- 1 Streamlined Program Alternative – Unfair Penalty
- 2 Quiet Disclosure
- 3 There may be Hope
- 4 Streamlined Offshore Disclosure Program
- 5 OVDP
- 6 Streamlined Domestic vs. Streamlined Foreign Program
- 7 Streamlined Domestic Offshore Procedures
- 8 Domestic Streamlined Requirements
- 9 Streamlined Foreign Offshore Procedures
- 10 IRC 911 (Physical Presence Test vs. Bona-Fide Resident Test)
- 11 Streamlined Offshore Disclosure Program Summary
- 11.1 Eligibility for the Streamlined Domestic Offshore Procedures
- 11.2 Description of Scope and Effect of Procedures
- 11.3 Specific Instructions for the Streamlined Domestic Offshore Procedures
- 11.4 International Tax Lawyers - Golding & Golding, A PLC
If you knowingly submit a Quiet Disclosure, you may have taken a non-willful situation (in which you did not previously know you had to report) and turned it into a willful tax violation (knowingly submitting amended tax returns outside of the accepted procedures).
The main accepted procedures are:
- OVDP (Willful)
- Streamlined Program (Non-Willful)
- Delinquency Procedures with Reasonable Cause (Non-Willful with a Penalty Abatement Request)
There is a lot of misinformation online regarding OVDP (Offshore Voluntary Disclosure Program), FBAR (Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act). One of the biggest misconceptions regarding foreign account compliance are the ramifications for submitting an FBAR Quiet Disclosure of Foreign Accounts and Tax Information.
Streamlined Program Alternative – Unfair Penalty
The most common scenario involving quiet disclosure is as follows: a taxpayer has a significant amount of money overseas. The money has been earning interest income in a country that has a relatively low passive income tax rate, or the country does not collect income tax on passive income altogether.
The person becomes aware that they should have been reporting their foreign interest income on their US tax return and pay tax on the money. The money that is in the account was either earned (in which income taxes were already paid on the lump sum) and/or the money comes from an inheritance.
The US person does not feel they should have to pay tax on the income and/or a 5% penalty on the highest year’s year-end balance as required under the Streamlined Offshore Disclosure Program (for non-willful taxpayers). Under the streamlined program, the taxpayer will total all of their account balances on the last day of the year for the last six years, select the year that has the highest year-end aggregate total of the unreported foreign accounts, and multiply by 5%.
We understand that it is Unfair: For example, if you have $500,000 overseas that you either received by inheritance or earned and paid income tax o — paying a $25,000 penalty seems exorbitant. With that said, some people attempt quiet disclosure, which should never be done.
In a quiet disclosure, the person does not enter the program but rather simply amends their tax returns to include the unreported foreign income (schedule B), report the foreign accounts (8938 forms) and file FBAR Statements with the Department of the Treasury.
Here’s the problem: If you were originally non-willful (in that you were unaware of the requirement to file an FBAR) but now you went ahead and willfully failed to pay the penalty, you may have bootstrapped your non-willful submission into full-blown tax fraud and tax evasion.
Why? Because you have now willfully evaded US tax, interest and penalties by knowingly filing an untimely FBAR or Amended Tax Return without payment penalty for money you know you earned in the past but had not paid any US tax on.
There may be Hope
No two submissions are identical. You may have perfectly legitimate reasons for having done a quiet disclosure – not the least being receiving bad advice from a CPA or Attorney. With FATCA compliance on the rise and thousands of Foreign Financial Institutions reporting U.S. foreign account holder information to the IRS, you should consider speaking with an experienced international tax lawyer to assess your situation and determine the best strategy for moving forward at avoiding even stiffer penalties and possible criminal investigation.
The following is a summary of the IRS Streamlined Offshore Disclosure Program:
Streamlined Offshore Disclosure Program
The IRS has introduced a new “streamlined” program to assist non-willful U.S. Taxpayer who are out of Foreign Tax Compliance by not complying with FATCA (Foreign Account Tax Compliance Act), not reporting Foreign Income, or failing to file timely FBAR reports (Report of Foreign Bank and Financial Accounts).
If you qualify for the Streamlined Program instead of the more comprehensive OVDP Penalty (Offshore Voluntary Disclosure Program) the FBAR Penalty is REDUCED to 5% or even completely eliminated if you qualify for the Streamlined Foreign Offshore Program.
OVDP is the Offshore Voluntary Disclosure Program. Prior to recent changes in the law, the IRS required ALL taxpayers who entered the program (Willful or Non-Willful) to amend their tax returns for eight (8) years, pay their outstanding tax liability and pay another 20% penalty on the outstanding tax amount.
In addition, the Taxpayer had to pay a 27.5% Penalty (or 50% penalty) on the Taxpayer’s highest annual aggregate total of overseas accounts – going back eight (8) years (unless they qualified to Opt-Out, which was not easy).
While there were some additional smaller thresholds which had smaller penalties, they were very limited.
What is the Streamlined Domestic/Foreign Offshore Disclosure Program?
The IRS has introduced new streamlined procedures which makes IRS tax compliance even easier. As provided by the IRS, “Individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Domestic Offshore Procedures must:
- Fail to meet the applicable non-residency requirement described in section 2.A. above (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement described in 2.A. above);
- 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;
- 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.
In addition, if you reside overseas, the penalty might be reduced to ZERO. The rules regarding offshore disclosure can be very complex depending on each person’s individualized set of facts.
