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Streamlined Domestic Offshore Disclosure Program – FBAR Lawyers | IRS Tax Compliance

Golding & Golding - U.S. and International Tax Lawyers

Golding & Golding – U.S. and International Tax Lawyers

If you have unreported foreign accounts that have an “annual aggregate total” that exceeds $10,000 you may consider entering into the IRS Streamlined Offshore Disclosure Program in order to get compliant and avoid even bigger headaches – and penalties – in the future.

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.

                                                                                  

Streamlined Domestic Offshore Procedures

When a person resides in the United States and were “non-willful”, then they qualify for the streamlined domestic offshore program. By residing in the United States, that means that the person has not resided outside of the United States for at least 330 days in any given year for the last three tax years.

Under the streamlined domestic offshore procedures, the applicant has the ability to significantly reduce the penalty amount from the OVDP penalty, which can reach as high as 50% of the annual aggregate account balance for the highest year over the last eight years.

When a person qualifies for the streamlined domestic offshore procedure, they are only required to pay penalty on 5% of the highest annual aggregate total of their year-end balance as opposed to the maximum value balance throughout the year. The purpose of this distinction is to protect the non-willful taxpayer who may have had an artificially high account balance during the year – as for example someone who may have sold their house and deposited those funds into their bank account before purchasing a new home or investing into a different type of asset.

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:

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.

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.

  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, 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.
  2. 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.
  3. 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.  
  4. 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.
  5. Submit payment of the Title 26 miscellaneous offshore penalty as defined above.  
  6. 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.
  7. 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.