Streamlined Foreign Offshore Procedures
Contents
- 1 Streamlined Foreign Offshore Procedures with Examples
- 2 Non-Willfulness Requirement
- 3 Taxpayer is Not Under Audit or Already Penalized
- 4 Foreign Resident 330-Day Rule or Substantial Presence Test
- 5 No Title 26 Offshore Penalty under SFOP
- 6 SFOP Allows for Original Tax Return Filing
- 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 Foreign Offshore Procedures with 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 different programs: Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP). This article will focus on the Streamlined Foreign Offshore Procedures, which offers Taxpayers the opportunity to file original tax returns (or amend prior returns) and avoid all 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 (either 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 simply fear-monger unsuspecting Taxpayers:-
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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 have 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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Foreign Resident 330-Day Rule or Substantial Presence Test
The benefit of the Streamlined Foreign Offshore Procedures compared to the Streamlined Domestic Offshore Procedures is that Taxpayers who qualify for the Streamlined Foreign Offshore Procedures are not penalized (they are also eligible to file original tax returns which they are not able to do under the Streamlined Domestic Offshore Procedures). But to qualify for the Streamlined Foreign Offshore Procedures, the Taxpayer must qualify as a foreign resident:-
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Example: Charlene is an H-1B visa holder, but only just started to meet the substantial presence test last year. Recently, she learned that she was required to report her foreign accounts. Since she is not a U.S. citizen or lawful permanent resident and is still a visa holder — and did not meet the substantial presence test in at least one of the three years included in her streamlined foreign application — she may qualify for the Streamlined Foreign Offshore Procedures.
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Example: Christopher is a lawful permanent resident who has been living in a foreign country for the past five years. He has several foreign accounts and assets but was unaware that he was required to report this information to the U.S. government since he lives overseas and all of his money is sourced in a foreign country. Since Christopher has been out of the United States for at least 330 days in the last year, he should also qualify for the Streamlined Foreign Offshore Procedures.
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Example: Charlie is a lawful permanent resident who travels back and forth between the United States and different foreign countries. He recently learned that he should have been reporting his foreign pension plan and bank accounts on his U.S. tax return. He has been out of the country for 365 days but it was not in the same 12-month year — instead, the time was split over two years. Since Charlie was not out of the United States for at least 330 days in a single tax year, the IRS takes the position that he does not qualify for the Streamlined Foreign Offshore Procedures.
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