In an increasingly common occurrence, a client calls in somewhat of a tizzy over foreign information returns, which, apparently, she was “required” to file for the past few years. She’s gone to three different CPAs, only the last one of which even asked her whether she had foreign assets or interests. Her new CPA, one of the good ones, inquired about any foreign relationships that she might have, and she disclosed a Swiss bank account, a Nevis trust, and a 50% interest in a Guatemalan corporation.
After assuring her that she was not going to jail, unless she actively and willfully attempted to conceal her foreign interests and assets, and telling her to breathe, you explain that there are three different procedures available to her to come into compliance with her foreign information return reporting requirements. She assures you that had she known that she was required to report them, she would have done so, but she relied on her CPAs—who, heretofore, simply had not inquired about them. You tell her that this case, where criminal penalties are likely not at issue, she will not have to avail herself of the voluntary disclosure program.
The New Delinquent “Procedures”
Until November 2020, in a non-willful case like hers, you would have been able to choose between two procedures—the Delinquent International Information Return Submission Procedures and the Streamlined Filing Compliance Procedures. In November, the IRS quietly changed the Delinquent Procedures, effectively gutting the efficacy of them. Before, you could submit delinquent international information returns with a reasonable cause statement, which statement would be considered before penalties were assessed. Now, however, the IRS has indicated that it may or may not consider the reasonable cause statement before assessing penalties.
The new “procedures” indicate that in the event that the IRS assesses the penalties, you can resubmit the reasonable cause statement in an attempt to abate the penalties. How this differs in any way from simply floating in delinquent returns, is anybody’s guess. The revised program is so new, there are few indications as to how the IRS is actually applying the program. Because international information return penalties are generally $10,000 per return, this gamble is unpalatable for most clients—especially those with multiple years of non-filing.
The Streamlined Procedures, Generally
The Streamlined Procedures remain unchanged. Two similar procedures exist under the Streamlined program—one for domestic U.S. filers, and one for foreign filers. There are two primary differences between these two programs, and both favor foreign filers. In order to participate under the domestic procedures, an individual must pay a 5% “miscellaneous offshore penalty.” This penalty is equal to the aggregate balance of all foreign assets, the calculation of which is quite complex, and will be the subject of a future article. Foreign filers, on the other hand, do not have to pay any miscellaneous offshore penalty to participate in the program. Second, domestic filers must have filed an original income tax return for the year in which they need to file their delinquent returns and failed to report income and/or paid tax. Foreign filers, however, may file original income tax returns in conjunction with their foreign information return filings (but they still must have failed to report income and/or paid tax).
General Eligibility for Streamlined Procedures
Streamlined Domestic Offshore Compliance Procedures (for U.S. residents) and Streamlined Foreign Offshore Compliance Procedures (for non-U.S. residents) are available for individual U.S. taxpayers or estates of individual U.S. taxpayers, who have failed to report foreign income, to pay tax on foreign income, and to file one or more foreign information return, including FBARs. The taxpayer must certify that the failure to report all income, pay all tax, and/or submit all required information returns—including FBARs—was due to non-willful conduct. The taxpayer must have a valid Social Security Number.
If the IRS has initiated a civil or criminal investigation of the taxpayer’s returns for any taxable year, streamlined procedures are not available to the taxpayer. Returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. If there is a question of criminal liability, you must think long and hard as to whether to proceed under the voluntary disclosure program.
Streamlined Domestic Offshore Compliance Procedures (U.S. Residents)
As noted above, U.S. resident taxpayers are subject to more stringent rules. The taxpayer must have previously filed a U.S. tax return for the most recent three years for which a U.S. tax return due date has passed. Thus, the Streamlined Domestic Offshore Procedures may not be used for filing an original, delinquent return—only amended returns, together with the required information returns. The taxpayer must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law. Thus, if the foreign asset didn’t generate any income, or if the taxpayer reported the income and pay taxes on it—but failed to file the appropriate foreign information return—the streamlined procedures are not available.
The taxpayer may have failed to file an FBAR and/or one or more international information returns with respect to the foreign financial asset. For general information returns (Form 5471, Form 3520, Form 8938, Form 8865, etc.), the taxpayer must submit amended Forms 1040X with the required information returns for the last three years. For FBARs, six years of FBARS must be filed with the three years of Forms 1040X. As such, it is common to file three years of Forms 8938 and six years of FBARs with the same streamlined application.
The taxpayer must pay a Title 26 miscellaneous offshore penalty equal to 5% of the highest aggregate balance of the taxpayer’s foreign financial assets subject to the penalty during the years. The penalty is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years. Thus, if a client had $200,000 in a foreign bank account and a 50% ownership interest in a corporation, the value of which shares was $500,000, the 5% penalty would be $35,000 (700,000 x .05).
A taxpayer who is eligible to use these Streamlined Domestic Offshore Procedures is subject only to the Title 26 miscellaneous offshore penalty and will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties—unless an examination determines that the original return was fraudulent and/or the FBAR violation was willful.
Instructions for Filing using Streamlined Domestic Offshore Procedures
For each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the taxpayer must submit an amended tax return using Form 1040X, together with any required information returns—even if these information returns would normally not be submitted with the Form 1040 (e.g., a Form 3520). The taxpayer may not file delinquent income tax returns (including an original Form 1040) using these procedures. The taxpayer must write at the top of the first page of each amended tax return and at the top of each information return “Streamlined Domestic Offshore” written in red ink to indicate that the returns are being submitted under the Streamlined Procedures.
The taxpayer must complete and sign a statement on the Certification by U.S. Person Residing in the U.S. (Form 14654) certifying:
- that you are eligible for the Streamlined Domestic Offshore Procedures;
- that all required FBARs have now been filed;
- that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and
- that the miscellaneous offshore penalty amount is accurate.
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. The taxpayer’s identification number must be included on the check. You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:
Internal Revenue Service
3651 South I-H 35Stop 6063 AUSC
Attn: Streamlined Domestic Offshore
Austin, TX 78741
For each of the most recent six years for which the FBAR due date has passed, the taxpayer must file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. The taxpayer is required to file these delinquent FBARs electronically through the FinCEN e-filing portal. On the cover page of the FBAR, select “Other” as the reason for filing late. In the explanation box, the taxpayer should enter “Streamlined Filing Compliance Procedures.” Nothing more, nothing less.
Special Rules for Non-U.S. Resident Taxpayers
As noted above, U.S. non-resident taxpayers are subject to more lenient rules. The “original return” requirement is not present for Non-U.S. Resident taxpayers. Thus, a non-U.S. Resident taxpayer may use the streamlined procedures to file an original Form 1040. The taxpayer still must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law. The taxpayer may have failed to file an FBAR and/or one or more international information returns with respect to the foreign financial asset.
For general information returns (5471, 3520, 8938, etc.), the taxpayer must submit amended (or delinquent, original) Forms 1040X with the required information returns for the last three years. For FBARs, the taxpayer must file six years of FBARS must be filed with the three years of Forms 1040X. A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties—unless an examination determines that the original return was fraudulent and/or the FBAR violation was willful.Add to favorites