- 1 Streamlined Filing Compliance Procedures
- 2 Are You Non-Willful?
- 3 Are You Currently Under IRS Audit?
- 4 Calculating the Penalty Accurately (Domestic)
- 5 Did you File Original Tax Returns (Domestic)
- 6 Do You Qualify as a Foreign Resident (Foreign)
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Golding & Golding: About Our International Tax Law Firm
Streamlined Filing Compliance Procedures
The Streamlined Filing Compliance Procedures (SFCP) is one of the more popular offshore disclosure programs that the Internal Revenue Service offers taxpayers with undisclosed foreign accounts, assets, investments, and income. The program is only available to taxpayers who are non-willful – when a taxpayer is willful, they do not qualify for the Streamlined Procedures. And, taxpayers who are willful and think they can sneak into SFCP by filing a false application should think again, since the IRS has pursued willful taxpayers much more aggressively than in years past. The Streamlined Filing Procedures can be very complicated, especially for taxpayers who own or operate foreign entities and/or may have invested in foreign mutual funds or other pooled funds (aka PFIC). While the Streamlined Procedures are the most popular offshore disclosure program, taxpayers who are considering entering the program should make sure it is a good fit for their own specific facts and circumstances. The Streamlined Procedures are not a one-size-fits-all program and while it may benefit some taxpayers, for other taxpayers it is simply not a good fit. Let’s look at five important facts about Streamlined Filing Compliance Procedures.
Are You Non-Willful?
You must qualify as non-willful to be eligible for the Streamlined Procedures. While there is no bright-line test to determine willfulness from non-willfulness, there are various factors taxpayers can use to assess and evaluate their offshore amnesty options. Taxpayers should be careful before certifying under penalty of perjury that they are non-willful since the IRS does go after willful taxpayers who try to submit to SFCP.
Are You Currently Under IRS Audit?
The Streamlined Procedures are only available to taxpayers who are not currently under IRS audit or examination. That is because if a taxpayer is under audit or examination, they are required to disclose this information to the agent. This is true, even if the taxpayer is not currently under audit or examination for any international income or reporting issues.
Calculating the Penalty Accurately (Domestic)
Under the domestic version of the program — which refers to US residents or citizens who have offshore accounts as opposed to foreign residents — there is a 5% Title 26 Miscellaneous Offshore Penalty for the one year of the compliance period that has the highest December 31st aggregate total of unreported accounts and assets. It is not uncommon for less experienced practitioners to submit incorrect penalty calculations by including assets that are either exempt or excluded from the penalty base. Before preparing the penalty calculation, it is important to ascertain whether any of the assets you have are exempt or excluded from the penalty calculation.
Did you File Original Tax Returns (Domestic)
To qualify under the domestic version of the program, the taxpayers must have filed original tax returns. There is also the presumption that the original tax returns were filed timely — which includes if they were filed timely on extension. Under the Streamlined Domestic Offshore Procedures, the IRS does not accept original tax returns — only amended returns.
As provided by the IRS:
“For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with any required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return. You may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.”
*The Streamlined Foreign Offshore Procedures (designed for foreign residents) allows taxpayers to submit original tax returns.
Do You Qualify as a Foreign Resident (Foreign)
Qualifying as a foreign resident under the IRS Streamline Procedures is not as easy as it is for other international tax submissions, such as the Foreign Earned Income Exclusion. The reason why is that when a taxpayer qualifies as a non-resident and is non-willful, they can qualify for a full penalty waiver. There are two tests to determine whether a person qualifies as a foreign resident under the Streamlined Foreign Offshore Procedures — one test for taxpayers who are either US Citizens or Lawful Permanent Residents and another test for taxpayers who are only residents of the United States because they met the Substantial Presence Test.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.