Foreign Nationals & Expats
Houston Tax Attorney
- 1 IRS Streamlined Foreign Offshore Procedures
- 1.1 Eligibility for the streamlined foreign offshore procedures
- 1.2 Disqualification from the streamlined foreign offshore procedures
- 1.3 Benefits of participating in the streamlined foreign offshore procedures
- 1.4 Requirements for participating in the streamlined foreign offshore procedures
- 1.5 General treatment under the streamlined procedures
- 1.6 Why hire us?
IRS Streamlined Foreign Offshore Procedures
The streamlined foreign offshore procedures (SFOP) are part of the streamlined filing compliance procedures.
Unlike the streamlined domestic offshore procedures, there is no 5% misc. offshore penalty assessed on a streamlined foreign offshore procedures filing.
U.S. taxpayers eligible to use these procedures will file delinquent or amended returns, together with all required international information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621), for the past three years and will file delinquent Report Of Foreign Bank & Financial Accounts (FBAR) (FinCEN Form 114) for the past six years.
Qualified filers must submit the above along with a signed certification statement attesting that the failures above resulted from non-willful conduct.
Eligibility for the streamlined foreign offshore procedures
In order to apply under the streamlined foreign offshore procedures, taxpayers must determine if they are eligible.
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.
A. 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.
B. 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.
Note that the following types of “exempt individuals” are not considered to have met the substantial presence test even if they have resided in the U.S. for more than 183 days as calculated under the test. Thus, any days spent in the U.S. while in one of these non-immigration visas do not count towards the substantial presence test.
• An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
• A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
• A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
• A professional athlete temporarily in the U.S. to compete in a charitable sports event.
Example 4: Mr. W, a student from the UK, comes to the U.S. in 2011 on an F1 visa. In 2014 after graduating with an engineering degree, Bob secures an H1B visa sponsored by his employer. It is now 1/1/2017 and Bob has just found out about foreign asset reporting requirements. Assuming his failure to report these assets was non-willful, Bob qualifies under the SFOP even though he has been physically present in the U.S. since 2011. The reason is that until 2014 he was on an F1 visa and therefore did not meet the substantial presence test for the third “look back” year (2015, 2014, 2013) for which the tax return due date has passed; he was an exempt individual in 2013.
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.
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.
Disqualification from the streamlined foreign offshore procedures
If the IRS has initiated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Benefits of participating in the streamlined foreign offshore procedures
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.
- Provide a certification of non-willfulness. Taxpayers 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.
- File FBARs. For each of the most recent 6 years for which the FBAR due date has passed, the taxpayer must file delinquent FBARs at FinCen.
- Submit full payment of taxes and interest. 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.
General treatment under the streamlined procedures
Tax returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be processed like any other return submitted to the IRS. Consequently, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS.
Returns submitted under the Streamlined Foreign Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.
Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program.
After a taxpayer has completed the streamlined filing compliance procedures, he or she will be expected to comply with U.S. law for all future years and file returns according to regular filing procedures.
Why hire us?
Kunal Patel, partner at Mitchell & Patel LLC, comes from a diverse background that includes IRS, Big 4 public accounting, and legal experience. He focuses almost exclusively in offshore compliance matters and has successfully brought numerous taxpayers into compliance with with U.S. tax laws concerning offshore accounts and income.
We assist taxpayers who have undisclosed foreign financial assets. Schedule a consultation to see how we can help.