In a recent blog, we discussed how U.S. taxpayers can become compliant with the IRS’s requirements for reporting foreign financial assets through the Offshore Voluntary Disclosure Program (OVDP). While the OVDP provides people with the ability to address outstanding offshore tax issues, it applies to people who have willfully failed to disclose foreign assets, and meeting its requirements can result in significant expenses but also can avoid significant penalties. For people whose failure to disclose offshore assets was non-willful, another option is available: streamlined compliance.
Eligibility for Streamlined Compliance
Streamlined compliance is available for individual U.S. taxpayers, and it consists of two programs: the Streamlined Foreign Offshore Procedures (for U.S. citizens or lawful permanent residents who lived outside of the United States for at least 330 days in one of the three previous years) and the Streamlined Domestic Offshore Procedures (for U.S. taxpayers who do not meet the non-residency requirement).
To participate in streamlined compliance, taxpayers must have a valid Social Security Number or Taxpayer Identification Number, and they must certify that their failure to fully report their income and pay taxes was due to non-willful conduct—i.e., they acted negligently, inadvertently, by mistake, or misunderstood the requirements of law in good faith. If a taxpayer is under either a civil examination or criminal investigation by the IRS, he or she is not eligible for streamlined compliance.
Streamlined Compliance Procedures
If a taxpayer is eligible for and wants to participate in a streamlined compliance program, then he or she will need to submit the following via mail:
- Amended tax returns for the most recent three years, using Form 1040X (Amended U.S. Individual Income Tax Return), along with any required information returns.
- A statement certifying that the taxpayer is eligible for streamlined compliance and that his or her failure to report income and pay taxes was non-willful. People participating in the Streamlined Domestic Offshore Procedures can file Form 14654 (Certification by U.S. Person Residing in the U.S.), and people participating in the Streamlined Foreign Offshore Procedures can file Form 14653 (Certification by U.S. Person Residing Outside of the U.S.).
- Payment of all taxes that are due, including any applicable interest.
- Payment of a Title 26 miscellaneous offshore penalty of 5 percent of the highest aggregate value of unreported offshore assets, for people participating in the Streamlined Domestic Offshore Procedures. For people participating in the Streamlined Foreign Offshore Procedures, this penalty is waived.
In addition, taxpayers must electronically submit delinquent Foreign Bank Account Reports (FBARs) for each of the past six years, along with a statement that these forms are being filed as part of the procedures for streamlined compliance.
Contact a San Jose Offshore Tax Attorney
Streamlined compliance allows taxpayers to comply with the IRS’s requirements for reporting offshore assets while paying a minimal penalty. However, unlike the OVDP, streamlined compliance does not provide taxpayers with a closing agreement, and it does not ensure that they will not be subject to criminal prosecution. If the failure to disclose foreign financial assets was willful (meaning that a taxpayer knew, or should have known, about the requirements for reporting their assets), the protection from criminal prosecution of the OVDP may provide the benefits desired.
If you have any undisclosed foreign assets, John D. Teter Law Offices can help you determine your best options for compliance and work with you to minimize your tax penalties. Contact a San Jose tax lawyer today at 408-866-1810.