Reassessing the IRS Streamlined Amnesty Program: Still Fit for Purpose?

In 2009, the IRS began a new series of voluntary international tax amnesty programs designed to encourage U.S. citizens and U.S. residents ^[1] , (and their estates), with undisclosed foreign assets or income, to become compliant with U.S. tax laws.  Each of the programs eventually terminates.  The IRS previously indicated that a remaining amnesty program, the “2014 Streamlined Filing Compliance Procedures”, will similarly terminate.  Although it is unknown when it will end, the following list indicates that it has now been in effect for longer than any of the other recent international amnesty programs.

What Are the Amnesty Options Under the 2014 Streamlined Filing Compliance Procedures?

The present Streamlined Filing Compliance Procedures, initiated in June, 2014, contain four options, depending on the residence of the U.S. taxpayer, and the nature of his/her noncompliance.

• Streamlined Foreign Offshore Procedures,
• Streamlined Domestic Offshore Procedures,
• Delinquent FBAR Submission Procedures, and
• Delinquent International Information Return Submission Procedures.

The first two are designed to assist certain individuals who failed to report income, and pay tax, with respect to a foreign financial asset, and perhaps omitted one or more FBARs.

The second two are designed to assist certain individuals who do not have unreported income, or unpaid tax, but are noncompliant with one or more FBARs, or international information returns.^[4]

Streamlined Foreign Offshore Procedures (SFOP)

Who Benefits from the SFOP?

Certain eligible individuals who spent little recent time in the U.S.^[5] and who have unreported income from foreign financial assets.

What are the Benefits of the SFOP?  

Provided their original income tax filings were not fraudulent, eligible individuals who file original or amended compliant income tax returns, FBARS, and international information returns, in accordance with the SFOP Filing Instructions described below, will be exempt from the following penalties:

• Failure to file tax return penalties,
• Failure to pay tax penalties,
• FBAR penalties,
• International information return penalties, and
• Accuracy-related penalties.

Interest will be payable on any tax due with the SFOP filing, and normal penalties may apply to any additional tax deficiency which the IRS determines is omitted from the SFOP filing.

Who is Eligible?

If you are a U.S. citizen or U.S. resident^[11] you may enter the SFOP if:

• You meet the applicable non-residency requirement,
• You failed to report the income from a foreign financial as^[6]set and pay tax as required by law and may have failed to file have an FBAR with respect to a foreign financial account.
• Your failure to comply was due to non-willful conduct, (see “Non-Willful Conduct” below),
• The IRS has not initiated a civil or criminal investigation, and
• You have a valid U.S. taxpayer identification number.

If all income has been reported, and the tax has been paid, the FBAR and international information return omissions can potentially be addressed instead, without penalty, under the separate Delinquent FBAR Submission Procedures, or Delinquent International Information Return Submission Procedures described below.

Applicable Non-Residency Requirement  

To be eligible for the SFOP, the individual must meet the “applicable non-residency” requirement.

1. Citizens and Lawful Permanent Residents. You meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, you did not have a U.S. abode, and you were physically outside the U.S for at least 330 full days. Very generally, your abode is who are where you maintain your family, and economic and personal ties.^[7]

Individuals who are not US. Citizens and Lawful Permanent Residents.     Individuals who are not U.S. citizens, or green card holders, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test.^[8]

Non-Willful Conduct

There is no simple definition of non-willful conduct.  The IRS generally considers it to be conduct that is due to negligence, inadvertence, or mistake that is the result of a good faith misunderstanding of the requirements of the law.  Please contact your tax advisor for advice on your particular circumstances.

SFOP Filing Instructions

To comply with the SFOP filing requirements you must:

• For each of the most recent 3 years, for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all international information returns, (e.g. IRS Forms 3520, 3520-A, 5471, 8938, 926, 8621), even if those information returns would normally be filed separately.
• Complete IRS Form 14653 (“Certification by U.S. Person Residing Outside the United States for Streamlined Foreign Offshore Procedures”) certifying that,
• you are eligible for the SFOP,
• all required FBARs have now been filed,
• the failure to file tax returns, report all income, pay all tax, and submit all information returns, including FBARs, resulted from non-willful conduct, and
• attach a narrative, signed under penalties of perjury, with the information described in the related IRS FAQ 6, explaining the reasons for your noncompliance.
• For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs electronically, and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

Streamlined Domestic Offshore Procedures (SDOP)

The Streamlined Domestic Offshore Procedures (SDOP) filing is similar to the SFOP except there is a one-time 5% Miscellaneous Offshore Penalty applicable to previously unreported financial assets, and there is no applicable residency test, (i.e. individuals are not required to have been physically outside the U.S. for a particular period of time).

