Streamlined Domestic Offshore Procedures (SDOP) – How to File?
The IRS or the Internal Revenue Service has been taking serious action against taxpayers who have unreported assets, income, investments, and accounts offshore in the past years. In fact, the IRS carefully manages and handles the streamlined filing submissions for taxpayers who are Green Card holders, US citizens, or anyone considered a legal resident in the country under the PPT or Physical Presence Test with financial assets offshore. Hence, the purpose of streamlined procedures is to certify that the taxpayer’s failure to report or include their offshore assets, income, and investments in their returns and the failure to settle all tax obligations on time wasn’t intentional. It’s also to encourage them for the compliance of the information-reporting obligation.
What are Streamlined Foreign Domestic Procedures?
The SFOP or the Streamlined Foreign Offshore Procedures is a compliance program set by the IRS for nonresidents of the country. It aims to encourage foreign residents to follow the US tax laws by reporting their assets, accounts, income, and investments offshore to their returns. Otherwise, these taxpayers will surely be charged with penalties and face other legal consequences, including FBAR penalties. (But there are separate disclosure procedures specifically for delinquent FBARs). However, if they comply with the forms and the necessary documents, they can avoid the Title 26 Miscellaneous Offshore Penalties.
Title 26 Miscellaneous Offshore Penalty
The IRS will require those taxpayers under the streamlined domestic program to pay a total of 5% penalty. Hence, instead of issuing penalties for taxpayers who filed forms late, the IRS will use the Title 26 Miscellaneous Offshore Penalty. It’s the 5% of the highest balance of the taxpayers’ financial assets offshore during the entire coverage of the FBAR period and tax return period.
However, calculating this particular penalty can be difficult and complicated because of the limitations, exclusions, and exceptions of some of the assets and investments. Therefore, the IRS will determine the highest value by summing up the foreign financial assets and account balances at the end of the taxable year. In addition, the assets and investments that this penalty covers may include offshore bank accounts, mutual funds, investment accounts, and pensions. It also includes foreign business and entity ownership and life insurance.
The streamlined procedures are created for the taxpayers living inside and outside of the United States. To qualify for the SDOP or the Streamlined Domestic Offshore Procedures, you have to meet the particular set of program requirements.
Eligibility for Streamlined Foreign Procedures
Meet the Requirements for Non-Residency
The Green Card holders or the US citizens, who are legal permanent residents, should qualify for the 330-day rule for them to be eligible resident aliens of the country. However, the nonresidents in the US don’t have to meet the 330-day rule, but they should not meet the SPT or the Substantial Presence Test in one of the three applicable years according to the IRC sec. 7701.
Another requirement for you to qualify for the Streamlined Foreign Procedures is you need to qualify as non-wilful.
Eligibility for Streamlined Domestic Offshore Procedures
If you’re one of the taxpayers living in the US or those who didn’t meet the requirements for non-residency, you’re eligible for streamlined domestic offshore procedures.
Filing Previous Tax Returns
Since the IRS won’t accept the filed original returns under this program, you have to process it again. You have at least one week to file your returns after the deadline stipulated on your form. Otherwise, the chance is high that your application for the program won’t be accepted.
Unpaid Foreign Income Taxes and Unfiled FBAR
Taxpayers who have unreported or undeclared foreign income qualify for the streamlined domestic offshore procedures. However, you won’t be eligible for the streamlined procedures of the IRS if you only have undeclared or unreported taxes from your domestic income. In addition, if you don’t have any unreported income, but you haven’t included your assets or accounts in your return, you may still avoid penalties by qualifying for another program of the IRS.
Non-Willful Conduct for SDOP
The primary requirement for all programs of streamlined procedures has unintentional conduct for the violation committed by the taxpayers. However, you won’t qualify for the said streamlined procedures if you did it wilfully.
Who is Disqualified from Filing?
Some taxpayers may be eligible for SDOP; however, others may be disqualified for either of these situations. In addition, any taxpayer won’t qualify for the program when the IRS begins a civil examination of the filed returns. So if you’re one of them, you need to consult a tax expert to find the assistance and help you need. The same thing goes for taxpayers who are under the IRS criminal investigation.
Moreover, since those who have submitted their amended tax returns will qualify for the said program, those who filed the original forms or haven’t processed their previous tax returns won’t be eligible for SDOP. However, it’s not an option for these taxpayers to submit late returns and amend them right away for them to qualify for the program. It’s because they could intentionally process their returns with false tax information.
Here are the documents you need to provide when you want to participate in the SDOF or the Streamlined Domestic Offshore Procedure.
- Form 1040X
- Forms 3520
- Form 3520-A
- Form 14654
- Form 5471
- Form 5472
- Form 8938
- Form 926
- Form 8621
Side Note: Form 14654 is the Certification by US Person Residing in the United States. It’s an important form when participating in the SDOP, which requires the taxpayers to be ready for the computation of the possible incurred penalties.
Benefits of the Streamlined Domestic Offshore Procedures
If you’re a taxpayer and you want to participate in the Streamlined Domestic Offshore Procedures, you can enjoy some of its benefits. You will only be subject to the Title 26 Miscellaneous Offshore Penalty if you qualify for these procedures. In addition, you will no longer be subject to information return penalties, FBAR penalties, or accuracy-related penalties.
Moreover, even though you’ll still be under the IRS audit after filing your forms and documents under these procedures, you won’t be subject to accuracy-related monetary penalties according to the reported amounts on information return penalties, tax returns, or FBAR penalties. Hence, if you qualify for Streamlined Domestic Offshore Procedures, the program will leverage a smaller penalty instead of facing a possibly larger penalty.
7 Steps to Filing the Streamlined Domestic Offshore Procedures
These are the steps when filing the streamlined domestic offshore procedures.
