U.S. law requires that all taxpayers pay taxes on any foreign income or assets they have. This extends to anyone who is required to file taxes in the United States; it is not limited to U.S. citizens. Many people are not aware of this and subsequently fail to file and pay taxes on their foreign income or assets. Any taxpayer that fails to file legally required tax returns can face severe penalties including, among others, “failure to file” which can require the taxpayer to pay a 25% tax penalty or “failure to report foreign bank and financial accounts” which result in a civil fine of anywhere from $10,000 to $100,000. Foreign assets that must be filed and reported include, but are not limited to:
- Financial accounts held at foreign financial institutions
- Financial accounts held at a foreign branch of U.S. financial institution
- Foreign stock or securities not held in a financial account
- Foreign mutual funds
- Foreign hedge funds and foreign private equity funds.
Luckily, the IRS offers tax resolution programs to taxpayers who have failed to report their foreign income and assets. One of these programs is called the IRS streamlined program. The streamlined program is, in essence, an amnesty program for taxpayers that have failed to report foreign income and assets. Taxpayers that qualify for the streamlined program will still be required to pay any taxes that would have owed if they filed on time or pay a tax penalty. The good news, however, is that going through the streamlined program will still be cheaper and save a taxpayer from the harsher penalties that come from a “failure to file” penalty, “failure to pay” penalty, accuracy related penalties, or any other consequences that can come from these failures such as passport revocation. The streamlined program is broken into two categories, the Streamlined Domestic Offshore Program (SDOP) and the Streamlined Foreign Offshore Program (SFOP).
Willful Conduct Requirement
Before we get into the differences between the SDOP and SFOP, let’s start with some similarities. Most importantly, to qualify for either SDOP or SFOP, the taxpayer’s failure to file must have been unwilful. Unwilful conduct means the failure to file must have been a result of negligence, inadvertence, or mistake made in good faith on the part of the taxpayer. Summed up, in order to qualify for the SDOP or SFOP, the failure to file cannot have been an attempt to purposefully skirt taxpaying obligations.
Streamlined Foreign Offshore Program
SFOP generally applies to non-resident taxpayers. You must meet qualifications to be eligible for the SFOP and if so, can begin the SFOP filing process.
SFOP Qualifications (SFOP)
- Meet the non-residency requirement, and
- Failed to report and pay income on a foreign assets
It is important to note here that filing previous years’ tax returns is not a requirement to qualify for SFOP; rather the requirement is that the taxpayer failed to report and pay any income on foreign assets.
The biggest difference in determining whether to apply for SFOP or SDOP is the non-resident requirement. In order to qualify for the non-resident requirement a taxpayer must verify that in the past three years they have:
- Been outside the United States for 330 full days during at least one year, and
- Not have a U.S. tax home, otherwise known as abode. An abode does not necessarily mean a physical home, but rather is the place where you maintain your family, economic, and personal ties
Any taxpayer wishing to qualify for SFOP must provide documentation verifying that both prongs of the non-residency requirement are met. If a taxpayer is married, both the taxpayer and their spouse must meet the non-residency test in order to qualify for SFOP.
SFOP Filing Process
If you qualify for SFOP, the next step is to complete the filing process. The taxpayer must:
- File delinquent tax returns for the previous three years,
- File any delinquent FBARs required over the past 6 years,
- Include the full amount of tax and interest due in connection with the filings, and
- Fill out and sign IRS Form 14653 certifying you are not a US resident
When you submit the necessary tax documents it is required that you write “Streamlined Foreign Offshore” at the top of the first page of each tax return in red ink. This is crucial and must be done.
SFOP Payment Due Upon Filing
When you submit your tax returns it is required that you include a cash or money order for the total amount of taxes due had you filed the tax returns on time, including interest. So as an example, if you failed to report $10,000 in foreign assets in year 1, $20,000 in foreign assets in year 2, and $15,000 in assets in year 3, you would need to include payment for the taxes due in each of the three years. It can be difficult to precisely determine how much you would have had to pay in each year; it is advised that you retain the assistance of an attorney for this.
Streamlined Domestic Offshore Program (SDOP)
The Streamlined Domestic Off Shore Program (SDOP) applies to taxpayers who have residency inside the United States. You must qualify for the SDOP program and, if eligible, can begin the SDOP filing process.
- Not qualify as a non-resident. Anyone who does not qualify as a non-resident will go through SDOP.
- Have previously filed the past three years of tax returns.
- Failed to report any gross income from a foreign financial asset, including failing to file a foreign bank account return (FBAR)
It is important to note the qualification differences between SFOP and SDOP. For example, the SDOP requires the past three years of tax returns to have been filed by the taxpayer. There may be a situation where you do not qualify for SFOP or SDOP depending on your specific situation.
SDOP Filing Process
If a taxpayer qualifies for SDOP, the next step is file or re-file the proper paperwork with the IRS. The taxpayer must:
- Amend the previous three years of tax returns to accurately include the foreign assets in their income,
- File any delinquent FBARs for the past six years,
- Pay a 5% penalty for the highest aggregate value of the taxpayer’s foreign assets in any of the previous 3 years, and
- Fill out and sign the IRS Form 14654 certifying that you are a U.S. resident
Additionally, when you submit the necessary tax documents it is required that you write “Streamlined Domestic Offshore” at the top of the first page of each tax return in red ink. This is crucial and must be done
SDOP Payment Due Upon Filing
When you submit your tax returns you must include a check or money order for the amount of the 5% penalty along with the returns. As an example, lets assume that over the past three years a taxpayer failed to report $2,000 in foreign assets in year 1, $5,000 in foreign assets in year 2 and 10,000 in foreign assets in year 3. Under SDOP the taxpayer is required to pay a 5% penalty on their highest foreign income over the past three years. So in our example, that would be year 3 when taxpayer earned $10,000 in foreign assets. So, the 5% penalty would be $500, that again, must be included along with the tax return. Furthermore, that taxpayer will be required to pay any taxes they would have been required to pay on the income had they reported it on time and correctly, in addition to the $500.
Contact an Attorney
The streamlined program can be extremely beneficial to taxpayers. It allows them to avoid the severe penalties that can come from “failure to file” or “failure to pay” penalties. However, it can be time consuming and tedious to apply for the streamlined program. Cases can be complex, including having to determine if you are a resident or non-resident, ensuring that required forms are filed correctly, and exactly how much you are required to pay along with your returns – whether that be the 5% penalty or the total taxes due. For these reasons it is advised that you hire a qualified and experienced tax attorney to guide you through the process. Retaining the assistance of attorney gives you the best chance at qualifying for the SDOP and SFOP.
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