On June 18, 2014, the IRS announced new changes to the Streamlined Procedures that will allow more taxpayers to qualify as well as ease the process for qualifying applicants. One of the most significant changes brought about by the revised Streamlined Procedures announced in June 2014 is the extension of eligibility to U.S. taxpayers residing in the United States. As a result, there are separate rules that apply to non-U.S. residents (“Streamlined Foreign Offshore Procedures”) and U.S. residents (“Streamlined Domestic Offshore Procedures”).
Eligibility for Streamlined Domestic Offshore Procedures
In order to participate in the Streamlined Domestic Offshore Procedures, individual U.S. taxpayers, or estates of individual U.S. taxpayers must meet general eligibility criteria for the streamlined procedures in addition to certain requirements specific to domestic applicants. These additional requirements are as follows:
- The individual taxpayer must fail to meet the non-residency requirements described in the instructions for the Streamlined Foreign Offshore Procedures;
- The individual taxpayer must have previously filed a U.S. tax return for each the most recent 3 years for which the U.S. ta return due date has passed;
- The individual taxpayer applying for streamlined domestic procedures must have failed to report gross income from a foreign financial asset or account and pay the U.S. tax required for that asset or account;
- The individual taxpayer may have failed to file FBAR forms or other informational reporting obligations for foreign financial assets or accounts; and
- The omissions must result from non-willful conduct, where “[n]on-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.” (See: IRS: U.S. Taxpayers Residing in the United States)
What is the Scope of the Streamlined Procedures for U.S. Residents?
The Streamlined Domestic Offshore Procedures apply to U.S. taxpayers who reside in the United States: U.S. citizens, lawful permanent residents, and those meeting the substantial presence test under IRC § 7701(b)(3). In order to apply for these procedures, eligible taxpayers must take certain steps. First, the taxpayer must calculate the “covered tax return period.” Here, the covered tax return period is equal to the most recent 3 years for which the tax return due date has passed. For the covered tax return period, any taxpayer using the streamlined domestic procedures should file amended tax returns as well as all required informational returns, such as Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621. Next, the taxpayer should calculate the “covered FBAR period” which is equal to each of the most recent 6 years for which the FBAR due date has passed. For this period, the taxpayer needs to file any delinquent FBAR reports. Finally, the taxpayer must pay a Title 26 miscellaneous offshore penalty.
How to Calculate the Offshore Penalty Under the Streamlined Domestic Procedures
As stated above, taxpayers who apply under the streamlined domestic offshore procedures are required to pay a Title 26 miscellaneous offshore penalty. To calculate this penalty, you must first compute the highest aggregate balance/value of the taxpayer’s foreign financial assets and accounts that would be covered by the penalty during the “covered tax return period” and the “covered FBAR period.” The aggregate balance/value of the foreign financial accounts and assets is determined by looking at all of the year-end balances of the foreign financial assets and accounts over the years covered by the tax return period and the FBAR period, and adding the highest aggregate values over those years.
Once that balance is calculated, the miscellaneous offshore penalty is equal to 5 percent of that highest aggregate balance or value.
Only Certain Foreign Financial Accounts and Assets are Subject to the Offshore Penalty
A financial account or asset is subject to the 5 percent miscellaneous offshore penalty if it would have been subject to the FBAR reporting requirement, but no FBAR was ever filed. It may also be subjected to the offshore penalty if it should have been reported on a Form 8938 for a given year, but where no form was ever filed. Finally, the financial account or asset may be subject to the offshore penalty during a covered tax return period if the account or asset was properly reported, but the gross income associated with that asset or account was not properly reported for the given tax year. Foreign financial assets subject to this offshore penalty include the following:
- Financial accounts in foreign financial institutions or the foreign branch of a U.S. financial institution;
- Foreign stocks, securities, and mutual funds;
- Foreign hedge funds or equity funds.
What is the Benefit of Using the Streamlined Domestic Offshore Procedures?
The streamlined procedures can be very beneficial for taxpayers because they allow the taxpayer to comply with income tax rules and regulations in a relatively easy manner. It is similar to the Offshore Voluntary Disclosure Program, but the process is less extensive. Another advantage of the streamlined procedures is that it protects the taxpayer from having to pay certain penalties, including accuracy-related penalties, information return penalties, or FBAR penalties. Although the taxpayer must pay the Title 26 miscellaneous offshore penalty, the return will not be subject to those additional penalties. This is true even if the taxpayer is later selected for an audit and should be subjected to those penalties. The only exception to this rule relates to the willfulness of the taxpayer’s omissions. If the failure to file FBARs or other informational returns, or pay tax on foreign assets and accounts was willful, then the taxpayer may be liable for accuracy-related penalties, FBAR penalties, or information returns penalties.
How a Tax Attorney Can Help
If you have undisclosed offshore foreign accounts or assets, you may be eligible to participate in the streamlined procedures under OVDP. In order to evaluate whether the streamlined procedures apply to your international tax situation, you should consider consulting a knowledgeable tax attorney. The OVDP program is rapidly changing, but a tax attorney can help you navigate the confusing aspects of the IRS program.
- US Federal
Income Tax Streamlined Procedures for U.S. Taxpayers Residing in the United States
By William Hartsock |
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