IRS Streamlined Foreign Offshore Procedures 2021
Some Americans living offshore are sometimes surprised when they know that they have to file their legal taxes in the U.S. after moving abroad. That might be what they’ve been thinking, but the fact is that the United States has a particular system for citizenship-based taxation. It means that all U.S. citizens need to file their tax returns wherever they earn or live.
However, when these expats will file their returns using the IRS Streamlined Foreign Offshore Procedures, they most often reduce their tax obligations. Otherwise, they will surely face the corresponding consequences and penalties from the IRS. So for you to learn more about it, here’s everything you need to know about the Streamlined Foreign Offshore Procedures of the Internal Revenue Service.
Why are Streamlined Foreign Offshore Procedures Important?
The Internal Revenue Service designed the Streamlined Foreign Offshore Procedures to help taxpayers who live in the U.S. and from different parts of the world to take advantage of a full penalty waiver. It’ll be a great benefit to those who own offshore accounts that they didn’t report or include in their tax returns, resulting in penalties and consequences. So if this happens to you in the future, you can avoid paying penalties when you make use of Streamlined Offshore Procedures.
Also, taxpayers will benefit from SFOP, especially those who process their tax returns using this procedure and are chosen for the IRS audit. The said program aims to bring those who have undisclosed or unreported foreign investments, income, financial accounts, or assets to the Internal Revenue Service offshore compliance without any penalties to deal with.
What Penalties are Avoided Under Streamlined Procedures?
As mentioned earlier, the Streamlined Procedures of the IRS will bring many taxpayers back into compliance, giving them some benefits. So here are the penalties that an individual can avoid under the Streamlined Procedures.
- Failure to Pay Penalty
It’s 0.5% of the total unpaid taxes owed.
- Non-Willful or Negligent
This is a FBAR penalty of a total of $10,000 per account each year.
- Failure to File Penalty
It’s 5% every month of the delinquent taxes and it’s capped at 25% of the aggregate amount of the tax obligation.
- International Return
This is a penalty of $10,000 per year per entity.
- Accuracy-Related Penalty
This is the additional 20% penalty when the total income reported is understated.
- Criminal Penalties
A willful violation will result in dealing with criminal penalties that include fines and jail time.
The Streamlined Procedures are for taxpayers who are both living offshore and within the United States. With that, there are a set of requirements to meet for a taxpayer to qualify for the Streamlined Procedures. Here are those.
The Tax Returns’ Civil Examination of the IRS in Any Taxable Year
Whether the said examination is related to the unreported financial assets offshore, the taxpayers won’t qualify for the Streamlined Procedures if the Internal Revenue Service is initiating a civil examination on their tax returns. The same thing can be said to those who are under criminal investigation by the agency. They will also not be eligible for the Streamlined Procedures. These taxpayers may consult a tax professional or get in touch with an agent for further assistance.
The Need to Have a Valid Taxpayer Identification Number
If you want to use the Streamlined Procedures, you need to have a valid taxpayer identification number. The taxpayer identification number is a valid SSN or Social Security Number for those resident aliens in the country, U.S. citizens, and certain other taxpayers. So your returns will not be processed under the Streamlined Procedures if you aren’t eligible for an ITIN or SSN. But you can still use the Streamlined Procedures even if you don’t have the ITIN as long as you’re eligible to get a Social Security Number and accompany it with a complete ITIN application. If you are unsure and need to determine alien tax status, check out our article about the substantial presence test.
The Conduct of an Individual Must Be Certified as Not Willful
All taxpayers who are under the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures should certify that the failure to disclose all of their income, include all of the details and information, and settle their owed taxes is non-willful. It also includes FinCEN Form 114. Moreover, the said non-willful conduct of the violation is the result of inadvertence, negligence, or mistake.
Eligible Taxpayers Should Pay Their Previous Penalty Assessments
If you have processed your amended or delinquent tax returns, you will qualify for the Streamlined Procedures when you settle your previous penalty assessments. Besides that, when you’ve filed your amended or delinquent tax returns to address the information reporting obligations and legal taxes, especially the legal taxes from financial accounts offshore, you may also take advantage of the Streamlined Procedures.
These are the required documents you need to submit if you want to apply for the Streamlined Foreign Offshore Procedure.
- Original Tax Returns for 3 Years
- International Information Returns for 3 Years (could include the following below)
- Form 3520
- Form 3520-A
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (there is a difference between the FBAR vs 8938)
- FBAR Filings for 6 Years
- The IRS Form 14653 Non-Willful Certification
Benefits of the Streamlined Foreign Procedures
As mentioned earlier, the Streamlined Foreign Offshore Procedures will help taxpayers who live in the U.S. and from different parts of the world to take advantage of a full penalty waiver. Taxpayers who are foreign residents of the country will also get the great benefit of the SFOP.
Moreover, the said program of the IRS allows non-residents and expats to get into tax compliance without dealing with any penalties. It’s not the same as the Streamlined Domestic Procedures. The penalties are waived when you’re under SFOP. Besides that, if you apply for the Foreign Tax Credits and Foreign Earned Income Exclusion to your tax obligations, you may have no penalties and tax liabilities.
7 Steps to Filing the Streamlined Foreign Offshore Procedures
If you fail to follow the instructions below or file any of the required documents, the chance is high that your tax returns will be processed in the normal course, and you will never get the benefits of the US Streamlined Foreign Offshore Procedures.
