Tax Law Center Blog

By Parag P. Patel, Esq. | Updated August 17, 2021

In the midst of tough tax season, many U.S taxpayers are unfortunately surprised to discover that they have a U.S. tax reporting obligation on financial accounts or assets held overseas. Once they discover their tax and reporting obligation, there are a number of programs through which they can become compliant.

One option, if the taxpayers meet the requirements, is to file under the Streamlined Domestic Offshore Procedures (SDOP) or the Streamlined Foreign Offshore Procedures (SFOP). Our firm has recently received many inquiries regarding these new IRS Streamlined Offshore Procedures. These programs require U.S. taxpayers to certify that their prior non-compliant conduct was non-willful.

Eligibility

To be eligible for the streamlined offshore procedures for U.S. residents, taxpayers (1) must fail to meet the nonresidency requirement described below (if the taxpayer filed a joint return, one or both of the spouses must fail to meet the requirement); (2) have previously filed a U.S. tax return (if required to file) for each of the most recent three years; (3) have failed to report gross income from a foreign financial asset and pay tax, and may have also failed to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) for the foreign financial asset; and (4) these failures resulted from non-willful conduct.

To be eligible for the streamlined offshore program for taxpayers residing outside the United States, taxpayers must (1) meet one of the nonresidency requirements described below (for joint return filers, both spouses must meet this), and (2) have failed to report the income from a foreign financial asset and pay tax, and may also have failed to file an FBAR, and those failures resulted from non-willful conduct.

Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, are nonresidents if, 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 individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the nonresidency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly extended due date) has passed, the individuals did not meet the Sec. 7701(b)(3) substantial-presence test.

Non-Willful Conduct Certification

In order for taxpayers to qualify for such preferable penalty treatment, they must meet several criteria. One critical criterion is that taxpayers must establish – to the satisfaction of the IRS – that their non-compliant behavior was non-willful. Non-willful conduct is defined as “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

Depending on where the U.S. taxpayer resides, certification of non-willful behavior may be made on one of the following forms initially released by the IRS in August 2014:

For U.S. taxpayers residing in the U.S. – IRS Form 14654: Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.

For U.S. taxpayers residing Abroad – IRS Form 14653: Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures.

Taxpayers must make this certification under penalty of perjury.  In our experience, the non-willful certification is carefully scrutinized by the IRS.

The IRS wants to know the “why” behind the non-willful conduct. Importantly, the IRS has added new language to both forms stating “Any submission that does not contain a narrative statement of the facts will be considered incomplete and will not qualify for streamlined penalty relief.”  Importantly, taxpayers should always bear in mind that they sign their non-willful conduct certification narrative under penalties of perjury.

Evidence of non-willful behavior could include having a small account, especially in comparison to the taxpayer’s other assets; an account on which no U.S. tax is due; a foreign government-sponsored savings or pension account; minimal or no withdrawals; amount of time in the U.S.; and no prior U.S. tax filings.

There is no perfect fact pattern or objective test for non-willful conduct. Furthermore, the taxpayer must “provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.”

Persuasive legal advocacy is required to affirmatively and persuasively demonstrate credible legal grounds for non-willfulness. Beware of badges (evidence) of willfulness, blind willfulness, concealment, etc. The IRS will carefully monitor taxpayer filings with large accounts making fraudulent claims in the streamlined program and likely seek to punish them to send a warning.

While the streamlined program offers a welcome option for many taxpayers with undeclared accounts, other ways to address past noncompliance remain viable, including the OVDP program and Delinquent FBAR Submission Procedures and Delinquent International Information Return Submission Procedures. The analysis to enter the one program versus other alternative options is complex and requires full legal analysis by a competent experienced tax attorney.

The IRS streamlined program makes it easier for some taxpayers and more difficult for others. Detailed analysis is required to ascertain the risk/reward for each taxpayer.  Regardless, as FATCA continues to go fully online (and the cooperating bank list grows), the cost and risk of doing nothing has gone up exponentially. In summary, taxpayers with undisclosed offshore accounts should fully explore some form of voluntary disclosure before it is too late and much more costly.

Our firm presented an informational webinar on the Streamlined Filing Compliance Procedures. Materials from the webinar can be downloaded here: Game Changer Streamline.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset and income compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign assets.

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

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