Married Filing Jointly Tax Returns – Undisclosed Foreign Accounts Penalties
When it comes to filing tax returns, under most circumstances when a married couple files together or as “married filing jointly” they will receive the best benefit in terms of deductions and reduced taxes (aside from the marriage penalty when both spouses are high income earners).
With that said, when an unsuspecting spouse filed jointly with a spouse who has foreign accounts and is not in compliance – it can spell trouble. Why? Because when an unsuspecting spouse files a joint return with a spouse who has unreported foreign accounts, the innocent spouse may become liable for the failure to report those accounts.
The Law is Unfair for Unsuspecting Spouses
The IRS rarely plays fair. It works like this: when a person has an annual aggregate total of more than $10,000 overseas they have an individual reporting requirement to report their foreign accounts on an annual FBAR (FinCEN 114) statement. As you may or may not be aware, the failure to file this form carries significant finds and penalties.
Unlike various other forms, the FBAR is not actually filed with your tax return but is actually filed separately – online with the Department of the Treasury. The $10,000 threshold requirement is an individual requirement and if one spouse is not identified on any of the accounts, then he or she is not required to report an FBAR.
There are Many Other Forms to File as Well…
The FBAR is only one of numerous forms that a spouse may need to file when they have foreign/offshore accounts and assets. The remaining forms are typically filed alongside a tax return. Thus, when two spouses are filing a tax return jointly, they are in essence filing one tax return between them.
As such, if your joint return is missing a certain forms and the IRS determines it will penalize the jointly filed return for failing to include the necessary foreign reporting forms then (unless there is an exception) both spouses will be liable for the unreported form. Here is a list of a few other common forms which are often missed besides the FBAR:
FATCA Form 8938
FATCA is the Foreign Account Tax Compliance Ac. It is a form designed to ensure that individuals who meet certain threshold requirements in accordance with their foreign accounts file this form annually – directly with the IRS. The form is very similar to the FBAR, but is filed annually with the tax return. The failure to file this form carries heavy penalties with it, and can reach as high as $60,000.
IRS Form 5471
This is a form commonly filed when a US person has more than 10% ownership of a foreign company. A typical example we deal with is when a US person has family business offshore and/or on foreign property which is held in a foreign company. Under certain circumstances a foreign company (even though it may function as a limited liability company in the country it was founded, and which can be disregarded in the United States) cannot be disregarded (under IRC Rule 301) and therefore must file as a corporation in the United States (even though this was never the intended goal). The failure to file this form carries heavy penalties with it.
*A common example we see often is a is a Sociedad Anonima.
IRS Form 8621
This is a form commonly filed for individuals who have PFIC (passive foreign investment companies). While your initial reaction may be “that does not apply to me” please keep in mind that under new rules and regulations the IRS has determined that nearly ALL foreign mutual funds are considered PFICs. Up until 2013 this form did not need to be filed typically unless there was an excess distribution. In 2013, the law changed so that everyone with foreign mutual funds or another type of PFIC (such as a foreign holding company) has to file this form annually.
– There are stiff penalties for failing to file this form and unless this form is filed a tax return is not considered complete and therefore the statute of limitations to close the return may not run. Finally, even if a person is not required to file a tax return they are generally required to file form 8621 (unless an exception applies).
Get into Compliance Now!
These are just some of the many forms that may be required for individuals with foreign accounts. When you file jointly, you are taking on the burden of ensuring these forms are filed properly. With the implementation of FATCA, in accordance with new rules such as passport revocation or denial and/or customs holds being used by the US government to enforce tax laws, it is very important that you stay in compliance.
If you are unaware of the requirement to file these forms and are looking to get into compliance one of the fastest and most effective ways to do so is by entering one of the Streamlined Offshore Disclosure Programs.
Streamlined Domestic Offshore Procedures FAQ
For many individuals who are considering whether or not they should “come clean” and enter one of the IRS offshore disclosure programs, they have several questions which are not explained or detailed by the IRS.
In addition, it is hard for individuals without a tax background to distinguish what is reality, and what is just overly-aggressive sales and fear tactics used by many unscrupulous Law Firms, CPAs, and Enrolled Agents.
