Streamlined Filing Compliance
On June 18, 2014, the IRS announced changes to the existing Streamlined Filing Compliance Procedure, which had been in effect since September 1, 2012 (the “Former 2012 Streamlined Program”). The Former 2012 Streamlined Program was difficult to qualify for because it applied only to non-resident, non-filing U.S. taxpayers (including dual residents) with a low compliance risk and less than $1500 of tax due.
U.S. resident taxpayers and U.S. non-resident taxpayers who filed U.S. tax returns, but who (1) failed to include offshore income on their U.S. tax returns, and/or (2) failed to properly file FBARs, were not allowed to participate in the Former 2012 Streamlined Procedure.
The new Streamlined Filing Compliance Procedures are designed to provide new options to help both U.S. taxpayers residing overseas and in the U.S., comply with their U.S. tax obligations.
Effective July 1, 2014, there are 2 NEW Streamlined Filing Compliance Procedures:
- the Streamlined Domestic Offshore Procedures (SDOP) and
- the Streamlined Foreign Offshore Procedures (SFOP)
Compared to the Former 2012 Streamlined Program, the SDOP and the SFOP include a broader section of non-compliant, but non-willful, U.S. taxpayers.
For the first time, U.S. resident taxpayers who are out of compliance with reporting their foreign source income or, who have failed to file international information returns such as the FBAR, can now participate.
The new Streamlined Filing Compliance procedures are designed to provide U.S. taxpayers with a streamlined procedure for:
- Filing amended or delinquent tax and international information returns; and
- For resolving their tax and penalty obligations.
These two new procedures will be available for an indefinite period of time, until otherwise announced.
General Eligibility For The New Streamlined Compliance Procedures
- The new streamlined filing Compliance Procedures are designed only for individual taxpayers, including estates of individual taxpayers.
- To be eligible for the SFOP: the taxpayer must meet the definition of a “non-resident taxpayer.”
- To be eligible for the SDOP: the taxpayer must fail to satisfy the “non-residency” criteria.
- Taxpayers must certify under penalties of perjury: that their conduct for the failure to report all income, pay all tax and file all information returns, including FBARs, was due to non-willful conduct.
- Taxpayers are not eligible if the IRS has initiated a civil examination of a taxpayer’s return for any taxable year, regardless of whether the examination relates to undisclosed offshore assets.
All tax returns submitted under the new Streamlined Filing Compliance Procedures must have a valid TIN (taxpayer identification number), which is either a valid SSN or a valid ITIN. Tax returns submitted without a valid SSN or a valid ITIN will not be processed under these procedures. However, taxpayers who are ineligible for an SSN and do not have a valid ITIN, may submit tax returns under these procedures if accompanied by a complete ITIN application. Taxpayers who are otherwise eligible to use the new Streamlined Filing Compliance Procedures, but who have previously made “quiet disclosures” outside any of the prior OVDPs, may still use the new procedures. (The prior quiet disclosures will not bar their participation). However, any penalty assessments previously made with respect to those filings--such as the 20% accuracy related penalty, will not be abated.
General Treatment Under The New Streamlined Compliance Procedures
- Tax returns submitted under these new procedures will be processed like any other returns submitted to the IRS.
- A receipt of returns will not be acknowledged by the IRS and these procedures will not result in the signing of a Closing Agreement.
- Tax returns submitted under these new procedures will not be subject to IRS audit automatically, but they may be selected for audit and subject to verification procedures.
1.Once a taxpayer makes a submission under either of the new Streamlined Procedures (i.e., the SFOP or the SDOP), she/he may not participate in the 2014 Offshore Voluntary Disclosure Program (OVDP).
2.Moreover, if the IRS receives or discovers evidence of willfulness, fraud, or criminal conduct on the part of the taxpayer, the IRS could open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even a referral to Criminal Investigation.
3.In addition, the IRS has said that there will be no pre-clearance protection under the new Streamlined Procedures.
4.Accordingly, taxpayers who are concerned that their failure to report income, pay tax, and/or to file required information returns was due to willful conduct should seriously consider participating in the OVDP.
What is Non-Willful Conduct?
- In order to participate in the SFOP or the SDOP, a Taxpayer must certify under penalty of perjury that his/her conduct was non-willful.
- The IRS has said that “non-willful conduct” for the new Streamlined Programs 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 IRS also has said that it will give no further definition of non-willful conduct for purposes of the SFOP or the SDOP (other than that stated above).
