Offshore Procedures

One of the key issues facing U.S. taxpayers who wish to use the Streamlined Foreign Offshore Procedures is meeting the non-residency requirement. If the non-residency requirement is not met (and assuming the regular delinquent FBAR submission procedure is not applicable), the U.S. taxpayer faces the less pleasant choice of either following the Streamlined Domestic Offshore Procedures with a 5% penalty, entering the 2014 Offshore Voluntary Disclosure Program with its 27.5% penalty or pursuing an altogether distinct choice of the statutory reasonable cause exception (also known as Modified Voluntary Disclosure or Noisy Disclosure).

In this article, I will focus on outlining the non-residency requirement under the Streamlined Foreign Offshore Procedures. This article is for the educational purposes only; my strong recommendation is to retain an international tax attorney to determine whether your situation meets this non-residency requirement.

General Framework of the Non-Residency Requirement

In order to make sure that you are applying the correct legal test, you need to understand the dual framework of the non-residency requirement. The IRS draws a sharp distinction between two groups of U.S. taxpayers. The first group consists of U.S. citizens, U.S. lawful permanent residents (i.e. the green card holders), and estates of U.S. persons or lawful permanent residents.
The second group consists of the U.S. taxpayers who are not U.S. citizens, U.S. lawful permanent residents, or estates of U.S. persons or lawful permanent residents. A large swath of people (primarily foreign workers and investors) fall under this category. For example, people who came here on the H-1, L and E visas as well as people who are in the process of obtaining their U.S. permanent residency.

Distinct non-residency requirement will be applicable to each group of taxpayers.

Non-Residency Requirement for U.S. citizens, Green Card Holders and Their Estates

In order to meet the non-residency requirement under the Streamlined Foreign Offshore Procedures, individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents:

1. 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,

2. Should not have had a U.S. abode, and

3. Should have been physically outside the United States for at least 330 full days.

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. The IRS made it clear that IRC section 911 and its regulations apply for the purposes of determining whether the non-residency requirement was met for the purposes of the Streamlined Foreign Offshore Procedures.

Non-Residency Requirement for Individuals Who are Not U.S. citizens or Lawful Permanent Residents

The key issue for the second group of individuals is understanding 26 U.S.C. 7701(b)(3). In order to meet the non-residency requirement under the Streamlined Foreign Offshore Procedures, individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent:

1. 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,

2. Should not have met the substantial presence test under IRC Section 7701(b)(3).

Under 26 U.S.C. §7701(b)(3), an individual meets the substantial presence test if the 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) equals or exceeds 183 days.

The IRS kindly provided this example:

Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States. Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013. The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011. Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.

Contact Sherayzen Law Office for Legal Help with Your Undisclosed Foreign Accounts

If you have undisclosed foreign accounts, contact Sherayzen Law Office. Our experienced international tax law firm has helped numerous clients throughout the world with various types of voluntary disclosures from Modified Voluntary Disclosure to 2009 OVDP, 2011 OVDI, and 2012 OVDP. Our clients can be found on virtually all continents and in all major regions of the world.

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