- You have to submit all the necessary forms and documents every year in the three most recent taxable years. It includes Forms 5471, 3520, 5472, 926, 3520-A, 5472, 8621, and 8938. You also have to provide the Amended US Individual Income Tax Return, Form 1040X. Besides that, using these streamlined procedures, you may not also process your existing unpaid tax returns.
- You have to write the “Streamlined Domestic Offshore” in red at the top portion of the first page of your amended tax returns and put it as well at the top part of each following page of your forms and documents. It’s to let the IRS know that these returns are under streamlined domestic offshore procedures.
- Provide a statement with your signature on the Certification by US Person Residing in the United States. This particular statement validates that you qualify for these streamlined procedures and you’ve successfully filed all FBARs. Besides, it also verifies that the non-willful conduct is the reason for the failure to pay the legal taxes, declares all your taxable income, and submit all required forms and documents, including the FBARs. In addition, the said certification also indicates that the amount you’ve stated on your documents for the miscellaneous offshore penalty is true and accurate. Upon submission, you also have to secure the necessary original and signed documents from your foreign financial institutions and provide copies of each information and tax return. Don’t forget to put your attachment copies to FBARs as well.
- Then, you can now go ahead and process all of the required payments and fees with the same amount as what you’ve stated on your returns. The said payment also includes the Title 26 miscellaneous offshore penalty. Keep in mind to put your taxpayer ID number on your check when processing your payment.
- Suppose you seek relief for failure to timely elect deferral of income from your savings or retirement plans since the IRS permits deferral by an applicable treaty. In that case, you have to submit a few additional documents. It includes the statement requesting the time to be extended to make an election to defer income tax. You also have to sign and submit the statement with the particular date under penalties of perjury. It should have the specific events that resulted in the failure of making the election, failure’s discovery, and the responsibility and engagement of your advisor whenever you get one. In addition, if you have Canadian plans, you also have to provide Form 8891 for every taxable year and include the plan type, its description, and coverage upon submission.
- After processing all of these forms, documents, and payments, you have to send them in printed form to the Internal Revenue Service, 3651 South I-H 35Stop 6063 AUSC, at Austin, Texas, with the postal code of 78741. Don’t forget to put “Attn: Streamlined Domestic Offshore” before the city in the address on the mail envelope.
- Then, you have to file your delinquent FBARs. In your documents, you should also mention that you’re filing the FBARs as part of these streamlined procedures. Besides that, you have to choose “Other” as the reason for filing it late, and a particular box will pop up on your screen where you have to write the Streamlined Filing Compliance Procedures.”
What will happen if I cannot get all my documents from overseas?
Getting the necessary documents from financial institutions offshore is one of the common problems that some taxpayers encounter. Hence, if this happens to you, there are some requirements that the IRS wants you to provide. One of them is the documentation of your attempts to communicate with your offshore financial institutions. It can also be phone conversations. Just make sure to get all of the important details, such as the complete name of the person you talked to and the time, date, and the entire duration of the call.
Moreover, if you’re using letters for communication, you have to make sure to provide printed copies of the letters you’ve sent and received. Besides that, the IRS also recommends you to use the postal service so that there will be confirmation of the delivery and the possible return receipts for the letters you’ve sent to your financial institutions offshore.
What will happen if the IRS rejects my streamlined domestic offshore filing?
When the taxpayers filed their amended tax returns under SDOP, they are presumed to be unintentional or non-willful. Then, their non-willfulness will be verified through the IRS audit. Since SDOP doesn’t actually reject or accept any application from the taxpayers, the IRS uses streamlined procedures for willful clients who let the agency conduct a thorough audit for their returns.
What happens if I don’t file at all?
It’s your choice if you don’t want to file at all. However, keep in mind that doing so will surely make you face corresponding consequences and civil penalties. Also, the IRS can take steps to revoke or deny your US passport.
When are Streamlined Domestic Offshore Procedures Ending?
The IRS will end SDOP in the future, but there’s no specific date yet. As long as they have, they’ll surely announce it to the public ahead of time. The same thing goes for other updates in the agency. They usually inform all taxpayers in many ways, like via email, snail mail, or a written article on their official website.
Do I still need to file if I have closed my foreign accounts?
If you’ve closed your foreign account, you won’t have to do any reporting of your foreign requirements moving forward. But you still have to settle your FBARs that you didn’t file and the previous returns that you didn’t process. Keep in mind that the IRS can audit your tax returns for up to six years if they suspect fraud or substantial underreporting, and they can also audit your account any time if you didn’t file the requirements for the international information tax returns.
Can I try to streamline first and then go for OVDP?
If you’ve successfully made your submission under either the SDOP (Streamlined Domestic Offshore Procedures) or the SFOP (Streamlined Foreign Offshore Procedures), you may no longer take advantage of OVDP or the Offshore Voluntary Disclosure Program. The same thing goes for those taxpayers who have already submitted to OVDP on the 1st of July, 2014, or after that, they’ll also no longer qualify for the streamlined procedures.
Moreover, if you did that before the 1st of July, 2014, you qualify to transition into the streamlined procedures, but the previously made assessments for possible penalties won’t be abated. However, since the IRS has already ended the Offshore Voluntary Disclosure Program last 28th of September, 2018, taxpayers will no longer take advantage of it moving forward.
If you want to participate in the streamlined procedures of the IRS, you need to be aware of the different tax issues that you have to fix and analyze before filing your previous returns in the best way possible. Moreover, every taxpayer has a different story to tell and experience to share. All of these need a unique and relevant interpretation of the US tax regulations and laws to prepare appropriate submission under a particular streamlined procedure to the IRS. Hence, it’ll still be the best idea to consult a tax professional before taking your next step.