- It has said that the concept of willfulness is well documented in case law and expects practitioners to apply those definitions, as well as relevant portions of the IRS Manual in advising clients on whether their conduct fits within the definition of non-willfulness.
- What kind of evidence is relevant to demonstrate “non-willfulness” for purposes of the SDOP and the SFOP when the definition of non-willful conduct ranges from negligent conduct to conduct resulting from a good faith misunderstanding of the law?
- How does a taxpayer actually prove that he/she did not know about including offshore income on his/her U.S. tax return or that he/she never knew about the FBAR filing requirement? What kind of supporting evidence does the taxpayer need to show?
- In determining whether the taxpayer can legitimately certify that he or she is non-willful, all relevant facts and circumstances should be analyzed.
- The IRS requires that every U.S. taxpayer applying for one of the new Streamlined Procedures write a personal statement on the Certification Form setting forth the specific reasons for his or her failure to report all income, pay all tax, and submit all required information returns, including FBARs.
- If the taxpayer relied on a professional advisor, the IRS wants the taxpayer to provide the name, address, and telephone number of the advisor, and a summary of the advice relied upon.
- Moreover, if married taxpayers submitting a joint certification have different reasons for non-compliance, then the IRS requires that each taxpayer provide his or her own personal statement on the Certification Form.
Questions relevant to a finding of non-willfulness:
1. Did the taxpayer use an accountant or paid return preparer to prepare the tax returns?
2. If so, was the taxpayer given a tax organizer? If yes, did the taxpayer fill it out truthfully? Does the taxpayer have a copy of the organizer?
3. If the taxpayer did not receive an organizer from the tax advisor, was he/she asked about the existence of any offshore accounts or assets, or about any foreign source income?
4. If the advisor did not ask the taxpayer the above questions, did the taxpayer affirmatively tell the accountant or tax return preparer about the existence of any offshore accounts, offshore assets, or foreign source income?
5. Did the taxpayer have any knowledge of the foreign source income, foreign accounts or foreign assets? Why was there income?
6. What is taxpayer’s level and type of education?
7. Does the taxpayer have any specialized knowledge of tax rules or finance or the fact that the U.S. requires U.S. persons to report income on a worldwide basis on their tax returns?
8. Does the taxpayer know anything about an FBAR or international information returns, such as a Form 5471?
Taxpayer's Connection to the Country, etc...
1. Was the taxpayer a citizen or resident of the country where the accounts/assets were/are located? If not, why were the accounts opened in that country?
2. If the taxpayer opened the account, did he/she do so with a U.S. passport, if applicable? Was the account opened in a jurisdiction with no bank secrecy laws?
3. What were/are the sources of the funds in the accounts?
4. Is the source of funds traceable to previously taxed income? Were the funds an inheritance? Were the funds from taxpayer’s work in the country where the accounts are located?
Activities in the Offshore Account
1. What type of activities took place with respect to the accounts? Deposits, withdrawals, wire transfers? If so, how frequent were these activities?
2. Were there any trades in the accounts? If so, who managed the accounts?
3. Was there a credit card associated with the account? If so, did the taxpayer ever use it? If so, how frequently?
4. Did the taxpayer receive regular statements from the bank? If not, did a relative or friend receive statements or did the bank have instructions not to send any statements to the taxpayer?
5. Has the account ever been moved? If so, why? Was it moved to a tax transparent country or to a jurisdiction with a tradition of bank secrecy?
6. Was an entity used when the account was opened? If so, did the bank require the use of an entity? Was it used to disguise the true identity of the account owner?
Differences Between the SDOP (Streamlined Domestic Offshore Procedures) & SFOP (Streamlined Foreign Offshore Procedures).
1.Residency vs. Non-residency: in the SFOP, the taxpayer qualifies as a non-resident U.S. taxpayer, whereas in the SDOP, the taxpayer qualifies as a resident U.S. taxpayer;
2. Penalties: in the SFOP, all penalties are waived--the taxpayer only needs to pay taxes and interest due over a three-year period. In the SDOP, the taxpayer must pay taxes and interest due over a three year period AND a 5% miscellaneous penalty on the highest account balances of the taxpayer’s offshore assets (using a six-year look back period and the year-end balances); and
3. Information returns: Paragraph 18.104.22.168.2.1 (9)(6) of the Internal Revenue Manual instructs account managers to refer any SDOP case with five or more foreign information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621) to LB&I OVDP Compliance. The five information return threshold is a combination of all years filed. (This referral threshold does not apply to the SFOP).
