International Tax Consulting

Streamlined Foreign Offshore Procedures

What are the IRS Streamlined Foreign Offshore Procedures?

The Streamlined Foreign Offshore Procedures are designed by the IRS to bring certain individuals with undisclosed foreign income, investments, assets, or accounts into the IRS offshore compliance without issuing any penalties against the taxpayer.

In other words, it provides taxpayers, who comply with the eligibility criteria outlined below, with amnesty from penalties such as failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties, or FBAR penalties.

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Why the IRS Streamlined Foreign Offshore Procedures are Important

The IRS designed this program with the goal to enable foreign residents living worldwide to obtain a full penalty waiver. This is beneficial for taxpayers who have unreported offshore accounts that subsequently subjects them to IRS offshore penalties, such as FBAR penalties. Such taxpayers can make use of streamlined foreign offshore procedure to avoid all offshore penalties.

The Streamline Foreign Offshore Procedure is also beneficial for taxpayers who file returns under the procedure and are subsequently selected for audit under an existing audit selection process. The taxpayer in such a situation will not be subject to failure-file and failure-to-pay penalties or accuracy related penalties with respect to amounts reported on the returns, or to information return penalties or FBAR penalties, except where the taxpayer’s conduct is considered as a fraudulent and/or willful violation of tax noncompliance. This benefit does not extend to penalties assessed previously.

Criteria for Streamlined Foreign Offshore Procedure (SFOP)

To be eligible for Streamlined Foreign Offshore Procedure, taxpayers must fulfill two main requirements. The first requirement is that a taxpayer’s conduct is non-willful, and the second, taxpayer must meet the applicable non-residency requirement.

(1) Non-Willful Conduct for SFOP

Under the totality of circumstances test, the applicant for Streamlined Foreign Offshore Procedure, must quality as non-willful. According to the IRS, any conduct arising out of negligence, inadvertence, or a mistake in understanding of the requirements of law amounts of non-willful conduct.

(2) Non-residency Requirement for SFOP

The non-residency requirement of the Streamlined Foreign Offshore Procedure essentially means taxpayer must be a Foreign Resident. The status of the foreign resident depends upon whether the taxpayer is a U.S. citizen or Green Card Holder or whether the taxpayer is a non-U.S. citizen.

Citizen of the U.S. and Legal Permanent Residents (Green Card Holders)

For U.S. citizens or Legal Permanent Residents to qualify as Foreign Resident, they must meet the 330-day rule. The 330-day rule means the U.S. citizens or Legal Permanent Residents must reside outside of the United States for at-least 330 days in any one or more of the most recent three years:

“ Individual U.S. citizens or lawful permanent residents, or estates of the U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied extended due date) has passed, the individual did not have a U.S. adobe and the individual was physically outside the United States for at least 330 full days.”
Internal Revenue Code Section 911

The 330-day rule should not be confused with the IRC 911 because IRC 911 allows a bona fide resident to qualify for the foreign earned income exclusion. For purposes of these procedures, the temporary presence of the individual in the United States or maintaining a dwelling in the United States by an individual does not mean that the individuals’ abode is in the United States.

Non-U.S. Citizens and Legal Permanent Residents

Non-U.S. citizens and legal permanent residents do not meet the 330-day rule mentioned above. The residency requirement for such applicants is that they must show that in one of the three applicable years, the applicant did not meet the Substantial Presence Test. The Substantial Presence Test is provided under IRC section 7701(b)(3).

Submitting Application for Streamlined Foreign Offshore Procedure

Submit Original Tax Returns for 3-Years

To qualify for the program, the applicant must submit three properly amended or original tax returns. Since the tax return for tax year 2020 is due now, the applicant may be able to submit an original tax return along with an amended 2018 in 2019 return. The returns must include all required foreign and/or offshore account, investments, assets and/or income information.

International Information Returns

In addition to the above referred returns, the applicant may also file international returns for the three-year required compliance period. The international information returns could be either of the following:

  • Form 3520
  • Form 3520-A
  • Form 5471
  • Form 8621
  • Form 8865
  • Form 8938

FBAR Filing for 6 Years

The IRS requires that in accordance with the requirements of streamlined domestic offshore, applicants should electronically submit 6 years of FBAR filings. The FBAR filings must include all necessary foreign account information such as bank accounts, investment accounts, pension, and/or life insurance polices to name a few.

Non-Willful Certification IRS Form 14653

The applicant for Streamlined Foreign Offshore Procedure is required to fill the form 14653. The applicant, under penalty of perjury, the facts necessary to establish non-willfulness. This certification is crucial to show the element of non-willfulness of the applicant.

Were you Willful?

If the taxpayer’s conduct was willful, the applicant cannot submit to the Streamlined Foreign Offshore Procedures. There is no exception for such individuals who were willful for a few years only.

OVDP

If the applicant knows that their conduct was willful, however the applicant wants to get into compliance regardless of their willful conduct, the best option available to the applicant in such a situation may be to submit to the traditional OVDP program. The applicant could opt-out to obtain a reduced penalty.

OVDP Last Option

A taxpayer who submits to an OVDP voluntary disclosure letter, first in accordance with OVDP FAQ 24 on or after July 1, 2014, will not be eligible to apply to the streamlined program.

Streamlined Foreign Program May Be Ending Soon

The streamlined foreign offshore is designed by the IRS to assist non willful taxpayers, however, the program can be terminated at any time by the IRS. The IRS also has the discretion to change the terms of the program or the eligibility criteria.

Therefore, taxpayers seeking to avoid all penalties must submit to Streamlined Foreign Offshore Procedures as soon as possible.

Talk with Tax Attorneys Today About Your Streamlined Disclosure and Offshore Compliance Plan

Learn how our firm of experienced international tax attorneys can better assist you before you make any affirmative representations or statements to the IRS by giving us a call at (410) 497-5947 or by scheduling a meeting here.

Our firm has extensive experience in international tax, specifically, IRS offshore disclosure and the Streamed Foreign Offshore Procedures.

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