The following is a list of FAQs (Frequently Asked Questions), pitfalls, and tips from the Tax Lawyers at Golding & Golding. Our firm is one of the only boutique tax law firms in the country that is focused exclusively on International Offshore Disclosure Tax Law, and we have handled a diverse range of streamlined program applications ranging from under $100,000 to nearly $40,000,000.
This is a summary of common Streamlined Program Questions we receive often. It does NOT constitute legal advice that can be relied upon as legal advice for your particular situation, since each person’s circumstances are unique and may impact the determination of whether he/she qualifies for the program.
How do I know if I Was Willful?
In reality, there is no concrete definition of the term Willful or Non-Willful. It is essentially a ‘smell test’ based on whether or not the facts and circumstances show that you knew, or had any reason to know that you are required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose. It is really that simple and for most people, if they did not know that there was a reporting requirement, then they could not have known that they were required to report the accounts/income — and would therefore fall into the “non-willful” category.
What if the IRS disagrees and Believes I was Willful?
This is a good question and without sounding like a salesperson, this is why you retain an experienced international tax lawyer to represent you throughout the application process. Yes, CPAs, Enrolled Agents and general practitioners will try to sell you that they can do it for “cheaper” and that you are “low-risk”, but once the IRS starts auditing individuals who are in the program, you will be a much better position (mentally and physically) to know you are being represented by an experienced International Tax Attorney (covered by the attorney-client privilege).
Is there No Attorney-Client Privilege with a Non-Attorney?
If you are being represented by a non-attorney, then there is no attorney client privilege. There is a very limited privilege with a CPA or Enrolled Agent, but if it turns out the IRS believes you were willful and wants to pursue a criminal investigation against you, the CPA or enrolled agent can be forced to submit to an examination by the IRS (unless the CPA or Enrolled Agent is also an attorney).
Which Three (3) Years of Tax Returns do I have to Amend?
Generally, it has to be the last three years of tax returns that were filed. So for example, in January 2016 you decide you want to enter the program, you would amend your tax returns for tax year 2014, tax year 2013, tax year 2012. Alternatively, if you were to file your 2015 tax return timely and accurately (disclosing the information), then you could submit an original 2015 with the application as well as an amended 2014 and 2013 tax return.
On my Original Schedule B I Indicated I had no Foreign Accounts?
This is where many people start to “ride the line” between willful and non-willful. The fact of the matter is there are many reasons that we have come across in our practice as to why a person would indicate they did not have foreign accounts on the Schedule B when in fact they did – and would still be considered non-willful. Thus, if the only reason you believe you were willful is because of how you or your CPA/Accountant responded on schedule B, it may be in your best interest to contact an experienced streamlined disclosure lawyer to discuss.
I received a FATCA Letter, now what?
When you receive a FATCA Letter (Foreign Account Tax Compliance Act), it is important to realize that the clock has already started ticking. It means that the foreign financial institution/foreign bank is probably going to report your information to the United States, and when the IRS learns that you have outstanding foreign accounts that have not been reported on your tax return, it could lead to an audit or examination which may prevent your ability to enter the program.
I Cannot Locate All of my Account Information
If you are unable to find all of your account information, the most important information to obtain is the year-end balances. That is because it is the year-end balances that are utilized by the IRS to determine what your penalty will be (unless you qualify for a penalty abatement). Thus, while many foreign countries do not hold account information for more than three years and/or charge ridiculous fees for you to obtain the information — you can usually obtain the year-end information.
I do not Have to Pay Tax on These Accounts Overseas?
Welcome to the United States. If you are entering the streamlined program it is because you are required to file your taxes as if you were a US citizen and you are taxed on your Worldwide Income. Thus, as a US citizen, Legal Permanent Resident, or Foreign National otherwise subject to US income tax on a 1040 you are required to file a US tax return and report all of your foreign earnings. Just because you are not taxed on passive income in the country in which the accounts were held, that does not mean the income is tax-free in the United States. In fact, they are usually taxable under IRS Tax Law — but if you have already paid foreign tax you may qualify for the foreign tax credit.
I already Paid Taxes on These Earnings Overseas?