It is always advisable to speak with a tax attorney before initiating any communications with the IRS.
Streamlined Domestic vs. Streamlined Foreign Program
The key difference between the Streamlined Domestic Program and Streamlined Foreign Program is whether or not the applicant resides in the United States or overseas (or has resided overseas for at least 330-days in any tax year going back three (3) years. The difference can mean a Fully Penalty Waiver for a qualifying applicant vs. a 5% Penalty.
Streamlined Domestic Offshore Procedures
The Streamlined Domestic Program does not have any foreign residence requirement. The word “domestic” can be deceiving, because it still refers to foreign accounts and foreign assets. Rather, the domestic portion of the phrase refers to the residence of the applicant. Thus, if the applicant resides in the United States or did not reside outside of the United States for at least 330 days in any tax year for the last three years then they must enter the domestic program – as long as they were not willful.
IRC 911 “Bona-Fide Resident Rules” are in applicable – any reference to IRC 911 is regarding the term “Abode” only. See a Golding & Golding Article on the distinction by Clicking Here.
Domestic Streamlined Requirements
The Streamlined Domestic Program requires the applicant to amend and pay outstanding tax liability for the last three years to include unreported foreign income that was not previously reported. It also requires six (6) years of FBARs (FinCEN 114) forms to be filed and the applicant to pay a penalty, which equals 5% of the highest year end value for any given year.
In other words, the applicant will tally the unreported accounts and undisclosed accounts for each year going back six (6) years as to what the value of these unreported accounts were on the last day of the year. Whichever year has the annual aggregate total that is the highest is then multiplied by 5% and that is the penalty amount.
*Even though the streamlined instructions are ambiguous we have confirmed in speaking with the IRS several times that the penalty only applies to the unreported accounts.
Streamlined Foreign Offshore Procedures
The streamlined foreign program has a foreign residence requirement – which is why it is referred to as the foreign program. The foreign portion of the phrase refers to the residence of the applicant. Thus, if the applicant has resided outside of the United States (does not need to be in just one country) for at least 330 days in any tax year for the last three tax years then the applicant qualifies for a penalty waiver. That means the applicant will not have to pay any penalty and will only be responsible for outstanding taxes that are due for the last three years.
It also requires six (6) years of FBARs (FinCEN 114) forms to be filed but the FBAR Penalty is waived
IRC 911 (Physical Presence Test vs. Bona-Fide Resident Test)
It should be noted that in the frequently asked questions the streamlined foreign program, the IRS is clear that the applicant must meet the 330 day rule. This should be distinguished from Internal Revenue Code section 911 which is used by taxpayers trying to claim the foreign earned income exclusion by showing they qualify for either the physical presence test (330 days) or the bona fide residence test.
Thus, even though a person could qualify as a bona fide resident under IRC 911 for the foreign earned income exclusion, it does not mean that they qualify for the streamlined foreign program.
As provided by the IRS: The discussion of the non-residency requirement for eligibility for the Streamlined Foreign Offshore Procedures refers to IRC § 911 and its regulations. Does that mean that anyone who is non-resident under IRC § 911 and its regulations is non-resident for purposes of the Streamlined Foreign Offshore Procedures?
- The reference to IRC § 911 and its regulations is only to the parts of those authorities that define “abode,” which are found in IRC § 911(d)(3) and Treas. Reg. § 1.911-2(b). Non-residency for purposes of the Streamlined Foreign Offshore Procedures is defined in those procedures, and not in IRC § 911 and its regulations.
Streamlined Offshore Disclosure Program Summary
If you are a US taxpayer and you have undisclosed foreign bank accounts and/or unreported foreign income, then under FATCA (Foreign Account Tax Compliance Act) and IRS general tax law, you may be subject to extremely high penalties according to the Reporting of Foreign Bank and Financial Account Rules. If your actions were non-willful, you may qualify for the Streamlined Filing Compliance Procedures.
If a person was willful, which generally means they intended on defrauding the United States by evading tax, then they have to enter the traditional OVDP (Offshore Voluntary Disclosure Program) and pay a penalty of either 27.5% or 50% on the maximum value of highest year’s annal aggregate total balance going back 8 years.
On the other hand, if the person’s failure to report foreign assets, accounts, and income was due to negligence or non-willfulness (without any intent to defraud the IRS or evade) they can generally opt for one of the streamline programs and have the amount the penalty they owe significantly reduce if not eliminated.
Even though the streamlined domestic offshore procedure is simpler than the traditional OVDP, it is still a comprehensive process and should only be handled by an experienced international tax lawyer. Only by retaining an attorney/lawyer will the applicant have an attorney-client privilege with their Streamlined Application submission Representative!
While retaining a CPA or enrolled agent to represent you in your application will probably cost you less (in the short-run), if for any reason the application process went awry or you ran into some hurdles and the IRS wants to criminally investigate you, then the information you provided to your CPA or Enrolled Agent (presuming they were not also attorneys) would not be protected under the attorney-client privilege and the enrolled agent or CPA could be forced to testify against you.
The following is a summary of the streamlined offshore Domestic procedures as provided by the Internal Revenue Service on the IRS website, since the majority of applicants qualify for the Domestic Procedures Program
Eligibility for the Streamlined Domestic Offshore Procedures
In addition to having to meet the general eligibility criteria described above, 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 section 2.A. above (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement described in 2.A. above); (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.
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.
- 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.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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