1. Submission of the Delinquent Tax Return or the Amended Tax Return
If you haven’t submitted your latest tax returns yet and the due date has passed, you have to submit an accurate and complete Form 1040 for your delinquent tax obligations, U.S. Individual Income Tax Return, including all of the required information and documents. However, if you have already processed the most recent tax returns to the IRS, you have to file the accurate and complete Form 1040X for your amended tax return.
2. “Streamlined Foreign Offshore” Written in Red
After filling out all of the necessary forms and getting all of the required documents ready, you have to write “Streamlined Foreign Offshore” in red at the top of every information return. It will indicate that the tax return you’re going to file is under the treatment of the SFOP, so that it’ll surely be processed using this procedure.
3. Complete the Form 14653 on Certification
The next step is to sign and complete a statement on the Certification by U.S. Person Residing Outside of the United States or Form 14653, which is in a PDF format. It certifies that you are eligible to use SFOP, have already filed FBAR requirements, and your failure to report all your income file your tax return on the due date are due to non-willful conduct. Also, make sure that the signed statement you’re going to submit is the original copy and attach it to each information return and tax return under this procedure.
4. Settle Your Payments
After preparing all of the required documents and filling out the necessary forms, you’re ready to process the payments for all your taxes due as shown on the tax returns you’re going to submit, including the interest and late payment fees. Besides that, you also need to include your taxpayer identification number on the check you’re going to issue upon processing the payment. Typically, IRS payment plans (installment agreements) are not available for foreign disclosures.
5. ITIN Application for Those Not Eligible to Have SSN
If you don’t have an ITIN yet and you’re not eligible to get a Social Security Number, you can still use the SFOP by submitting a complete application for an ITIN. Just make sure to include all your tax returns and other necessary documents and forms upon application under these procedures.
6. Permitting Deferral by an Applicable Treaty
If taxpayers seek relief for failure to timely elect deferral of their income from a particular savings plan or retirement plan, which deferral is allowed by an applicable treaty, they should provide a statement to identify the provision of the applicable treaty and request an extension to make an election to defer their income taxes. Also, taxpayers need to submit a dated and signed statement under penalties of perjury describing the events that resulted in discovering the failure and failure to make the election. In addition, if you hire a tax professional, you also need to include his or her responsibilities and engagement during the filing process. Lastly, you also have to see SFO FAQ 2 for the updated details if you have relevant Canadian plans.
7. Submitting Your Payments and All of the Requirements
If everything is ready, you can now submit the payment and all of the documents and forms in print to the physical address of the IRS office. Please remember that the agency won’t accept any submission being sent electronically. So you have to send everything in paper form to the provided address.
What is a streamlined amnesty program?
The amnesty program is given to qualified taxpayers to help them avoid the penalties of not disclosing their entire income, assets, investments, or financial accounts to the IRS. It’s when they use the Streamlined Foreign Offshore Procedures and meet a particular set of criteria to take advantage of the said benefits of the program.
The Streamlined Foreign Program May Be Ending Soon
The Streamlined Foreign Program has been a great help for those non-willful taxpayers. But the Internal Revenue Service may terminate the said program at any time in the future. Besides that, the agency may also make changes to the program’s terms and even the set of criteria for eligibility.
How do I prove that my failure to file wasn’t willful?
The Internal Revenue Service will know if you failed to file your tax return by checking your account and even getting into your records of assessments and payments. Then, the agency will conduct a thorough investigation to find out if your conduct was intentional or non-willful. If you had assets in a Caribbean tax haven country, that might be evidence of being willful. But if you have assets in Canada that you received by inheritance, that might be a factor showing non-willful behavior.
Can a married couple file together for the Streamlined Filing Compliance Procedures?
Yes, married couples can apply for a joint Streamlined Foreign Offshore Procedures. They can do so as long as they do the filing together and the husband or wife has a valid SSN or ITIN. Besides that, if they have children, they can also check if they’re eligible to apply for the Child Tax Credit Refund.
What is the difference between OVDP and SP?
One big difference between the Offshore Voluntary Disclosure Program and the Streamlined Foreign Offshore Procedures is the international form penalties. The SFOP grants qualified taxpayers a full-penalty waiver. On the other hand, under OVDP, the IRS may identify that no penalty applies for a certain international information return, but it still depends on the documents and other relevant facts presented by the taxpayer. Hence, both the OVDP and the SFOP will give benefits to the taxpayers. NOTE: OVDP is no longer available and has been discontinued by the IRS.
I have not filed FBAR for my non-US accounts. What are my options?
The filing options available will still depend on whether or not you have included or reported the interest of your foreign financial accounts on your tax return you’ve recently filed to the IRS. So if you’ve already reported your interest from those accounts, you need to submit the FBARs with the use of the Delinquent FBAR Submission Procedure. Otherwise, you need to file the amended tax returns with the use of SFOP along the six years of your bank account reports offshore.
I did not file 5471 for my foreign corporation. What should I do?
Tax Form 5471 of the Internal Revenue Service is very complicated. That’s why it is highly recommended that you talk to a tax professional in your area to get the help and assistance you need in filing your returns properly.
Every individual has a different situation compared to other taxpayers. That’s why it’s very important to do your research to know more about U.S. tax laws that are applicable to your current situation. It is equally important to do international estate planning to make sure you don’t run into other tax troubles again. It’ll also be best for you to seek help and guidance from a tax professional when you file your return to make sure that everything is correct and in line with the IRS guidelines.