IRS Streamlined Foreign Offshore Procedures

The streamlined Foreign Offshore Procedures (SFOP) are one of the two programs available in the streamlined filing compliance procedures. It is available to those who have unreported income from undisclosed foreign financial assets.

Unlike the streamlined domestic Offshore Procedures, there is no 5% misc. offshore penalty assessed on a Streamlined Foreign Offshore procedures filing.

Eligibility for the streamlined foreign offshore procedures

In order to apply under the streamlined foreign offshore procedures, taxpayers must determine if they are eligible.

Non-residency requirement

There are two sets of non-residency requirements depending on whether the taxpayer is a U.S. Citizen, green card holder, or a non-immigrant U.S. resident.

U.S. citizens and green card holders

For the covered tax return period (i.e., the three most recent tax periods for which the deadline has passed), the individual must have been physically outside the U.S. for at least 330 full days in any one or more years. For married taxpayers, both spouses filing a joint certification must meet the non-residency requirement.

In addition, the individual must not have had a U.S. abode.  “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling.

The location of your abode often will depend on where you maintain your economic, family, and personal ties.

Example 1:  Mr. W was born in the United States but moved to Germany with his parents when he was five years old, lived there ever since, and does not have a U.S. abode.  Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

Example 2:  Assume the same facts as Example 1, except that Mr. W moved to the United States and acquired a U.S. abode in 2012.  The most recent 3 years for which Mr. W’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011.  Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

Non-U.S. citizens and lawful permanent residents

For the covered tax return period (i.e., the three most recent tax periods for which the deadline has passed), the individual must have been not met the substantial presence test under IRC 7701(b)(3) in any one or more years.

For married taxpayers, both spouses filing a joint certification must meet the non-residency requirement.

Example 3:  Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States.  Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013.  The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011.  While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011.  Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.

Non-willfulness

The failure to report all income, pay all tax, and submit all required information returns, including FBARs, must be due to non-willful conduct.

Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Willful Blindness

A taxpayer who understands that there may be a filing requirement, but deliberately avoids learning about international information reporting requirements can be considered to have acted willfully. The law does not protect deliberate ignorance or conscious avoidance.

Benefits of participating in the SFOP

A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.

Even if returns properly filed under these procedures are subsequently selected for audit, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the IRS determines that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.

Most importantly, taxpayers will come into compliance with their U.S. tax obligations without the fear of civil penalties which can be significant.

The streamlined foreign offshore procedures are an uncharacteristically lenient program; eligible foreign nationals and expats should take advantage of it. Expatriates, especially, who have been in non-compliance for many years have been able to avail themselves of this program.

The program is not permanent and will likely end at some point (related: OVDP ending announcement).

Requirements for participating in the streamlined foreign offshore procedures

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 taxpayer must file an original or amended U.S. tax return disclosing the foreign assets on required international information forms (e.g., Forms 3520, 5471, and 8938) and income.

They must file a certification of non-willfulness certifying that their failure to report foreign assets and pay all income taxes, including FBARs resulted from non-willful conduct.

For each of the most recent 6 years for which the FBAR due date has passed, the taxpayer must file delinquent FBARs at FinCen.

Finally, the taxpayer must submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.

We assist taxpayers who have undisclosed foreign financial assets. Contact us today to see how we can help.

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