Delinquent Procedures vs Streamlined Offshore Filing

Delinquent Procedures vs Streamlined Offshore

Delinquent Procedures vs Streamlined Offshore 

Delinquent Return Procedures vs Streamlined Offshore Filing: When a non-willful taxpayer has undisclosed foreign accounts, assets, investments or income, they have the opportunity to apply to various IRS offshore tax amnesty programs available to them in order to safely get into compliance. The most common programs offered to non-willful taxpayers are the Streamlined Filing Compliance Procedures (broken down further into the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures). The other program is the Delinquency Return Submission Procedures. Recently, the IRS updated delinquency procedures were updated and therefore we wanted to provide a brief summary of the difference been using these two different programs.

What is Streamlined Offshore Filing?

When a person is non-willful, one of the more common offshore tax amnesty programs they may consider entering into in order to get into compliance is the streamlined filing compliance procedures. The “Streamlined Program” can be broken down further into the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures.

The terms domestic and foreign do not refer to the location of the assets or income, but rather the residence of the taxpayer.

Streamlined for US Residents (Domestic Offshore) 

The Streamlined Program for US Residents (aka Domestic Offshore Procedures) is designed for US residents who already filed original timely tax returns. The taxpayer can then use this program to amend their previously filed returns in order and to include any undisclosed income, accounts, assets and investments. If the taxpayer also has missing domestic income (presuming it was non-willful), then they can include this income in the return as well.

Taxpayers also file any missing international information reporting forms — along with six years of FBAR.

Instead of all the different horrible penalties you may read about during your Google research quest, under SDOP — taxpayers are limited to paying a single 5% penalty on the highest year’s unreported aggregate total balance .

Streamlined for Foreign Residents (Foreign Offshore)

The Streamlined Foreign Offshore Procedures (SFOP) are one of the best IRS offshore programs around.

It is primarily for nonresidents  who were previously US persons, Accidental Americans and/or expats. The taxpayer must be non-willful, but unlike the Streamlined Domestic Program, under SFOP — the taxpayer can submit original tax returns as part of the program — and all offshore penalties are waived.

What are IRS Delinquency Procedures?

For some taxpayers who did not have to make any substantive changes to their tax return that would have resulted in a change in tax liability, the IRS offers “Delinquent Procedures” instead of the Streamlined Procedures. Delinquency is really an alternative to the Streamlined Domestic Procedures, because streamlined foreign has no penalty.

Unlike the streamlined procedures, the delinquency procedures are bit more nebulous and uncertain. The submission package does not require the taxpayer to submit a signed certification (for better or for worse) — but rather a reasonable cause letter. 

How did IRS Modify Delinquency Procedures?

In November, the IRS updated the delinquency procedures and in essence turn the procedure into a Reasonable Cause Package Submission. As a result, the nearly automatic penalty waiver that was afforded under the prior delinquency procedures is no longer available. These types of submissions should always be handled by a Board-Certified Tax Attorney Specialist.

Beware of Purported Specialists and Experts

There are only a few Board-Certified Tax Lawyer Specialists with 20+ plus years experience, advanced tax law degrees, and dual-license (Tax and Legal)  who focus exclusively on offshore disclosure and compliance. Plenty of attorneys will claim they are specialists, but oftentimes put clients in a worse position than when they started.

Some examples of the horrible advice taxpayers receive:

• Recommending clients enter streamlined or delinquency when the client was admittedly willful, by convincing them their willful violation was “minor” even though there is no de minimis exception.
• Referring clients to outside CPA and misrepresenting the nature of a Kovel Letter, by purporting that the tax preparation is covered under the attorney client privilege.
• Providing an artificially low upfront retainer, that leads to bait-and-switch.

Evaluate Your Offshore Strategies Carefully Before Submission

In conclusion, the Internal Revenue Service has developed multiple offshore tax amnesty programs including the streamlined filing compliance procedures and delinquency procedures.

There are different nuances to each program and pros and cons that each taxpayer should weigh carefully before committing to either one of these programs.

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.