Unreported Foreign Inheritance – Streamlined Disclosure Procedures
- 1 Gift vs. Inheritance
- 2 IRS Form 3520
- 3 Form 3520 is Usually not “Complicated”
- 4 3520 Penalties
- 5 FBAR (Report of Foreign Bank Accounts)
- 6 IRS Streamlined Disclosure Program
- 7 Streamlined Disclosure FAQ
- 7.1 How do I know if I Was Willful?
- 7.2 What if the IRS disagrees and Believes I was Willful?
- 7.3 Is there No Attorney-Client Privilege with a Non-Attorney?
- 7.4 Which Three (3) Years of Tax Returns do I have to Amend?
- 7.5 On my Original Schedule B I Indicated I had no Foreign Accounts?
- 7.6 I received a FATCA Letter, now what?
- 7.7 I Cannot Locate All of my Account Information
- 7.8 I do not Have to Pay Tax on These Accounts Overseas?
- 7.9 I already Paid Taxes on These Earnings Overseas?
- 7.10 Are There Penalties on the Outstanding Tax Liability?
- 7.11 How is the 5% Penalty Calculated?
- 7.12 I live Overseas, Do I Qualify for the IRS Penalty Waiver?
- 7.13 Is my Foreign Real Estate Calculated into the Equation?
- 7.14 What Type of Accounts Must be Reported?
- 7.15 Must Foreign Insurance Policies be Reported?
- 7.16 What if I am Under IRS Audit or Examination?
- 7.17 What is a Reasonable Cause Statement?
- 7.18 But I have no tax liability?
- 7.19 What is Quiet Disclosure/Silent Disclosure
- 7.20 Does my Foreign Inheritance Count Toward the Penalty?
- 7.21 Do I Receive Criminal Protection under the Streamlined Program?
- 8 What is the Streamlined Offshore Disclosure Program?
- 9 Streamlined Domestic vs. Streamlined Foreign Program
- 10 Streamlined Domestic Offshore Procedures
- 11 Domestic Streamlined Requirements
- 12 Streamlined Foreign Offshore Procedures
- 13 IRC 911 (Physical Presence Test vs. Bona-Fide Resident Test)
- 14 Streamlined Offshore Disclosure Program Summary
- 14.1 Eligibility for the Streamlined Domestic Offshore Procedures
- 14.2 Description of Scope and Effect of Procedures
- 14.3 Specific Instructions for the Streamlined Domestic Offshore Procedures
- 14.4 International Tax Lawyers - Golding & Golding, A PLC
When it comes to a foreign inheritance, it is important to make the distinction between “reportable” and “taxable.” Generally, if a foreign inheritance is received from a foreign person who is neither a US citizen nor Legal Permanent Resident, the inheritance is tax-free.
That is because it is considered a gift from a person overseas who is not subject to U.S. tax liability. Still, it is important to keep in mind when talking about “gifts” it is the person who is doing the gifting that is subject to the tax. Thus, simply because a person “receives” a gift does not mean it is taxable.
*If the person living overseas is a US person and/or as a foreign person who is gifting US “situs” then certain tax rules may apply. Moreover, if the gift is an inheritance then estate tax rules will apply.
Gift vs. Inheritance
Expanding the concept of a Gift, an inheritance is a gift. While all gifts do not need to be “inheritances” all inheritances are gifts. Therefore, an inheritance is subject to the reporting requirements of IRS form 3520, “Annual Return To Report Transactions With. Foreign Trusts and Receipt of Certain Foreign Gifts”
IRS Form 3520
Form 3520 is a reporting form. Therefore, having to report a receipt of a gift on form 3520 does not mean your gift is subject to tax liability. Rather, it simply means you must report the gift to the US government when you meet certain threshold requirements. The most common scenario is when a foreign person gets a US person property or money in a value that exceeds $100,000 at the time the gift.
As an example, it does not matter if it is one gift in the amount of $120,000, or 12 gives the total hundred and $120,000 (e.g. one gift vs. series of transactions) — it is from the same person than once you meet the hundred thousand dollars threshold in any given year you must report the gift on a form 3520.
