The Internal Revenue Service announced major changes in its offshore voluntary compliance programs, providing new…
Streamlined Procedures for U.S. Taxpayers Residing In the United States
Many of our clients are interested in the new Streamlined Filing Compliance Procedures, which were recently announced by the IRS. Therefore, we are providing more general information on the Procedures.
General Eligibility: The modified Streamlined Filing Compliance Procedures are designed for only individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside of the United States and U.S. individual taxpayers residing in the United States.
Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be required to certify that the failure to report all income, pay all tax and submit all required information returns, including FBARs, was due to non-willful conduct.
If the IRS has initiated a criminal investigation or a civil examination of a taxpayer’s returns, the taxpayer will not be eligible to use these procedures.
Taxpayers who have made “quiet disclosures” may still use the Streamlined Filing Compliance Procedures. However, any penalty assessments previously made with respect to those filings will not be abated.
Eligibility. In addition to having to meet the general eligibility criteria described above, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Domestic Offshore Procedures must:
- fail to meet the applicable non-residency requirement described above (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement);
- have previously filed a U.S. tax return (if required) 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;
- 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 and/or one or more international information returns with respect to the foreign financial asset; and
- such failures resulted from non-willful conduct.
Comment: It appears that the Domestic Streamlined Program is not available to non-filers.
Scope and Effect of Domestic Streamlined Procedures. U.S. taxpayers (U.S. citizens, lawful permanent residents and those meeting the “substantial presence” test) eligible to use the Streamlined Domestic Offshore Procedures must:
- 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 (the “covered tax return period”), file amended tax returns, together with all required information returns;
- for each of the most recent six years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs;
- pay a miscellaneous offshore penalty;
- pay the full amount of the tax, interest and miscellaneous offshore penalty due in connection with these filings at the time the foregoing returns and FBAR are filed; and
- complete and sign a statement on the Certification by U.S. Person Residing in the U.S., certifying:
- (a) that the taxpayer is eligible for the Streamlined Domestic Offshore Procedures;
- (b) that all required FBARs have now been filed;
- (c) that the failure to report all income, pay all tax and submit all required information returns, including FBARs, resulted from non-willful conduct; and
- (d) that the miscellaneous offshore penalty amount is accurate.
It is important to note that a taxpayer may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.
The Miscellaneous Offshore Penalty is 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.
A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty if:
- the asset should have been, but was not, reported on an FBAR for that year;
- the asset should have been, but was not, reported on a Form 8938 for that year; and
- the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.
It appears that rental property, business interests, and other income-generating assets that are not required to be reported on FBAR or Form 8938 are not subject to the 5% penalty. This is a major difference from OVDp treatment of the same assets.
A participating taxpayer will be subject only to the 5-percent miscellaneous offshore penalty and will not be subject to accuracy-related penalties, information return penalties or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit, no such penalties will be imposed unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated.
For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty.