Overview
The purpose of the Streamlined Foreign Offshore Procedures (“SFOP”) is to bring foreign or non-U.S. resident taxpayers into compliance for reporting foreign financial assets. In other words, SFOP provides taxpayers, who comply with the eligibility criteria outlined below, with amnesty from penalties such as failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties, or FBAR penalties.
Eligibility for the Streamlined Foreign Offshore Procedures
In addition to having to meet the general eligibility criteria for the Streamlined Procedures, which has previously been written about here, individual U.S. taxpayers (including estates of U.S. taxpayers) must also:
(1) Satisfy the applicable non-residency requirements described below;
(2) Have failed to report income from a foreign financial asset and pay the tax or failed to file an FBAR with respect to a foreign financial account; and
(3) Such failures resulted from non-willful conduct.
According to the IRS, non-willful conduct is conduct that is due to negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law. For more information on the meaning of “foreign financial asset,” see our earlier article – Foreign Financial Assets? Let’s Talk Reporting .
Non-Residency Requirements Applicable to Individuals who are U.S. Citizens or Lawful Permanent Residents:
Individual U.S. citizens, estates of U.S. citizens, and lawful permanent residents (green card holders) satisfy the applicable non-residency requirements if, in any one or more of the most recent three years for which the U.S. tax return date has passed, the citizen or resident was outside the U.S. for at least 330 days and did not have a U.S. abode. This is often referred to as the “330-day rule.”
Non-Residency Requirement Applicable to Individuals who are not U.S. Citizens or Lawful Permanent Residents:
Individuals who are not U.S. citizens or green card holders, or estates of individuals who were not U.S. citizens or green card holders, satisfy the non-residency requirement if, during any one or more of the prior three years for which the return due date has passed, the individual failed to meet the substantial presence test.
The substantial presence test of IRC § 7701(b)(3) is met if an individual is physically present in the U.S. on at least:
1. 31 days during the current year, and
2. 183 days during the three-year period that includes the current year and the two years immediately before that, counting:
a. All of the days the individual was present in the current year,
b. 1/3 of the days the individual was present in the first year before the current year, and
c. 1/6 of the days the individual was present in the second year before the current year.
Applying to the Streamlined Foreign Offshore Procedures
If the taxpayer satisfies the eligibility requirements set forth above, the taxpayer must file delinquent or amended tax returns, together with all required information returns for the prior three years for which the return due date has passed. Since the tax return due date for 2020 has passed, taxpayers should submit original or amended returns for 2018 through 2020.
Additionally, for each of the most recent six years for which the FBAR due date has passed, the taxpayer must file all such delinquent FBARs. Moreover, any tax and interest must be paid in connection with the delinquent or amended returns. Since the FBAR due date for 2020 has passed, taxpayers should submit original or amended FBARs for 2015 through 2020.
Common international information returns include
Form 3520;
Form 3520-A;
Form 5471;
Form 8621;
Form 8865; and
Form 8938.
Assessment of Penalties
A taxpayer who is eligible to use SFOP and who complies with all the requirements will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. More importantly, if the returns are later selected for audit, the taxpayer will not be subject to the aforementioned penalties, unless the original noncompliance was due to fraud or the taxpayer willfully failed to file such returns. Notably, any previously assessed penalties with respect to those years, however, will not be abated. However, if the IRS determines an additional tax deficiency for a return submitted under SFOP, the IRS may assert applicable additions to tax and penalties relating to the additional deficiency.
If you have failed to file the necessary international information returns or FBARs, contact The Wilson Firm today. Our firm of experienced tax attorneys can help you navigate the Streamlined Filing Procedures and potentially mitigate exposure to significant IRS penalties.
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