Applicants eligible under the Streamlined Foreign Offshore Procedures must follow particular steps to ensure that their returns are processed under the special program. If the taxpayer does not complete the process in a satisfactory fashion, the taxpayer will not be able to take advantage of the streamlined foreign offshore procedures. This article provides an overview of the necessary procedures, however it is recommended that you contact an experienced tax attorney for advice on the best course of action for your specific case.
What is the Scope and Effect of the Foreign Procedures?
The streamlined foreign offshore procedures apply to U.S. taxpayers who meet a general non-residency requirement set forth by the IRS. U.S. citizens, lawful permanent residents, and individuals meeting the substantial presence test of IRC § 7701(b)(3) may be eligible for the foreign streamlined procedures. Eligible taxpayers must first file all delinquent or amended tax returns, along with any required informational returns, for each of the most recent three years for which the U.S. tax return due date has passed. Second, these taxpayer must file any delinquent FBAR forms for each of the most recent six years for which the FBAR due date has passed (1). At the same time that the taxpayer submits the delinquent tax returns or informational returns, the full amount of tax and interest must be submitted.
What is the Benefit to Using the Streamlined Foreign 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. In addition to the ease of application, the streamlined foreign offshore procedures will protect the taxpayer from having to pay various penalties, including the failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, information return penalties, and FBAR penalties (2). This protection from penalties will remain in place even if the amended tax returns are later selected for audit, unless the IRS demonstrates that the original tax noncompliance was fraudulent or that the failure to file FBAR reports was the result of willful behavior. However, if, during the course of the examination, the IRS determines that an additional tax deficiency is due by the taxpayer, the taxpayer may at that point be subject to any applicable taxes and penalties for that additional deficiency.
What are the Specific Steps for Applying to the Streamlined Foreign Offshore Procedures?
If you are eligible to use the Streamlined Foreign Offshore Procedures, then you must follow particular steps. If you fail to properly comply with the steps, then your application will be rejected for the streamlined procedures. Instead, your tax return will simply be processed in the usual manner and you will not be able to avail yourself of any of the benefits of the streamlined procedures.
- Step 1: As stated above, an applicant for the streamlined foreign offshore procedures must first file all delinquent or amended tax returns for the most recent three years for which the due date has already passed. At the same time, the taxpayer must file any associated informational returns, including Forms 3520, 5471, and 8938. In addition, the applicant must file any delinquent FBAR forms for the past six years for which the FBAR filing requirement has passed.
- In order to ensure that your application under the Streamlined Foreign Offshore Procedures is accepted, it must be properly labeled as such. The IRS has stated that each page of each amended tax return submitted under these procedures is labeled with “Streamlined Foreign Offshore” written in red ink. This labeling requirement is absolutely critical to identify that your returns are being submitted under the streamlined procedures. If you fail to properly label your returns in this manner, you will not be able to participate in the streamlined procedures and your returns will be processed in the usual manner.
- The third step of applying for the streamlined foreign offshore procedures requires taxpayers to sign a “Certification by U.S. Person Residing Outside of the U.S.” certifying the following: (1) that the applicant is eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed; and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, was not the result of willful conduct. Copies of this certification must be attached to each and every tax return and informational return being submitted under the streamlined procedures.
- As the next step in the streamlined procedures, the taxpayer must submit payment of all tax due as reflected on the amended tax returns filed under the process. This payment should include all applicable statutory interest associated with the late payment amounts. When submitting this tax due, include the taxpayer identification number on the check to ensure proper processing.
- A final step in complying with the streamlined domestic offshore procedures requires the taxpayer to file any delinquent FBARs for each of the most recent 6 tax years for which the FBAR due date has passed. In doing so, you must explain that you are filing the delinquent FBARs in attempt to comply with the streamlined domestic offshore procedures. Most importantly, the FBAR filings must be made electronically under the streamlined procedures. In order to indicate that these FBAR filings are made under the streamlined procedures, you must enter “Streamlined Filing Compliance Procedures” in the explanation box on the electronic filing website. This step is very important because it explains why you are filing the FBAR late, and also puts the IRS on notice that you have completed the final step in the Streamlined Foreign Offshore Procedures submission process.
Original article can be found at: San Diego Tax Attorney Blog