IRS Streamlined Offshore Disclosure Program - International Tax Lawyers

IRS Streamlined Offshore Disclosure Program – International Tax Lawyers

The IRS Streamlined Filing Compliance Procedures (aka “Streamlined Program”) is comprised of the Streamlined Domestic Offshore Procedures and/or the Streamlined Foreign Offshore Procedures.

International Tax Compliance is a major enforcement priority for the IRS. With the introduction of FATCA (Foreign Account Tax Compliance Act),  more than 100 countries (and tens of thousands of Foreign Financial Institutions “FFIs”) have agreed to report U.S. Account Holders to the IRS.

Why? because the penalties for failing to comply with even the FBAR Requirements can reach as high as $10,000.00 per account, per year (if you were non-willful) and as high as 100% value of the account if you were willful.

Our International Tax Lawyers represent hundreds of taxpayers annually in Streamlined Domestic Offshore Procedure submission in over 50 countries.

The Streamlined Offshore Procedures are a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance before it is too late!

        

Golding & Golding

Golding and Golding is one of the premier Offshore Disclosure Law Firms worldwide. We limit our entire practice to Offshore Disclosure. If you have unreported foreign accounts and are non-willful, you may qualify for the Streamlined Domestic Offshore Procedures.

Whether it is because you received a FATCA Letter, learned about it from friends or family, or happened upon it by accident — Foreign Account compliance is important. Under new U.S. Tax and Offshore Reporting Rules and Regulations, it is important to remain in IRS Tax and FBAR reporting compliance.  

           

Streamlined Domestic Offshore Procedures

In order to qualify for Streamlined Domestic Offshore Procedures, you must meet two major requirements:

  • Qualify as Non-Willful; and
  • Filed all Necessary Prior Year Tax Returns.

Streamlined Foreign Offshore Procedures

In order to qualify for Streamlined Foreign Offshore Procedures, you must meet three major requirements:

  • Qualify as Non-Willful
  • Meet the 330-Day Foreign Residence Test/Non U.S. Person; and
  • Filed all Necessary Prior Year Tax Returns.

How to Qualify as a Foreign Resident?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three (3) tax years or do not meet the Substantial Presence Test in one of the last three (3) tax years) you may obtain a waiver of all FBAR and FATCA penalties.

IRC 911 (Physical Presence Test vs. Bona-Fide Resident Test)

The Streamlined Foreign “330-day rule,” is a hard and fast rule — there are no exceptions.

Thus, the Streamlined Foreign “330-day rule” 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.

           

What does Non-Willful Mean?

Qualifying as Non-Willful is by far the most difficult aspect of Streamlined Offshore Disclosure.

You are willful if you knew you were supposed to report and disclose your foreign income and assets but choose not to — as such, you will be required to submit to OVDP instead of the Streamlined Program. In other words, if you knew you had a duty to report the information on an FBAR (Report of Foreign Bank and Financial Accounts)  Form 8938  (Statement of Specified Foreign Assets), or any other number of different IRS forms, but intentionally do not report your accounts, then you act “willfully.”

You are non-willful if you acted unintentionally, and did not know you were required to either report or disclose your foreign income, accounts, or other specified assets.

If you are Non-Willful…

And you filed all necessary prior year tax returns, you should qualify for the Streamlined Offshore Procedures.

The process for getting into compliance is as follows:

Streamlined Basic Requirements

The Streamlined Program requires the applicant to amend and pay outstanding tax liability for the last three (3) years to include unreported foreign income and unreported foreign accounts that were not previously reported on a U.S Tax Return. It also requires the applicant to file six (6) years of FBARs (FinCEN 114) and pay a (relatively) small penalty which equals 5% of the highest year end value for any given year.

To Summarize the Streamlined Program:

  • Amend the last 3 years of Tax Returns
  • File required forms such as 3520, 3520-A, 5471, 8621
  • File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
  • Take a “snapshot” of the aggregate offshore unreported balances on 12/31
  • Pick the highest year’s 12/31 annual aggregate value
  • Multiply the value by 5%
  • Pay the outstanding Tax, Interest on Taxes due, along with the 5% percent penalty

What Forms Must be Reported?

The following is a list of common forms which many people were never aware they had to report, but which the failure to report may lead to extensive fines and penalties:

Reporting Foreign Accounts (FBAR)

There is a lot of information online regarding the FBAR (Report of Foreign Bank and Financial Account Form) due to the extremely high penalties involved with this form. We have written countless articles, which you can find in our International Tax Library, by clicking here.

If you are a U.S. Person, it does not matter whether or not you have to file a US tax return to determine if you have to file an FBAR. The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FBAR Form and report all of the accounts.

It does not matter if the money is all in one account, or in 15 different accounts. It also does not matter if the majority of the money is in one account, with minimal amounts of money in the remaining accounts – rather, once you meet the threshold requirements, you have to report all the accounts.

Penalty: The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

Golding & Golding Resources: FBAR FAQ; FBAR Penalties

FATCA Form (8938)

FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.

Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Golding & Golding Resources: Form 8938 FAQ; Form 8938 Penalties

Foreign Gift Form (3520)

If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have the file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).

Penalty: The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Golding & Golding Resources: Form 3520 Penalties

Foreign Corporation or Foreign Partnership (5471 or 8865)

The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return

Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Golding & Golding Resources: Form 5471 Penalties

Passive Foreign Investment Company (PFIC)

One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.

As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules)

Penalty: The Penalties for not filing an 8621 run concurrent with the 8938 penalties (see above).

Golding & Golding Resources: Form 8621 Penalties; PFIC Form 8621 Excess Distribution Calculation

Foreign Trust (3520-A)

A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you and placed $5 million in trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.

Penalty: The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

Golding & Golding Resources: Form 3520-A Foreign Trust Penalties 

Foreign Real Estate Income

Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.

A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.

Penalty: Varies, depending on the Nature and Extent of the non-disclosure.

Golding & Golding Resources: Foreign Real Estate Income FAQ

How do I Fix this Mess?

The easiest way to get back into compliance is through the Streamline 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 over 50 different countries.

We have successfully handled several hundred streamlined disclosure applications in just the two years in which the program was available — without any issue. Our clients have disclosed foreign accounts with less than $50,000 in total of unreported accounts accounts, and as high as nearly $40 million in unreported accounts in a single disclosure.