- 0.1 Streamlined Alternative
- 0.2 The 5% Domestic Penalty is Non-Negotiable
- 0.3 Streamlined Foreign Has No Penalty
- 0.4 Streamlined Does Not Provide Audit or Criminal Protection
- 0.5 Am I Willful or Non-Willful?
- 0.6 You cannot Alternate between OVDP and Streamlined
- 0.7 Warning – Your Attorney or CPA is Probably Not an Expert
- 0.8 Basic IRS Foreign Reporting Requirements – A Primer
- 0.9 Who Has to Report?
- 1 The Basics
- 1.1 Foreign Income
- 1.2 Foreign Accounts
- 1.3 Fines & Penalties
- 1.4 Customs Holds and Passport Revocation
- 1.5 Getting Into Compliance
The IRS Streamlined Filing Compliance Procedures is a relatively new program, which was enhanced by the Internal Revenue Service back in July 2014.
It is a program designed to bring non-willful individuals and estates who are out of tax compliance involving their foreign (and possibly domestic) tax issues into compliance.
Prior to the introduction of the Streamlined Filing Compliance Procedures, the only program that the IRS made available for getting compliance when a person was out of compliance was traditional OVDP (Offshore Voluntary Disclosure Program). The problem was that for individuals who were non-willful, it was an unfair and massive undertaking.
Why was OVDP considered to be too burdensome for many? Because the program was designed for people who were willful; in other words, people who knew they had a reporting requirement but failed to comply. For those individuals, the IRS wants to make sure that they fully disclose all of their information because there was a likelihood that the source funds was illegal or not properly disclose for many years.
To try to ease the burden for the non-willful individuals, the IRS removed the streamlined procedures that were once part of OVDP – and much more limited in scope than the streamlined procedures are today – and used them to create a separate streamline programs (aka Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures). Under the current rules, a person does not first to go through traditional Offshore Voluntary Disclosure Program procedures before submitting to the Streamlined Program — they go directly into the Streamlined Program.
The following are five (5) important things to know about IRS Streamlined Filing Compliance Procedures (as of 12/2016):
The 5% Domestic Penalty is Non-Negotiable
There are two types of streamline programs: Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. Both programs involve the reporting of foreign or offshore accounts, but the distinction involves residence. If a person is a resident of the United States for more than 35 or 36 days in any given tax year (or meets the Substantial Presence Test) than they will not qualify for the foreign program. The foreign program requires a person to live outside of the United States for at least 330 days in any given tax year (see below).
In the domestic program, the penalty is a straight 5%. In other words, the applicant will look at the annual aggregate total of all of their qualifying foreign money and accounts (not all types of foreign assets will be penalized) on December 31st for each of the six years in the compliance period. Whichever year has the highest annual aggregate total will then be multiplied by 5% for the penalty.
**It is just the highest year, not every year.
The IRS does not have the authority to negotiate the penalty. And, there is no opt-out procedure available for the streamlined program. Therefore, if you are entering the streamlined domestic offshore procedures, you should be doing so with the understanding that you will be paying the 5% penalty.
*If you are seeking to avoid the penalty you have two options: you can submit to OVDP and then opt-out, or you can attempt to bypass the streamlined procedures and submit a reasonable cause application – each option has its own pros and cons.
Streamlined Foreign Has No Penalty
For a person to qualify for the streamlined foreign, it means they must have lived outside of the United States for at least 330 days in any one tax year (or not have met substantial presence test during the compliance period for at least one year if they were only subject to US tax because they met the substantial presence that – as opposed to being a citizen or green card holder).
The IRS does not care whether the applicant lived in one country or 50 different countries during the compliance period; the key phraseology is that the individual “lived outside of the United States.” If you can meet this relatively strict requirement, the IRS Will waive the penalty associated with the streamlined program.
This is why it is crucial for accidental Americans, ex-pats and others outside the United States to be careful what they read on Expat Forums and other websites. Even presuming that FATCA has bad aspects to it — which unfairly impacts US ex-pats and accidental Americans — the IRS does provide a procedure for individuals to get back to the tax compliance without any penalty (As to taxation, while U.S. persons must pay tax to the IRS on their worldwide income no matter where they live, they may qualify for foreign tax credit or foreign earned income exclusion and avoid any additional taxation).