Who Benefits from the SDOP?

Certain eligible individuals^[9] who have unreported income from foreign financial assets, and are not eligible for the SFOP.

What are the Benefits of the SDOP?  

Provided their prior tax filings were not fraudulent, eligible individuals who file original or amended compliant tax returns in accordance with the SDOP Filing Instructions described below, will be exempt the following penalties:

• Failure to file tax return penalties,
• Failure to pay tax penalties,
• FBAR penalties,
• Information return penalties, and
• Accuracy-related penalties,

However, individuals entering the SDOP are subject to the “5% Miscellaneous Offshore Penalty”.  Also, interest is payable on any tax due, and normal penalties may apply to any additional tax deficiency determined by the IRS because of inaccuracies or omissions in the SDOP filing.

5% Miscellaneous Offshore Penalty

This one-time penalty is 5% of the highest aggregate balance/value of the taxpayer’s “foreign

financial assets” that are subject to this penalty, during the years in the covered tax return period and the covered FBAR period. Foreign financial assets are assets that are required to be reported on the FBAR and IRS Form 8938.  Certain Canadian RRSPs, RRIFs, and certain other Canadian pension plans are excluded from the penalty.^[10]The 5% penalty also applies if the asset was reported as required on the FBAR and/or Form 8938, but the related gross income was not reported in that year.

Who is Eligible?

If you are a U.S. citizen or U.S. resident^[10] you may enter the SDOP if:

• You fail to meet the applicable non-residency requirement described in the SFOP above,
• The IRS has not initiated a civil or criminal investigation,
• You have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, (see Gap Person below),
• You have failed to report gross income from a foreign financial asset and pay tax as required, and you may have failed to file an FBAR and/or one or more international information returns (e.g. Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), with respect to such foreign financial asset, and
• Your failures resulted from non-willful conduct. (Please see Non-Willful Conduct, above).

As indicated, to enter the SDOP you must have unreported income from a foreign financial asset, on which the tax has not been paid. If you have unreported income, but it is not from a foreign financial asset. then a normal amended tax return must be filed, instead of entering the SDOP. 

Gap Person

The SDOP is only available to individuals^[12] who have previously filed a U.S. income tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed.  Therefore, persons (referred to as gap persons) who do not meet the applicable non-residency requirements of the SFOP, and who have not filed all required income tax returns for the past three years cannot enter either the SFOP or SDOP.

Of course, if you are a gap person, you are expected to become compliant by filing all omitted income tax returns, in which case any unpaid tax, interest, and late filing and late paying penalties would normally be payable.  If you have also been noncompliant with FBAR filings and/or international information returns, those penalties for noncompliance could also be assessed. In some cases you may be able to request a reasonable cause abatement for those penalties. (See Reasonable Cause Statement below, under Delinquent International Information Return Submission Procedures).

SDOP Filing Instructions

To comply with the SDOP filing requirements you must:

• For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, submit complete and accurate amended tax returns, together with any required information returns, even if they would not normally be submitted with the original return. Delinquent income tax returns cannot be filed using the SDOP,
• Complete IRS Form 14654 (“Certification of U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures”) certifying that,
• you are eligible for the SDOP,
• you have filed all required FBARs,
• the failure to report all income, pay all tax, and submit all FBARs and international information returns, resulted from non-willful conduct,
• the calculation of the 5% miscellaneous offshore penalty amount is accurate, and
• attach a narrative, signed under penalties of perjury, with the information described in IRS FAQ 13, explaining the reasons for your non-compliance.
• For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs electronically, and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

Delinquent FBAR Submission Procedures

Who Benefits from the Delinquent FBAR Submission Procedures?

Eligible individuals ^[13]who are delinquent with FBAR filings but have do not have unreported income from foreign financial assets.

What is the Benefit?

All penalties for prior delinquent FBARs are forgiven.

Who is Eligible?