Even if you have already paid tax on the foreign earnings overseas you still must report the information and disclose the earnings on your US tax return. But, when you disclose the account information you also claim what is referred to as an FTC (Foreign Tax Credit). In other words, while you are required to disclose the information regarding your foreign taxes, it does not mean you are subject to double taxation – you get a ‘Foreign Tax Credit’ for taxes you already paid.
Are There Penalties on the Outstanding Tax Liability?
No. Unlike the Offshore Voluntary Disclosure Program (OVDP) in which you have to amend your tax returns for eight (8) years as well as paid 20% penalty on the total outstanding tax liability, under the streamlined program there is no additional penalty for the taxes; rather, there is a 5% penalty on the year-end account balances.
How is the 5% Penalty Calculated?
The penalties calculated as follows: a person will total their year-end balances for each year of the last six years. If you are in the streamlined program this does not include the value of unreported foreign real estate which generates real estate income. Thus, once you have the annual aggregate total of your foreign accounts for each year in the last six years, you pick the highest year-end total, multiply it by .05 (5%) and that will be your penalty. In addition to this penalty, you also have to pay any additional tax liability for the last three years that result from amending the tax return (if there is any taxes due) as well as interest on the taxes.
I live Overseas, Do I Qualify for the IRS Penalty Waiver?
The IRS Streamlined Program carved out a very small niche for foreigners who meet very specific residence requirements. In other words, if you reside overseas for at least 330 days in any one of the last three tax years in which you are filing an amended tax return, then you may qualify to have your 5% penalty abated. It is important to understand that this is not the same as the Foreign Earned Income Exclusion Test and the FEIF Bona-Fide Residence Exception under IRC 2555 does not apply (Click here for recent article we authored on this subject)
Is my Foreign Real Estate Calculated into the Equation?
This can become a very complicated discussion, but keeping it simple it goes like this: if you as an Individual own foreign real estate that generated income and you qualify for the streamlined program, the value of the real estate is not included in the penalty competition. In OVDP the value of foreign real estate that generates income is included in the penalty computation (subject to any outstanding mortgage).
To complicate matters, if you own foreign real estate within an investment such as a foreign mutual fund or possibly a foreign self-directed IRA, then the value of the account will include all the investments held in the mutual fund and if that includes foreign real estate then you may indirectly be subject to a penalty on that foreign real estate.
*If you are in this type of situation, you should consider speaking when experienced international tax lawyer before making any submission.
What Type of Accounts Must be Reported?
Generally, all foreign accounts must be reported. For example, Foreign Account reporting would generally include: Foreign Bank Accounts, Foreign Savings Accounts, Foreign Investment Accounts, Foreign Securities Accounts, Foreign Mutual Funds, Foreign Trusts, Foreign Retirement Plans, Foreign Business and/or Corporate Accounts, Insurance Policies (including some Life Insurance), Foreign Accounts held in a CFC (Controlled Foreign Corporation), and Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Must Foreign Insurance Policies be Reported?
If there is a surrender value, then generally insurance policy must be reported. Foreign life insurance and life assurance policies generally have an investment mechanism to them, which provides monthly, quarterly or annual interest/bonus payments – as well as a surrender value – and if so, the policy must be reported.
What if I am Under IRS Audit or Examination?
If you are currently under IRS audit or examination, than you generally will be disqualified from the program. The idea is that the streamlined program and OVDP are voluntary programs and once you are under audit you are no longer acting “voluntarily.”
Of course, not every IRS agent is fully aware of the parameters of the program and once you receive the notice of audit letter from the IRS it may not hurt you to try to submit to the program but it can cause a major issue depending on whether the audit has anything to do with for accounts and other very personal and confidential information.
*There seems to be some inexperienced CPA and “International” Tax Attorneys who do not have any litigation or actual law practice experience (or are CPA/Lawyers who try to combine their CPA/Attorney experience when they really have less than 10-15 years of Attorney experience and not understand the ramifications of their advice. These attorneys are motivated by the “dollar” and are all too quick to submit their client to the streamlined program after their client has already received a notice of audit or examination — just to make a quick buck.