Example: Taxpayer’s submission contains three Forms 5471 for 2011 and three Forms 5471 for 2012. This submission would be referred to LB&I since the total number of information returns submitted is six.
Eligibility Requirements For The SDOP
In addition to the general eligibility requirements discussed before, the Taxpayer must:
- Fail to meet the applicable non-residency requirement (for joint filers one or both spouses must fail to meet the applicable non-residency requirement);
- Have previously filed a U.S. tax return for each of the most recent 3 years for which the U.S. tax return due date (or properly extended due date) has passed;
- Have failed to report gross income for a foreign financial asset and pay tax on it and may have failed to an information return, such as an FBAR, with respect to such asset; and
- Certify that such failures resulted from non-willful conduct.
The SDOP Procedure
Once it is determined that a Taxpayer is eligible to participate in the SDOP, the Taxpayer must:
- File amended tax returns, together with all required information returns for each of the most recent three years and pay any tax and interest due;
- File delinquent FBARs for each of the most recent six years; and
- File a Certification in which the Taxpayer certifies under penalty of perjury that the failure to file tax returns, report all income, pay all tax, and submit all information returns, including FBARs, was due to non-willful conduct.
There are special rules if the Taxpayer is seeking relief for failure to elect deferral of income from retirement plans.
The SDOP Miscellaneous Penalty
- In addition to paying any tax and interest due, a taxpayer participating in the SDOP must pay a 5% miscellaneous penalty on 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 FBAR period.
- In this case, year-end account balances and year-end asset values are used in lieu of the highest balances over the course of the year and the 5% penalty is assessed on the highest year.
- For the six years covered in the FBAR period, all foreign financial accounts (as defined in the instructions for FINCEN Form 114) in which the taxpayer has a personal financial interest that should have been, but were not reported on an FBAR.
- For the three years covered in the tax return period, all foreign financial assets (as defined in the instructions for Form 8938) in which the taxpayer has a personal financial interest that should have been, but were not reported on Form 8938,
- For the three years covered in the tax return period, all foreign financial accounts/assets (as defined in the Instructions for FINCEN Form 114 or IRS Form 8938) for which gross income was not reported for that year.
Non-Residency Requirement of The SFOP
Individual U.S. citizens or lawful permanent residents (e.g., Green Card Holders) or their estates meet the applicable non-residency requirement if:
1. In any one or more of the most recent three years for which the U.S. tax return due date (or properly extended due date) has passed, the taxpayer did not have a U.S. “abode” and the taxpayer was physically outside the U.S. for at least 330 days.
2. Neither temporary presence of the taxpayer in the U.S. nor maintenance of a dwelling in the U.S. by an individual necessarily means that the taxpayer’s “abode” is in the U.S.
What is a U.S. Abode?
- The SFOP looks to the definition of Abode in IRC Section 911(d)(3) and Treas. Reg.§ 1.911-2(b).
- Abode has been defined as one’s home, habitation, residence, domicile, or place of dwelling.
- It does not mean your principal place of business.
- Abode has a domestic rather than a vocational meaning and does not mean the same thing as “tax home.”
- The location of your abode often will depend on where you maintain your economic, family, and personal ties.
- You are not considered to have a tax home in a foreign country for any period in which your abode is in the U.S.
Non-Residency Requirement For Taxpayers Who Are NOT U.S. Citizens or Green Cardholders
- The SFOP provides a different non-residency requirement for taxpayers who are not U.S. citizens or green card holders.
- Taxpayers in this category will meet the non-residency requirement if, in any one or more the last three years for which the U.S. tax return due date (or properly extended due date) has passed, the taxpayer did not meet the "substantial presence" test.
The SFOP Procedure
Once it is determined that a Taxpayer is eligible to participate in the SFOP, the Taxpayer must:
- File delinquent or amended tax returns, together with all required information returns for each of the most recent three years and pay any tax and interest due;
- File delinquent or amended FBARs for each of the most recent six years; and
- File a Certification in which the Taxpayer certifies under penalty of perjury that the failure to file tax returns, report all income, pay all tax, and submit all information returns, including FBARs was due to non-willful conduct.
There are special rules if the Taxpayer is seeking relief for failure to elect deferral of income from retirement plans.
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