Streamlined Does Not Provide Audit or Criminal Protection
One of the main benefits to entering traditional OVDP is that there is audit protection and protection from criminal prosecution. While the IRS is not guarantee immunity, even the IRS has stated that as long as an applicant makes a full and truthful disclosure, the IRS will usually not seek prosecution. For example, we have never had any of our OVDP applicants criminally investigated or indicted.
Under the streamlined procedures, the applicant does not receive the same protection, but it is generally not necessary. Unfortunately, many other law firms and CPAs try to use this fact to force applicants into traditional OVDP (presumably so that the law firm and CPA firm can collect a bigger fee since it is a much bigger undertaking), when traditional OVDP is not necessary.
The reason why the IRS does not provide audit protection for criminal protection is because it is not necessary. When a person is non-willful, it means they had no intent or mens rea to commit any sort of tax crime; they just didn’t know they were supposed to report the information to the IRS. As such, there is no crime, and thus no basis for the IRS or DOJ to launch a criminal investigation on these issues.
The IRS may still audit an individual who submitted to the program, but there are certain factors to keep in mind. First, the IRS would generally not audit you for anything within the streamlined program submission. And if they audit your for issues not involving Foreign Tax Compliance, then the audit had nothing to do with the streamlined submission.
Second, and most important is that even if the IRS does audit you for the time-period in which you submitted to the streamlined program, they will be limited in their ability to penalize you. That is because since you have amended your returns and filed FBARs for the last six years — along with the 8938 forms or 3520, 5471, or 8621 forms — there is not much that the IRS could penalize you on anyway
In other words, the mere fact that the IRS does not provide audit protection to see my program should not be enough to dissuade you from entering the program.
Am I Willful or Non-Willful?
This is a question we have been asked more than any other question in the history of our practice. As offshore disclosure is the only area of tax law we practice, it is understandable that the first question most applicants have is whether they were willful or non-willful.
The reason this question is so important is because it is the key determination in deciding whether a client should enter streamlined or OVDP. If a person knowingly (a.k.a. willfully, deliberately or intentionally) avoided reporting foreign money, accounts, assets or investments, than they are willful and then they cannot enter the streamlined program.
Absent an opt-out, the penalty under OVDP can range as high as 50% penalty on foreign accounts (in addition to failure-to-file penalties, failure-to-pay penalties, and an annual penalty on taxes owed).
As such, before making any decision to submit or communicate directly with the IRS, you should speak with an experienced international tax lawyer that handles IRS voluntary disclosures to properly assess and evaluate your case.
You cannot Alternate between OVDP and Streamlined
At Golding & Golding, we would estimate that at least 10-20% of calls comes from individuals who first used a different firm. Oftentimes it is from firms that advertise heavy that they are experts in the field and/or have numerous years of experience in IRS voluntary disclosure.
In reality, a majority of these firms have no experience whatsoever, and chances are you may be one of the first projects they are working on in the realm of IRS Voluntary Disclosure. As such, the learning curve is steep and often times the attorneys and CPAs misunderstand the submission process from the get-go.
The IRS is very clear that once a person makes a decision to enter either OVDP or Streamlined and moves ahead in the application process, they cannot go back and submit to the other program. Thus, that is why it is very important to work with a knowledgeable firm and to go over your background in detail before making any affirmative representation to the IRS..
Some inexperienced tax attorneys and CPAs will make statements such as “everyone gets into the streamlined program,” “you are at low risk,” “nothing is going to happen and the IRS is not going to follow up.” The fact of the matter is, the IRS does reject individuals from both OVDP and the Streamlined Program.
And, if your application is rejected, you can believe the IRS is going to follow-up, which will then subject you to more extreme fines and penalties, which can reach 100% value of the foreign accounts in a multiyear audit scenario in which the IRS believes you were willful.
That is why it is important to speak with experience counsel – and white is also important to ensure you negotiate a flat fee arrangement before beginning the process.
Warning – Your Attorney or CPA is Probably Not an Expert
If you find a firm that is advertising themselves as “Experts,” please be wary. Some of the most experienced tax attorneys in the world have stated that they would never even think about holding themselves out as an expert as that would be ‘preposterous.’ In fact, the ABA (American Bar Association) published an article about the dangers for lawyers to use that term.
Basic IRS Foreign Reporting Requirements – A Primer
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
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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