It is not uncommon for U.S. citizens or Green Card holders to come across a situation where they realize they haven’t been entirely compliant with U.S. tax filing requirements. The filing requirements, especially for foreign assets and income, have become so complex that even some tax practitioners don’t know where to start. If you feel like you may be in a situation like this, or if you have a client that may not have correctly filed or disclosed all foreign income or assets, there is hope.
The IRS offers the Streamlined Offshore Disclosure procedures for individuals who want to come forward and “clean up” any prior-year filings which involved foreign financial assets and/or income that wasn’t disclosed or reported. Why would taxpayers want to come forward and pay professional fees and penalties and possible additional tax when they can just file correctly moving forward? The reason is that if the IRS contacts the taxpayer before the taxpayer comes forward voluntarily, this program is no longer available. That means, instead of the one-time 5% penalty explained below, the taxpayer now may be assessed for the various steep penalties that go with not filing information returns. Most of these forms have penalties of $10,000 per year or more in the case of a 3520 or 3520-A.
The Streamlined Offshore Disclosure Procedures can be used only by individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing inside the United States and U.S. individual taxpayers residing outside the United States. There are two programs available:
- Streamlined Domestic Offshore Procedures are the procedures available for taxpayers living in the U.S. To be eligible, the taxpayer must have previously filed income tax returns for the past three years. The submission will include amended income tax returns for the past three years (including information returns such as 5471, 3520, 3520-A, etc.) and either amended or original FBARs for the past six years. The taxpayer will have to complete and sign Certification Form 14654, attesting that the failures above resulted from non-willful conduct. There is also a 5% Title 26 miscellaneous offshore penalty, which is a 5% penalty on the highest balance of unreported foreign assets during the six-year period, that is included in the program.
- Streamlined Foreign Offshore Procedures are the procedures available for taxpayers living abroad. To be eligible, the taxpayer, or one spouse if filing jointly, must have been physically outside of the U.S. for 330 days for at least one out of the last three years. The taxpayer cannot have had a U.S. abode during this time. Owning property in the U.S. does not count as abode. IRS Publication 54 has specific examples of U.S. abodes. The submission will include the same informational and income tax returns as for individuals living in the U.S. The taxpayer will also have to complete and sign Certification Form 14653, attesting that the failures above resulted from non-willful conduct. The difference between the Domestic Offshore Procedures and the Foreign Offshore Procedures is that there is no Title 26 5% penalty for the Foreign Offshore procedures.
Important to point out again, one of the main requirements for the streamlined filing compliance procedures is that the taxpayer acted non-willfully. Taxpayers must certify that the failure to report all income from a foreign financial asset, failure to pay all taxes, and failure to submit all required information returns, including FBAR’s (FinCEN Form 114), was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Anyone who qualifies should consider filing under the program as soon as possible. Our professional tax experts are here to help you with your IRS offshore tax compliance. Contact us today.
Authors: Elvira Frencillo, CPA & Evelyn Fernandez, CPA, MST
About the Author
Evelyn Fernandez, CPA, MST, Principal
Tax, International Tax, Manufacturing & Distribution
Evelyn is a Tax Principal at KROST. She has been in the public accounting profession for over 15 years. Her areas of expertise include tax planning and compliance for high net worth individuals, international entities and individuals, multi-state taxation, partnerships, S corporations, trusts, nonprofit organizations, and entertainment businesses. » Full Bio
Elvira Frencillo, CPA, Senior Manager
Tax
Elvira Frencillo is a Tax Manager at KROST. She has 25 years of Accounting, Financial, and Taxation experience in both public and private industries. She has been in public accounting for over 11 years. Her areas of focus include tax planning, tax compliance, and financial reporting for individuals and their closely-held businesses, partnerships, corporations, and trusts. » Full Bio