**If the Attorney/CPA/Enrolled Agent does not properly vet the facts and circumstances of their clients unreported information, the client may face serious inquiries and the CPA/Enrolled Agent may be forced to submit to IRS questioning.
What is a Reasonable Cause Statement?
As an alternative to the streamlined program, some individuals opt to just submitting all of the prior documentation that was not previously disclosed or reported, along with a statement detailing why they have reasonable cause for failing to do so. This is a risky move, because by doing so the person is disclosing all of their financial information to the Internal Revenue Service without any guarantee of non-prosecution. Since the penalties for failing to file and FBAR are exorbitant and even the non-willful person can be subject to a $10,000 per account penalty per year the applicant must bec careful.
But I have no tax liability?
The threshold requirement is not whether you owe tax based on foreign earnings and foreign accounts, but whether you properly disclosed your foreign accounts and income. In other words, if you have foreign income from your bank but there also bank fees which reduces your foreign interest income to zero, that does not mean do not have to report and the failure to report the account and the “money” that was generated from the account is the problem and would still require disclosure. It also will not exempt you from tax and account reporting requirements.
What is Quiet Disclosure/Silent Disclosure
Honestly, it is a horrible idea to submit documents to the IRS via a Quiet Disclosure or Silent Disclosure. These type to disclosures occur when a person simply goes back and reports/discloses the accounts without entering any program or submitting a reasonable cause statement. If a person does this, than they may be subject to criminal prosecution. But if you have already done so you can still get right by the IRS and submit under the streamlined program if you are non-willful (there are some people who inadvertently filed a quiet disclosure or silent disclosure because they were did not know they were required to even submit to a program or pay a penalty)
Does my Foreign Inheritance Count Toward the Penalty?
Yes. A distinction must be made between estate tax, income tax and reporting requirements. When a person has a foreign inheritance there may not be any estate tax on receiving the money, but if the account generates income then there is income tax. In addition, if the account value exceeds $10,000 (or the annual aggregate total of all the foreign accounts exceeds $10,000) the person must still report the information and therefore the value of the account will go towards the penalty.
Do I Receive Criminal Protection under the Streamlined Program?
No. While a person is almost guaranteed protection against prosecution under OVDP, there is no criminal protection under the streamlined program. Although, if the streamlined submission goes as planned then the person is normally spared an IRS audit for the foreign account information. In other words, if a person successfully submits to the streamlined program, while they may not be audited for their foreign account information and income they can still be audited for domestic issues for the years included in the streamlined program submission.
We hope the summary has been of some help to you. Below please find a summary of the application process for the IRS Streamlined Offshore Disclosure Program:
STREAMLINED PROGRAM – SUMMARY
So…you just realized that you were supposed to be reporting your foreign accounts, assets and income, now what?
Maybe it was because you received a FATCA Letter, were educated by friends or family, or overheard a conversation while you were out regarding Foreign Account compliance.
Whether you are a U.S.Citizen who has Offshore Investments, a Legal Permanent Resident/Green-Card Holder who never closed your foreign accounts, or an individual who meets the “Substantial Presence Test” and still have literally no idea why as a Noncitizen/Nonlegal Permanent Resident you are somehow required to report your foreign accounts to the US, you are in a bit of a legal bind.
Moreover, with the introduction of FATCA (Foreign Account Tax Compliance Act) the chances have significantly increased that you may get caught with being out of compliance.
Nevertheless, Golding & Golding can work with you to cost-effectively submit to the Streamlined Domestic Offshore Disclosure Procedures and fix this “mess” quickly.
What is FATCA?
FATCA is a recent law that was enacted in 2010 and put into effect in 2014. The main purpose behind FATCA is to reduce offshore tax evasion and moving money from the United States to offshore/hidden/secret accounts.
More than 100 countries have entered into agreements (or agreements in substance) with the United States to enforce FATCA. Moreover, several thousands of Foreign Financial Institutions have agreed to comply with FATCA and report taxpayer information to the United States.
For you, the non-willful taxpayer, it is very difficult because under these new laws and guidelines almost everyone who fails to be in compliance with these new (and prior/existing) laws are considered to be “a bad guy or gal.” Thus, if you’re out of compliance it is very important to quickly get back into compliance using the Streamlined Program, which we would detail below.
