IRS 5% Penalty Waiver for Streamlined Foreign Offshore Procedures

IRS 5% Penalty Waiver

The Streamlined Program offered by the Internal Revenue Service offers two options for taxpayers depending on whether they qualify as a US resident or a foreign resident for purposes of the submission. For taxpayers who qualify as a foreign resident, they may qualify for a complete penalty waiver for their unreported foreign accounts, assets, or investments. Conversely, for taxpayers who do not qualify as a foreign resident, they will be subject to a 5% penalty. Unfortunately, the IRS has affirmed in the non-willful certification, that taxpayers do not qualify for a penalty waiver and any attempt to receive a refund of the penalty will result in a forfeiture and removal from the program.

As provided by the IRS

• • • I acknowledge the possibility that amended income tax returns I am submitting under the Streamlined Domestic Offshore Procedures may report income for tax years beyond the three-year assessment limitations period under I.R.C. § 6501(a). Other assessment limitations periods in I.R.C. § 6501 may allow the Internal Revenue Service to assess and collect tax.

  • • If I seek a refund for any tax or interest paid for the omitted income that I am reporting on my amended income tax returns because I feel that my payments were made beyond the assessment limitations period, I understand that I will forfeit the favorable terms of the Streamlined Procedures.

How to Qualify as a Foreign Resident?

The two tests are different depending on the status of the applicant:

U.S. Citizen/Green-Card Holder

A person will qualify as a foreign resident as long as they live outside of the United States for at least 330 days in any one of the last three calendar tax years. 

Non-U.S. Citizen/Non-Green-Card Holder

A Person must show that in any one of the three years within their compliance period, they did not meet the Substantial Presence Test. By not meeting the Substantial Presence Test, an individual is not subject to U.S. Tax because they are considered a Non-U.S. Person for the period at issue (If they had U.S. Sourced income, they would still file a 1040NR). When a person can show they did not meet the Substantial Presence Test for at least one year in the three-year tax compliance period, the IRS waives the 5% penalty.

Unfiled Previous Year Tax Returns

Another benefit to the Streamlined Foreign Offshore Procedures (Sorry U.S. Residents) is that the applicant can still apply for the program, even if they have not filed timely tax returns in prior years. Under the Streamlined Domestic Offshore Procedures, a person must have filed tax returns during the compliance period to qualify.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

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 who 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. 

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.