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IRS Announces New Clarifying FAQs for Streamlined Offshore Compliance Program

The IRS updated its streamlined offshore compliance program to provide procedures taxpayers residing both inside and outside the United States should use to participate in the program. The streamlined offshore compliance program is for taxpayers whose failure to comply with requirements to report offshore assets is nonwillful. It is designed to allow U.S. taxpayers with offshore assets to become tax compliant with reduced or no penalties.

Under the streamlined offshore procedures for both U.S. residents and nonresidents, taxpayers must (1) file delinquent or amended tax returns, together with all required information returns for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, and (2) for each of the most recent six years for which the FBAR due date has passed, file any delinquent FBARs.

Under the streamlined offshore procedure for U.S. residents, the taxpayer must also pay a miscellaneous offshore penalty of 5% of the highest aggregate balance or 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.

In FAQ #1, the IRS clarified that the 5% penalty will not apply to assets in which the taxpayer has no financial interest but only signature authority.  The IRS also clarified that the 5% penalty will not apply to assets in which the taxpayer has no or partial interest.  The IRS will apply the principles announced in OVDP FAQs 31 through 33, 35.1, and 38 through 41. This interestingly may be the first time where the IRS Streamlined Filing Compliance Procedures is specifically applying OVDP regime principles.  If appropriate, this could lead to the possibility of analogizing of principles and nuances from the OVDP regime (with 55+ detailed FAQs) to taxpayers under the Streamlined Filing Compliance Procedures (where fewer rules exist).

In FAQ #2, the IRS clarified that the 5% penalty applies only to assets reportable on either FBAR or Form 8938, not rental real estate.

In FAQ #4, the IRS made clear that the 5% penalty applies to a foreign business with assets including financial accounts.  In FAQ #6, the IRS clarified that mechanical calculation of the 5% penalty.  In FAQ #7, the IRS explained that a taxpayer can make a streamlined submission and pay a 5% penalty where compliant tax returns and FBARs were filed for the most recent three years but no FBARs for the three years prior to that.

In light of the new IRS clarifying announcements regarding the Streamlined Filing Compliance Procedures, the Streamlined program offers excellent opportunities to eligible taxpayer to clean up past compliance violations and move forward.