Frost Law
The Streamlined Foreign Offshore Procedure is designed by the IRS to assist certain eligible taxpayers with undisclosed foreign income and assets into compliance with their filing obligations, without assessment of the potentially significant statutory penalties.
In other words, it provides taxpayers, who comply with the eligibility criteria outlined below, with relief from penalties such as failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties (e.g. Form 5471, 3520, 8938, 926, 5472, 3520-A), or FBAR penalties.
The IRS designed this procedure with the goal of incentivizing eligible taxpayers to come into compliance with their US income tax and information reporting obligations. This is beneficial for taxpayers who have undisclosed offshore accounts or assets, who face potentially significant penalties, such as FBAR penalties, among others. Eligible taxpayers can make use of streamlined foreign offshore procedures to potentially avoid all offshore penalties.
According to the IRS webpage outlining the eligibility requirements under this procedure, 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.” The non-willful analysis should be carefully conducted, considering all facts and circumstances.
The applicant for Streamlined Foreign Offshore Procedure, must quality as non-willful. According to the IRS, non-willfulness is any “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.” Careful consideration should be taken when making this determination.
The non-residency requirement of the Streamlined Foreign Offshore Procedure depends on whether the taxpayer is a U.S. Citizen or lawful permanent resident, or is not a U.S. citizen or lawful permanent resident, but met the substantial presence test of IRC section 7701(b)(3).
For U.S. citizens or Legal Permanent Residents to qualify for the SFOP, they must meet the 330-day rule. The 330-day rule requires that the U.S. citizens or Legal Permanent Residents must be physically outside of the United States for at-least 330 days in any one or more of the most recent three years for which the U.S. tax return due date (or extended due date) have passed, and the taxpayer must not have a U.S. Abode.
The 330-day rule should not be confused with the IRC 911 because IRC 911 allows a bona fide resident to qualify for the foreign earned income exclusion. For purposes of these procedures, the temporary presence of the individual in the United States or maintaining a dwelling in the United States by an individual does not mean that the individuals’ abode is in the United States.
Non-U.S. citizens and legal permanent residents are not eligible to use the 330-day rule mentioned above. The eligibility requirements for such applicants is that they must show that in one of the three applicable years, the applicant did not meet the Substantial Presence Test under IRC section 7701(b)(3).
To qualify for the program, the applicant must submit original or amended income tax returns for the last 3 years (see applicable lookback period above) to correct any IRS information reporting obligations and income tax non-compliance related to the offshore income and assets.
In addition to the above referenced income tax returns, the applicant may also file the associated international information returns for the three-year lookback period. The international information returns include:
The IRS requires that SFOP applicants should electronically submit 6 years of delinquent or amended FBAR filings. The FBAR filings must include all of the taxpayers foreign financial assets required to be disclosed.
The applicant for Streamlined Foreign Offshore Procedure is required to fill Form 14653. The applicant provides their non-willful certification under the penalties of perjury on this form. This certification is crucial to establish the element of non-willfulness of the applicant.
If the taxpayer’s conduct was willful, the applicant cannot submit to the Streamlined Foreign Offshore Procedures. That is why careful consideration of a taxpayer’s conduct is critical.
If a taxpayer believes that their conduct was willful, and would like to come into compliance while mitigating criminal exposure to the extent possible, they may want to consider the Voluntary Disclosure Practice.
The streamlined foreign offshore procedure is designed by the IRS to assist non willful taxpayers, however, the program can be terminated at any time by the IRS. The IRS also has the discretion to change the terms of the program or the eligibility criteria.
Therefore, taxpayers seeking to mitigate their penalty exposure must make their disclosure as soon as possible.
Learn how our firm of experienced international tax attorneys can better assist you before you make any affirmative representations or statements to the IRS by giving us a call at (410) 834-4214 or by scheduling a meeting here.
Our firm has extensive experience in international tax, specifically, IRS offshore disclosure and the Streamed Foreign Offshore Procedures.
