Streamlined Domestic vs. Foreign Offshore Procedures

Streamlined Domestic vs Streamlined Foreign Offshore Procedures

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to non-U.S. investments. Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers Streamlined Filing Compliance Procedures (SFC). These procedures have been in existence since September 2012. However, due to the increase in global economics, the streamlined filing compliance procedures were expanded and modified to accommodate a broader group of U.S. taxpayers.

Previously, the procedures were only available to filers outside the United States. In 2014 the Streamlined Filing Compliance procedures were expanded to provide a means for U.S. taxpayers living in the United States to correct tax non-compliance with respect to non-U.S. investments resulting from non-willful conduct.

Let’s take a look at the requirements, process, and differences between the two programs.

Streamlined Foreign Offshore Procedures (SFOP)

Theses procedures were created for U.S. taxpayers residing outside the United States.

Qualification

(1) U.S. citizen or green card  holders qualify to use the streamlined foreign offshore procedures (SFOP) if:

• In any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not have a U.S. abode and

• The individual was physically outside the United States for at least 330 full days.

(2) Individuals who are not U.S. citizens or green card holders may use this procedure if in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not meet the substantial presence test of IRC 7701(b)(3).

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: Bob, a student from India, 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.

Process

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.

Streamlined Domestic Offshore Procedures (SDOP)

These procedures were created for U.S. taxpayers residing in the United States.

Qualifications

Individual U.S. taxpayers are eligible to use the Streamlined Filing program if:

• They are a U.S. Resident.

• They have previously filed a U.S. tax return (if required) 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.

• They have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset.

• The failures above resulted from non-willful conduct.

Eligible filers will be assessed a Title 26 miscellaneous offshore penalty equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period.

Process

U.S. taxpayers eligible to use these procedures will file amended returns, together with all required 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.

Streamlined Domestic vs Streamlined Foreign Offshore Procedures

These programs are similar but have some important distinctions:

  1. The streamlined foreign offshore procedures allow taxpayers to file both original and amended tax returns with the application, while the streamlined domestic offshore procedures require the three most recent tax returns to already have been filed. In other words, an original return cannot be filed with the SDOP application. So what if taxpayer did not file one or more of the three most recent tax returns? It’s possible that the taxpayer could quickly file any delinquent tax returns (correctly reporting any foreign income and assets) and then enter into the streamlined program.
  2. The SFOP does not assess the 5% miscellaneous offshore penalty, while the SDOP does.

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Sources:

Internal Revenue Manual § 21.8.2.18

Internal Revenue Code § 7701(b)(3)

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