Streamlined Foreign Offshore Procedures (2018) - How Do I Qualify? (Golding & Golding)

Streamlined Foreign Offshore Procedures (2018) – How Do I Qualify? (Golding & Golding)

Streamlined Foreign Offshore Procedures (2018) – How Do I Qualify?

Streamlined Foreign Offshore Procedures: In order to provide some better context about the IRS Streamlined Disclosure Program for Foreign Residents, it is important to understand what the term Streamlined Foreign Offshore Procedures (SFOP) means. SFOP is also referred to as:

  • Streamlined Foreign Offshore
  • Streamlined Foreign Procedures
  • Offshore Streamlined Filing
  • Streamlined Expat
  • IRS Amnesty for Expats
  • Streamlined Foreign Disclosure

Streamlined Foreign Offshore Specialist

We have successfully handled hundreds of Streamlined Foreign Offshore Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

           

Streamlined Foreign Offshore Procedures

This article will summarize the IRS SFOP procedures and guidelines. The two most important aspects are to qualify as a Foreign Resident, and to have acted Non-Willful.

If a person qualifies for the IRS Streamlined Program, then the IRS will waive the 5% IRS Streamlined Penalty!

SFOP 

Streamlined Foreign Offshore Procedures (SFOP) 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! It allows individuals to come into IRS Tax and Reporting Compliance, without having to pay any penalties.

How To Qualify for Streamlined Foreign Offshore Procedures

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

  • Qualify as Non-Willful
  • Meet the 330-Day Foreign Residence Test/Non U.S. Person; and
  • You do not have to have filed all prior year tax returns.

Are You 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.

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 in any 12-month period) 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.

Stated another way, to qualify for the 330-day rule, you must have lived outside of the U.S. for 330-days within the 12-month tax year; other possible exceptions which may be available for use under the Foreign Earned Income Exclusion test would typically not apply.

           

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 chose not to. This includes acting with Willful Blindness (aka Willful Omission) or with Reckless Disregard. If you are willful, you will be required to submit to OVDP instead of the Streamlined Program – if you want to get into voluntary compliance.

In other words, if you knew or should have known 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 acted “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 I was Only Willful for a Few Years, Can I Go Streamlined?

The IRS is clearIf you were willful at all, then you cannot qualify for the IRS Streamlined Program. There are no exceptions for people who were only willful for a year or two, and no exceptions for people who only failed to report “small” amounts of income. We find it abhorrent that there are other attorneys putting potential clients in serious financial risk, as well as harm’s way for a potential IRS Criminal Investigation, by pushing them into Streamlined when they know the client was willful.

Incredibly, these unscrupulous attorneys recommend that if a person was only willful for a “little while” then they can still go Streamlined. These attorneys typically have no real experience in OVDP, and probably represented clients in a handful of Streamlined Cases — and have never seen the inside of a courtroom. 

On multiple occasions, we have had clients come to us after retaining one of these dreadful firms, who were now terrified because they realized that they paid an inexperienced Offshore Disclosure Attorney a “small fee” to go streamlined, when they admitted to the Attorney they were willful. Click Here for a Case Study Example of what can occur when you go Streamlined when you were willful.

Once you submit to the Streamlined Program, you can not thereafter submit to OVDP.

If a person is willful, they do not qualify for Streamlined or Reasonable Cause. It doesn’t matter whether it was 1-year, 5-years or 10-years worth of non-compliance.

**While the extent of the willfulness penalties might be mitigated through an OVDP Opt-Out, you should never submit a reasonable cause letter or streamlined submission if you were willful. This is especially true, since the IRS has begun auditing Streamlined Submissions.

Tip: The reason these firms push you into Streamlined when they know you were willful is to make a quick buck from you. Obviously a person would prefer to go Streamlined and pay a reduced penalty, and these Attorneys prey upon that feeling — at a time when you may be vulnerable. They need your business and need your money, and will throw ethics out the window to get it. Remember, you only get one bite at the Apple.

It is not their money or their freedom on the line – it is yours, so be careful…

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:

  • File Original Returns (or Amend Returns) for the last 3 years of Tax Returns
  • File required forms such as 3520, 3520-A, 5471, 8621, 8938, 8865, etc.
  • File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
  • All Penalties are waived.

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 Foreign 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.

No Case is Too Big; No Case is Too Small.

We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.

We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):

Who Decides to Go Streamlined?

All different types of people submit to the Streamlined Foreign Offshore Procedures. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

…We even represent IRS Staff with getting into compliance.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.

In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.) 

He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”