Form 3520 is Usually not “Complicated”
There are many hard IRS forms such as the 8621 PFIC disclosures, and even the 5471 foreign corporation reporting – especially if tax and accounting is not in your skill set. The main problem with form 3520 is if you do not file it, then you can be subject to very high penalties.
The penalties for failing to file form 3520 are located in Internal Revenue Code Section 6677, and are as follows:
- A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally, the initial penalty is equal to the greater of $10,000 or:
- 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or
- 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or
- 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information.
Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.
FBAR (Report of Foreign Bank Accounts)
If the gift is money or investment accounts which are being held in your name overseas, you may be subject to FBAR filing requirements.
An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury when a person, trust or business owner has more than an annual aggregate amount of $10,000 in foreign and overseas accounts.
The penalties for failing to file the FBAR can reach 100% value of the foreign accounts, so it is important that if you have not filed FBAR forms (or IRS Form 8938) that you get into compliance quickly.
IRS Streamlined Disclosure Program
For most individuals, they can try to avoid the penalties by submitting (usually through an experienced international tax lawyer) reasonable cause statements. Moreover, if they have also failed to report certain accounts, it may benefit them by submitting their entire application through the streamlined program.
Streamlined Disclosure FAQ
A summary of the streamlined program and a series of FAQs we receive often is provided below:
For many individuals who are considering whether or not they should “come clean” and enter one of the IRS offshore disclosure programs, they have several questions which are not explained or detailed by the IRS.
In addition, it is hard for individuals without a tax background to distinguish what is reality, and what is just overly-aggressive sales and fear tactics used by many unscrupulous Law Firms, CPAs, and Enrolled Agents.
The following is a list of FAQs (Frequently Asked Questions), pitfalls, and tips from the Tax Lawyers at Golding & Golding. Our firm is one of the only boutique tax law firms in the country that is focused exclusively on International Offshore Disclosure Tax Law, and we have handled a diverse range of streamlined program applications ranging from under $100,000 to more than $30,000,000.
This is a summary of common Streamlined Program Questions we receive often. It does NOT constitute legal advice that can be relied upon as legal advice for your particular situation, since each person’s circumstances are unique and may impact the determination of whether he/she qualifies for the program.
How do I know if I Was Willful?
In reality, there is no concrete definition of the term Willful or Non-Willful. It is essentially a ‘smell test’ based on whether or not the facts and circumstances show that you knew, or had any reason to know that you are required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose. It is really that simple and for most people, if they did not know that there was a reporting requirement, then they could not have known that they were required to report the accounts/income — and would therefore fall into the “non-willful” category.
What if the IRS disagrees and Believes I was Willful?
This is a good question and without sounding like a salesperson, this is why you retain an experienced international tax lawyer to represent you throughout the application process. Yes, CPAs, Enrolled Agents and general practitioners will try to sell you that they can do it for “cheaper” and that you are “low-risk”, but once the IRS starts auditing individuals who are in the program, you will be a much better position (mentally and physically) to know you are being represented by an experienced International Tax Attorney (covered by the attorney-client privilege).
Is there No Attorney-Client Privilege with a Non-Attorney?
If you are being represented by a non-attorney, then there is no attorney client privilege. There is a very limited privilege with a CPA or Enrolled Agent, but if it turns out the IRS believes you were willful and wants to pursue a criminal investigation against you, the CPA or enrolled agent can be forced to submit to an examination by the IRS (unless the CPA or Enrolled Agent is also an attorney).
Which Three (3) Years of Tax Returns do I have to Amend?
Generally, it has to be the last three years of tax returns that were filed. So for example, in January 2016 you decide you want to enter the program, you would amend your tax returns for tax year 2014, tax year 2013, tax year 2012. Alternatively, if you were to file your 2015 tax return timely and accurately (disclosing the information), then you could submit an original 2015 with the application as well as an amended 2014 and 2013 tax return.
On my Original Schedule B I Indicated I had no Foreign Accounts?
This is where many people start to “ride the line” between willful and non-willful. The fact of the matter is there are many reasons that we have come across in our practice as to why a person would indicate they did not have foreign accounts on the Schedule B when in fact they did – and would still be considered non-willful. Thus, if the only reason you believe you were willful is because of how you or your CPA/Accountant responded on schedule B, it may be in your best interest to contact an experienced streamlined disclosure lawyer to discuss.