*A word of caution: if you were willful then streamlined compliance procedures do not apply to your situation. Do not be fooled into thinking you could sneak one by the IRS by entering streamlined when you are willful; it is not worth the gamble.
*While there is no specific definition of willful, it is pretty clear to any experienced offshore disclosure attorney (15+ years of licensed Attorney Experience with a Master’s of Tax Law) when someone is willful. Thus, you should always speak with an experienced attorney to discuss your matter before making any decision about moving forward.
What am I supposed to Report?
There are three (3) main aspects to dealing with foreign money. The first aspect is reporting your foreign account(s) the second aspect is reporting certain specified assets, and the third aspect is reporting your foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… Not the least being a criminal investigation.
*The majority of individuals are usually non-willful, and this article will focus specifically on non-willfulness and the Streamlined Domestic Offshore Disclosure Procedures/Program.
Reporting Foreign Accounts – FBAR aka FinCEN 114 aka TD F 90-22.1
There are many different types of accounts that need to be reported on an annual basis. For purposes of this article, we are going to keep it very simple: if you have more than $10,000 overseas in foreign accounts at any time during the year, whether the money is in one account or spread over numerous accounts, then you are required to file an annual FBAR aka FinCEN 114. For more information about FBAR specific, please click the following: Golding & Golding’s Comprehensive FBAR FAQ from the Trenches.
This form is filed online directly with the Department of Treasury. The failure to file this form timely can result in significant fines and penalties (see above). Moreover, there is no authorized method for filing the FBARs late, aside from a formalized method such as offshore disclosure. If you just go ahead and file them, you have committed a crime known as “quiet disclosure.”
*Quiet disclosures can be fixed so if you did commit one, it is better to “put out the file while it is small” and go through the proper channels, as opposed to letting it linger, having it turn into an inferno…and risking a criminal investigation.
FBAR Delinquency Procedures still require some disclosure and is not the same as “Quiet Disclosure”
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation it may not need to be reported on the FBAR, but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
Whether or not you have the file in 8938 will depend on whether you are married filing jointly or married filing separate/single or whether you are considered a US resident or foreign resident. If you’re residing in the United States and therefore applying the streamlined domestic offshore disclosure program a.k.a. streamline compliance filing procedures then the threshold is as follows:
– If you are single or married filing separate the threshold requirement is $50,000 on the last day of the year or $75,000 at any time during the year.
– If you are married and filing married filing jointly the threshold requirements are doubled, so that it is $100,000 on the last day of the year or hundred and $50,000 at any time during
Other Forms – Foreign Business
While the FBAR and 8938 are the two most common forms, please keep in mind that there are many many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift you may have to file a 3520.
- If you are the Owner of a foreign trust you will also have to file a 3520-A.
- If you have certain Ownerships of a foreign corporation you have to file a 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file and 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident, which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country, or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return, and pay any differential in tax that might be due.
In other words, if you earn $100,000 in Japan and paid 25% tax in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability would be less than $25,000 then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you would have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket) then you have to pay the difference to the U.S. Government.
How do I Fix this Mess?
The easiest way to get back into compliance is to streamline domestic offshore disclosure program. At Golding & Golding all we do is Offshore Disclosure! As both tax attorneys (with Masters of Tax Law) who are also Enrolled Agents (the highest credential issued by the IRS) we are highly-qualified and well-respected worldwide, with clients in nearly 45 different countries.
We have successfully handled more than 100 streamlined disclosure applications in just the two years in which the program was available without any issue. We’ve handled applications for clients with less than $50,000 of unreported accounts accounts and as high as nearly $40 million in unreported accounts in a single disclosure.
Streamlined Domestic Disclosure – The Basics
For purposes of this summary, let’s assume you are non-willful. Therefore, you never had any intent to be out of tax compliance and had you known that you were required to file these forms and report this income you would’ve done so. Here is how the program works:
– Once you determine that you are ready, able and willing (and qualify) for the streamlined disclosure program, you work with our firm in analyzing and evaluating all of your foreign assets, income, and accounts to determine the overall circumstances of your case.
