Streamlined Domestic Offshore Procedures with Examples
Contents
- 1 Streamlined Domestic Offshore Procedures (Examples)
- 2 Non-Willfulness Requirement
- 3 Taxpayer is Not Under Audit or Already Penalized
- 4 Previously Timely Filed U.S Tax Returns
- 5 5% (Title 26) Offshore Penalty Instead of Multiple FBAR/Form 8938 Penalties
- 6 Exceptions to the 5% Penalty
- 7 Late Filing Penalties May be Reduced or Avoided
- 8 Current Year vs. Prior Year Non-Compliance
- 9 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 10 Need Help Finding an Experienced Offshore Tax Attorney?
- 11 Golding & Golding: About Our International Tax Law Firm
Streamlined Domestic Offshore Procedures (Examples)
When a Taxpayer is a U.S. person for tax purposes and has not previously reported their foreign income on their U.S. tax returns and failed to file accurate international information reporting forms, they may be subject to extensive IRS fines and penalties. Some of the more common international reporting forms that Taxpayers may be aware of are the FBAR (FinCEN Form 114) and FATCA Form 8938 (Foreign Account Tax Compliance Act). Non-willful Taxpayers who have not yet been penalized and are not under audit may qualify for the Streamlined Filing Compliance Procedures to get into compliance and minimize or avoid penalties. The streamlined procedures have two programs: Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP). This article will focus on the Streamlined Domestic Offshore Procedures which offers Taxpayers the opportunity to amend previously filed tax returns and minimize penalties to a single 5% Title 26 miscellaneous offshore penalties. Let’s walk through the basics of the streamlined procedures for Taxpayers who qualify for the foreign offshore program — along with providing examples explaining the different requirements. *For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.Non-Willfulness Requirement
The most important aspect of qualifying for the Streamlined Filing Compliance Procedures (domestic or offshore) is that the filer is non-willful. Taxpayers will find a lot of information online explaining the difference between willful and non-willful — and unfortunately many of those resources are inaccurate or designed to fear-monger unsuspecting Taxpayers into believing they are willful when they are not:-
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Example: Adam is a U.S. citizen who has been living in the United States his entire life. His grandfather lives overseas and when his grandfather passed away he left Adam money in two different foreign bank accounts. These are the only foreign accounts that Adam has and other than these two foreign accounts Adam’s tax return is relatively straightforward. He has not made any deposits or withdrawals from the account and only very recently learned about the reporting requirements. Adam should qualify as non-willful.
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Example: Adrian is an L-1 visa holder who recently relocated to the United States a few years ago. When he relocated to the United States, he began using a local CPA who claimed to be knowledgeable in international tax. Adrian had several foreign accounts and assets that he told the CPA about, but the CPA told Adrian there was nothing he needed to do because he was not a permanent resident or a citizen. Adrian relied on this information and only recently learned that he was required to report this information to the IRS in prior years. Adrian should qualify as non-willful.
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Example: Alicia is a lawful permanent resident who has been filing U.S. tax returns for the past several years. A few years ago she learned that she was supposed to report her foreign accounts on the FBAR and Form 8938 but chose not to do so because she did not want to risk having to pay any penalty. When Alicia’s CPA asked her if she had any foreign accounts, she told the CPA no — even though she was aware she had foreign accounts and that they were required to be reported. Alicia would not qualify as non-willful.
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Taxpayer is Not Under Audit or Already Penalized
To be eligible for the streamlined procedures, the Taxpayer must not be under audit or already penalized regarding the foreign accounts:-
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Example: Brian is a U.S. citizen who learned earlier in the year that he had foreign accounts that were required to be reported to the U.S. government on the FBAR and Form 8938. He was planning on submitting under the streamline procedures but in the interim, he found himself under IRS examination — including for one of the years involving the foreign accounts. Brian would no longer be eligible for the streamlined procedures.
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Example: Brenda is a lawful permanent resident who received a foreign gift but was unaware that she had to report the foreign gift on Form 3520 until very recently. She was also unaware that she was required to report the foreign accounts that the gift was deposited into. Before learning about the streamlined procedures, Brenda’s accountant submitted a late form 3520 and she received a CP15 Notice. Since Brenda has already been penalized, she may not be eligible for the streamlined procedures.
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Previously Timely Filed U.S Tax Returns
To qualify for the Streamlined Domestic Offshore Procedures, Taxpayers must have filed timely tax returns when they were due. While the IRS may provide some leeway as to what is considered ‘timely,’ they have been known to be very strict about the prior filings having been made on time:-
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Example: Frank is a U.S. Citizen who previously filed U.S. tax returns timely, but he did not include his foregin interest income because it is tax-exempt overseas and he was unaware he was required to include it on his U.S. tax return — he also failed to file Form 8938. Frank may qualify for the Streamlined Procedures.
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Example: Fred is a Lawful Permanent Resident who filed his tax returns in October in each of the past three (3) years but was on extension. He was unaware he had to report foreign income, FBAR or Form 8938. Since he was on extension, Fred may qualify for the Streamlined Procedures.
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Example: Felicia is a U.S. Citizen who was required to file U.S. tax returns but did not do so. She recently learned she was required to file returns and report her foreign income. She does not qualify for the Streamlined Foreign Offshore Procedures, because she resides in the U.S. Unfortunately, Felicia would not qualify for the Streamlined Procedures since she did not file timely U.S. tax returns at the time they were due.
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5% (Title 26) Offshore Penalty Instead of Multiple FBAR/Form 8938 Penalties
Taxpayers can avoid the extremely harsh FBAR and Form 8938 penalties by submitting to the Streamlined Domestic Offshore Procedures. In place of FBAR and Form 8938 penalties, Taxpayers pay a single, 5% of Title 26 Miscellaneous offshore penalty. The penalty is based on the highest 12/31 aggregate value and not the highest value throughout the year:-
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Example: Matthew submitted to the Streamlined Domestic Offshore Procedures and failed to file FBAR and Form 8938 in multiple years. The maximum 12/31 value of his accounts and assets is $160,000. His SDOP penalty would be $8,000 instead of potentially $150,000+ if he was audited and penalized.
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Example: Michelle submitted to the Streamlined Domestic Offshore Procedures and had several accounts with very high balances throughout the year, but the 12/31 maximum value for all accounts combined was $90,000. Her SDOP penalty would be $4,500.
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Example: Miranda is considering submitting to the Streamlined Domestic Offshore Procedures but her 12/31 maximum value is $7,000,000. Her penalty would be $350,000 but she believes she may qualify for Reasonable Cause and a penalty waiver. Miranda may consider alternative to the Streamlined Domestic Offshore Procedures.
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Exceptions to the 5% Penalty
While most assets are subject to the Title 26 Miscellaneous Offshore Penalty, some accounts and assets may be excluded from the penalty base:-
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Example: Tim submits to the Streamlined Domestic Offshore Procedures. He has $800,000 in RRSP and $150,000 in TFSA and Foreign Accounts. Even though the total value is $950,000, the RRSP may be exempt from the penalty computation – reducing the penalty from $45,000 to $7,500.
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Example: Tonya submits to the Streamlined Domestic Offshore Procedures. She has a foreign bank account with a maximum 12/31 value of $80,000 and 5 rental properties she individually owns. Since the rental real estate is individually owned, it is excluded from the penalty base so that her SDOP penalty would be $4,000.
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Example: Ted submits to the Streamlined Domestic Offshore Procedures. He has 7 rental properties but he does not own them individually. Rather, they are all owned in a foreign corporation. Unfortunately for Ted, the value of the foreign corporation may be subject to the SDOP penalty.
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