You are eligible if you:

• Have one or more delinquent FBARs,
• Do not need to enter the SFOP or SDOP to file delinquent or amended tax returns to report and pay additional tax,
• Are not under civil examination or criminal investigation by the IRS, and
• Have not already been contacted by the IRS about delinquent FBARs.

How Do You Proceed?

• Electronically file all delinquent FBARs covering the most recent 6 years for which the FBAR filing deadline has passed, and
• Include a statement explaining why you are filing the FBARs late.

Delinquent International Information Return Submission Procedures

Who Benefits from this Program?

Eligible individuals ^[14] who have not filed one or more required international information returns but do not have any unreported income from foreign financial assets.

What is the Benefit?

Penalties for prior delinquent international information returns are forgiven if you have reasonable cause and attach a reasonable cause statement to each delinquent international information return filed.

Who is Eligible?

You are eligible if you:

• Have not filed one or more international information returns,
• Have reasonable cause for not timely filing the information returns,
• Do not need to enter the SFOP or SDOP to file delinquent or amended tax returns to report and pay additional tax,^[15]
• Are not under civil examination or criminal investigation by the IRS, and
• Have not already been contacted by the IRS about delinquent international information returns.

How Do You Proceed?

• Prepare the delinquent international information returns,
• Prepare and attach to each of those returns a “reasonable cause statement”.

Reasonable Cause Statement

The “reasonable cause statement”, signed under penalties of perjury, must make an affirmative showing of all facts alleged as reasonable cause for the compliance failure. It must also certify that any entity, for which the information returns are being filed, was not engaged in tax evasion.

There is no simple definition of reasonable cause.  The government’s reasonable cause provisions for penalty relief for noncompliance with U.S. tax matters is applicable to many different types of U.S. tax noncompliance, not just the context of SFOP, SDOP, or noncompliance with international information returns.  The definition of reasonable cause may even depend, in part, on the particular tax return, tax form, or section of the tax code, for which there is noncompliance.   As an extremely broad generality, reasonable cause relief may be granted if you can demonstrate you exercised ordinary business care and prudence in meeting your tax obligations, but nevertheless failed to meet them.  Please consult your tax advisor for advice in your circumstances.   Some factors the IRS may consider are:

• The reasons given for your noncompliance,
• Your compliance history,
• The length of time between your failure, and your subsequent compliance, and
• Circumstances beyond your control.

Depending on the facts and circumstances, reasonable cause can possibly be established if you show that you were not aware of the specific obligation.   Some factors the IRS will consider in this case are:

• Your education,
• Whether you have previously been subject to the tax,
• Whether you have been penalized before,
• Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know, and
• The level of complexity of a tax or compliance issue.

You might have reasonable cause for noncompliance due to ignorance of the law, if a reasonable and good faith effort was made to comply with the law, or you were unaware of the requirement and could not reasonably be expected to know of the requirement.  Please consult your tax advisor for advice.

How AbitOs Can Assist

AbitOs specializes in addressing the unique tax needs of high net-worth individuals, particularly those with international lifestyles and business interests. We offer comprehensive expertise in handling IRS Streamline Procedures for clients, including those from LATAM, Canada, and other non-U.S. entities operating within the U.S., as well as U.S. entities conducting business internationally.

[1] Defined as lawful permanent residents, including green card holders living outside the U.S., and individuals meeting the substantial presence test of IRC section 7701(b)(3) who did not file a valid IRS Form 8840

[2] Available only to nonresident filers

[3] Procedures were modified, eligibility was broadened, and FBAR and internal information return provisions were added

[4] FAQ 1 to the IRS Delinquent International Information Return Submission Procedures states that taxpayers who have unreported income or unpaid tax, are not precluded from filing delinquent international information returns

[5] Or the estates thereof

[6] Or the estates thereof

[7] For a definition of “abode”, see IRS Publication 54. For the purposes of the SFOP you do not necessarily have a U.S abode due to temporary presence in the U.S. nor maintenance of a dwelling in the U.S.

[8] See IRS 7701(b)(3) for the definition of the substantial presence test

[9] Or the estates thereof

[10] SFOP Q&A 8

[11] Or the estates thereof

[12] Or the estates thereof

[13] Or the estates thereof

[14] Or the estates thereof

[15] FAQ 1 to the IRS Delinquent International Information Return Submission Procedures states that taxpayers who have unreported income or unpaid tax, are not precluded from filing delinquent international information returns