I received a FATCA Letter, now what?
When you receive a FATCA Letter (Foreign Account Tax Compliance Act), it is important to realize that the clock has already started ticking. It means that the foreign financial institution/foreign bank is probably going to report your information to the United States, and when the IRS learns that you have outstanding foreign accounts that have not been reported on your tax return, it could lead to an audit or examination which may prevent your ability to enter the program.
I Cannot Locate All of my Account Information
If you are unable to find all of your account information, the most important information to obtain is the year-end balances. That is because it is the year-end balances that are utilized by the IRS to determine what your penalty will be (unless you qualify for a penalty abatement). Thus, while many foreign countries do not hold account information for more than three years and/or charge ridiculous fees for you to obtain the information — you can usually obtain the year-end information.
I do not Have to Pay Tax on These Accounts Overseas?
Welcome to the United States. If you are entering the streamlined program it is because you are required to file your taxes as if you were a US citizen and you are taxed on your Worldwide Income. Thus, as a US citizen, Legal Permanent Resident, or Foreign National otherwise subject to US income tax on a 1040 you are required to file a US tax return and report all of your foreign earnings. Just because you are not taxed on passive income in the country in which the accounts were held, that does not mean the income is tax-free in the United States. In fact, they are usually taxable under IRS Tax Law — but if you have already paid foreign tax you may qualify for the foreign tax credit.
I already Paid Taxes on These Earnings Overseas?
Even if you have already paid tax on the foreign earnings overseas you still must report the information and disclose the earnings on your US tax return. But, when you disclose the account information you also claim what is referred to as an FTC (Foreign Tax Credit). In other words, while you are required to disclose the information regarding your foreign taxes, it does not mean you are subject to double taxation – you get a ‘Foreign Tax Credit’ for taxes you already paid.
Are There Penalties on the Outstanding Tax Liability?
No. Unlike the Offshore Voluntary Disclosure Program (OVDP) in which you have to amend your tax returns for eight (8) years as well as paid 20% penalty on the total outstanding tax liability, under the streamlined program there is no additional penalty for the taxes; rather, there is a 5% penalty on the year-end account balances.
How is the 5% Penalty Calculated?
The penalties calculated as follows: a person will total their year-end balances for each year of the last six years. If you are in the streamlined program this does not include the value of unreported foreign real estate which generates real estate income. Thus, once you have the annual aggregate total of your foreign accounts for each year in the last six years, you pick the highest year-end total, multiply it by .05 (5%) and that will be your penalty. In addition to this penalty, you also have to pay any additional tax liability for the last three years that result from amending the tax return (if there is any taxes due) as well as interest on the taxes.
I live Overseas, Do I Qualify for the IRS Penalty Waiver?
The IRS Streamlined Program carved out a very small niche for foreigners who meet very specific residence requirements. In other words, if you reside overseas for at least 330 days in any one of the last three tax years in which you are filing an amended tax return, then you may qualify to have your 5% penalty abated. It is important to understand that this is not the same as the Foreign Earned Income Exclusion Test and the FEIF Bona-Fide Residence Exception under IRC 2555 does not apply (Click here for recent article we authored on this subject)
Is my Foreign Real Estate Calculated into the Equation?
This can become a very complicated discussion, but keeping it simple it goes like this: if you as an Individual own foreign real estate that generated income and you qualify for the streamlined program, the value of the real estate is not included in the penalty competition. In OVDP the value of foreign real estate that generates income is included in the penalty computation .
To complicate matters, if you own foreign real estate within an investment such as a foreign mutual fund or possibly a foreign self-directed IRA, then the value of the account will include all the investments held in the mutual fund and if that includes foreign real estate then you may indirectly be subject to a penalty on that foreign real estate.
*If you are in this type of situation, you should consider speaking when experienced international tax lawyer before making any submission.
What Type of Accounts Must be Reported?
