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, for the past three years and will file delinquent Report Of Foreign Bank & Financial Accounts (FBARs) 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.

First, you must meet the Non-residency requirement

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.

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.

Non-U.S. citizens and lawful permanent residents

For the covered tax return period, the individual must have 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.

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.

• 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.

Second, you must be Non-willful

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.

Willful Blindness

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.

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 the Streamlined Foreign Offshore Procedures and who complies with all of the instructions 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 later 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.

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.

Requirements for participating in the streamlined foreign offshore procedures

There are generally four requirements to participate in the SFOP:

1. File returns. 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.
2. 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.
3. 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.
4. 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.

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.

Is this a penalty abatement?

While many pitch this as some sort of streamlined ‘penalty waiver’ or ‘penalty abatement’, it’s not. It’s not an abatement of any penalty since a penalty was not assessed in the first place.

What happens if the IRS rejects your streamlined foreign offshore filing?

The streamlined procedures are not really a program, in that it doesn’t result in an acceptance or a rejection. A taxpayer is presumed to be non-willful when they submit amended tax returns under the streamlined procedures.

Non-willfulness, however, can be later called into question in a subsequent audit. Therefore the risk is not of rejection, but rather of a willful client applying under the streamlined procedures and later being audited.

Thus far, we have not had any audits of our streamlined filings. We carefully counsel clients away from the streamlined procedures if they are not a good fit for it.

What if I just don’t do anything?

Unless you’re ready to face a potential audit from hell and substantial civil penalties, you should disclose now.

Hiring a tax attorney

The certification of non-willfulness is important. The biggest hazard with the streamlined procedures is that of a willful client making a false submission to the IRS. Or very possibly, it could turn a situation that would’ve been non-willful into a willful one. When a false statement is made, the client can be charged with filing a false document.

Almost equally bad are verbose statements that carelessly include more information than they need to, sometimes discussing unrelated matters or information that is far beyond the statute of limitations. This leaves more areas for the IRS to probe into.