Do I Qualify for Streamlined Domestic or Streamlined Foreign?

Do You Qualify for Streamlined Domestic or Streamlined Foreign?

Streamlined Domestic vs Streamlined Foreign

When a Taxpayer has failed to properly report their foreign accounts, assets, investments, and income to the U.S. Government — and they are non-willful — they may qualify for the Streamlined Filing Compliance Procedures. The Streamlined Filing Compliance Procedures are designed to help taxpayers safely get into compliance with minimal or no Title 26 miscellaneous offshore penalties. There are two versions of the IRS‘ streamlined procedures: Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP). While both procedures require the Taxpayer to be non-willful to qualify, the eligibility requirements are different for each program. Let’s look at the differences between the two different streamlined procedures.

Streamlined Domestic Offshore Procedures (SDOP)

The Streamlined Domestic Offshore Procedures (SDOP) are for non-willful taxpayers who qualify as U.S. residents. Stated another way, if a non-willful Taxpayer does not qualify as a foreign resident, then they do not qualify for the Streamlined Foreign Offshore Procedures (which offers a complete penalty waiver) but may qualify for the Streamlined Domestic Offshore Procedures — which offers a reduced penalty.

SDOP Requires Timely Filed Tax Returns

To submit to the Streamlined Domestic Offshore Procedures, the Taxpayer must submit amended tax returns. This presumes that the taxpayer initially submitted timely tax returns. In our communications with the Internal Revenue Service over the years, there may be a bit of wiggle room if the Taxpayer missed the tax filing due date by a few days or even a week or two — but a Taxpayer generally cannot submit late filed returns and then submit amended returns under the Streamlined Domestic Offshore Procedures in order to qualify.

As provided by the IRS:

• • • “U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Domestic Offshore Procedures must (1) 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 (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), (2) for each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and (3) pay a Title 26 miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.”

5% Title 26 Miscellaneous Offshore Penalty

Taxpayers who qualify for the Streamlined Domestic Offshore Procedures must pay a 5% penalty on the highest year’s annual aggregate total of their unreported accounts and assets (based on the December 31st values) within the compliance period. Some accounts and assets are excluded from the penalty computation such as certain rental real estate and retirement accounts in Canada (RRSP and RRIF).

Streamlined Foreign Offshore Procedures

For taxpayers who qualify for the Streamlined Foreign Offshore Procedures (SFOP), there is a complete offshore penalty waiver so that there is no Title 26 miscellaneous offshore penalty for unreported accounts, assets, and/or investments. It is important to note there are a few differences in the Streamlined Foreign Procedures versus the Streamlined Domestic Procedures.

Original Tax Returns

Unlike the Streamlined Domestic Offshore Procedures, with the Streamlined Foreign Offshore Procedures taxpayers can submit original tax returns as part of the submission process. Therefore, even if a Taxpayer has not filed original tax returns, they can still submit their original tax returns under the Streamlined Foreign Offshore Procedures and qualify for the program.

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: 

      • if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time, or

      • if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.”

Two Tests to Qualify as a Foreign Resident

There are two different tests to determine if a Taxpayer may qualify as a foreign person in order to be eligible for the Streamlined Foreign Offshore Procedures. When the taxpayer is either a U.S. Citizen or Lawful Permanent Resident, they must show that they resided outside of the United States for at least 330 days in any one of the past three tax years. For taxpayers who are not considered U.S. Citizens or Lawful Permanent Residents, they must show that they did not meet the Substantial Presence Test in one of the past three years. 

Common Issues for Both Streamlined Programs

Here are two important facts that Taxpayers should consider when they are submitting to either version of the streamlined procedures:

Taxpayers Must Be Non-Willful

Under either version of the streamlined procedures, Taxpayers must qualify as non-willful. In recent years, the Internal Revenue Service has launched investigations and even criminal prosecution against taxpayers who have misrepresented (under penalty of perjury) that they were non-willful when they were in fact willful. For taxpayers who are considering entering the streamlined procedures, they must have their ducks in a row before making their submissions.

Taxpayers Can Still Be Audited After submission

Another important aspect of the streamlined procedures is that after a taxpayer submits to the program, they may still be audited in future years. This is unlike the voluntary disclosure program in which the IRS offers a closing letter. Rather, with the streamlined procedures, the Internal Revenue Service can still pursue an audit or examination even after the submission is completed.

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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

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.