Generally, all foreign accounts must be reported. For example, Foreign Account reporting would generally include: Foreign Bank Accounts, Foreign Savings Accounts, Foreign Investment Accounts, Foreign Securities Accounts, Foreign Mutual Funds, Foreign Trusts, Foreign Retirement Plans, Foreign Business and/or Corporate Accounts, Insurance Policies (including some Life Insurance), Foreign Accounts held in a CFC (Controlled Foreign Corporation), and Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Must Foreign Insurance Policies be Reported?
If there is a surrender value, then generally insurance policy must be reported. Foreign life insurance and life assurance policies generally have an investment mechanism to them, which provides monthly, quarterly or annual interest/bonus payments – as well as a surrender value – and if so, the policy must be reported.
What if I am Under IRS Audit or Examination?
If you are currently under IRS audit or examination, than you generally will be disqualified from the program. The idea is that the streamlined program and OVDP are voluntary programs and once you are under audit you are no longer acting “voluntarily.”
Of course, not every IRS agent is fully aware of the parameters of the program and once you receive the notice of audit letter from the IRS it may not hurt you to try to submit to the program but it can cause a major issue depending on whether the audit has anything to do with for accounts and other very personal and confidential information.
*There seems to be some inexperienced CPA and “International” Tax Attorneys who do not have any litigation or actual law practice experience (or are CPA/Lawyers who try to combine their CPA/Attorney experience when they really have less than 10-15 years of Attorney experience and not understand the ramifications of their advice. These attorneys are motivated by the “dollar” and are all too quick to submit their client to the streamlined program after their client has already received a notice of audit or examination — just to make a quick buck.
**If the Attorney/CPA/Enrolled Agent does not properly vet the facts and circumstances of their clients unreported information, the client may face serious inquiries and the CPA/Enrolled Agent may be forced to submit to IRS questioning.
What is a Reasonable Cause Statement?
As an alternative to the streamlined program, some individuals opt to just submitting all of the prior documentation that was not previously disclosed or reported, along with a statement detailing why they have reasonable cause for failing to do so. This is a risky move, because by doing so the person is disclosing all of their financial information to the Internal Revenue Service without any guarantee of non-prosecution. Since the penalties for failing to file and FBAR are exorbitant and even the non-willful person can be subject to a $10,000 per account penalty per year the applicant must bec careful.
But I have no tax liability?
The threshold requirement is not whether you owe tax based on foreign earnings and foreign accounts, but whether you properly disclosed your foreign accounts and income. In other words, if you have foreign income from your bank but there also bank fees which reduces your foreign interest income to zero, that does not mean do not have to report and the failure to report the account and the “money” that was generated from the account is the problem and would still require disclosure. It also will not exempt you from tax and account reporting requirements.
What is Quiet Disclosure/Silent Disclosure
Honestly, it is a horrible idea to submit documents to the IRS via a Quiet Disclosure or Silent Disclosure. These type to disclosures occur when a person simply goes back and reports/discloses the accounts without entering any program or submitting a reasonable cause statement. If a person does this, than they may be subject to criminal prosecution. But if you have already done so you can still get right by the IRS and submit under the streamlined program if you are non-willful (there are some people who inadvertently filed a quiet disclosure or silent disclosure because they were did not know they were required to even submit to a program or pay a penalty)
Does my Foreign Inheritance Count Toward the Penalty?
Yes. A distinction must be made between estate tax, income tax and reporting requirements. When a person has a foreign inheritance there may not be any estate tax on receiving the money, but if the account generates income then there is income tax. In addition, if the account value exceeds $10,000 (or the annual aggregate total of all the foreign accounts exceeds $10,000) the person must still report the information and therefore the value of the account will go towards the penalty.
Do I Receive Criminal Protection under the Streamlined Program?
No. While a person is almost guaranteed protection against prosecution under OVDP, there is no criminal protection under the streamlined program. Although, if the streamlined submission goes as planned then the person is normally spared an IRS audit for the foreign account information. In other words, if a person successfully submits to the streamlined program, while they may not be audited for their foreign account information and income they can still be audited for domestic issues for the years included in the streamlined program submission.
We hope the summary has been of some help to you. Below please find a summary of the application process for the IRS Streamlined Offshore Disclosure Program:
What is the Streamlined 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.
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.
- 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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