– We agree upon a flat fee to handle the matter from beginning to end-including providing future audit protection for these issue
– We work together to parse out the various different requirements for filing and which forms are required to be filed.
– We perform all of the currency exchanges for you as well as prepare all forms and tax returns.
– Specifically, six years of FBARs must be completed, as well as three years of tax returns. When it comes to the tax returns there may be various other forms that must be filed, but until a complete analysis of your tax situation is completed there is no way to know specifically what forms will be included. This is all handled in-house and not “assigned” to an outside Accountant or CPA you may have never met and may have no background in International Tax (but have cheaper rates)
– Thereafter, our firm prepares the certification statement and then reviews the information with you in detail so that you are comfortable in moving forward.
– Once a client agrees upon the completed forms, we work together with the client completing the submission and moving forward accordingly.
To Re-Cap the Streamlined Program:
- Six (6) years of FBAR statements
- Three (3) years of Amended Tax Returns
- Streamlined Certification Statement and supporting documents
- 5% penalty
- Unpaid taxes an interest for three (3) prior years
This is just a basic summary of the program and how our process works. For more information, please feel free to contact us at (800) 776-8264 for a private and confidential reduced fee telephone consultation.
For more information about the program we have included the actual procedures as provided by the IRS below:
IRS Streamlined Disclosure Summary
The following streamlined procedures are referred to as the Streamlined Domestic Offshore procedures.
Eligibility for the Streamlined Domestic Offshore Procedures
In addition to having to meet the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Domestic Offshore Procedures described in this section must: (1) fail to meet the applicable non-residency requirement described in the “Eligibility for the Streamlined Offshore Procedures” (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement described in the “Eligibility for the Streamlined Offshore Procedures”); (2) 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; (3) 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 (FinCEN Form 114, previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and (4) such failures resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114and the instructions for Form 8938.
Description of Scope and Effect of Procedures
U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Domestic Offshore Procedures must (1) 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 (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), (2) for each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and (3) pay a Title 26 miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.
The Title 26 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. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.
A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.
For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114and the instructions for Form 8938. For example, foreign financial assets may include:
- financial accounts held at foreign financial institutions;
- financial accounts held at a foreign branch of a U.S. financial institution;
- foreign stock or securities not held in a financial account;
- foreign mutual funds; and
- foreign hedge funds and foreign private equity funds.
A taxpayer who is eligible to use these Streamlined Domestic Offshore Procedures and who complies with all of the instructions below will be subject only to the Title 26 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 under existing audit selection processes, the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, 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. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.
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. The proper deferral elections with respect to such plans must be made with the submission. See the instructions below for the information required to be submitted with such requests.
Specific Instructions for the Streamlined Domestic Offshore Procedures
Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
- 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 a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with any required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return. You may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.
- Include at the top of the first page of each amended tax return “Streamlined Domestic Offshore” written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.
- Complete and sign a statement on the Certification by U.S. Person Residing in the U.S.certifying: (1) that you are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 9 below); (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate (see instruction 5 below). You must maintain your foreign financial asset information supporting the self-certified miscellaneous offshore penalty computation and be prepared to provide it upon request. You must submit an original signed statement and attach copies of the statement to each tax return and information return being submitted through these procedures. You should not attach copies of the statement to FBARs. Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
- Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. Your taxpayer identification number must be included on your check. You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
- Submit payment of the Title 26 miscellaneous offshore penalty as defined above.
- If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:
- a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
- a dated statement signed by you under penalties of perjury describing:
- the events that led to the failure to make the election,
- the events that led to the discovery of the failure, and
- if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
- for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission.
- The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:Internal Revenue Service
3651 South I-H 35Stop 6063 AUSC
Attn: Streamlined Domestic Offshore
Austin, TX 78741
This address may only be used for returns filed under these procedures. For all future filings, you must file according to regular filing procedures.
8. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. You are required to file these delinquent FBARs electronically at FinCen. On the cover page of the electronic form, select “Other” as the reason for filing late. An explanation box will appear. In the explanation box, enter “Streamlined Filing Compliance Procedures.” If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.