Streamlined Tax Amnesty

The Ultimate Guide to Streamlined Tax Amnesty

 

We would like to begin by confirming four points –

  • If you are US exposed (citizen, green card or substantial presence), you are usually taxed on your worldwide income;
  • These tax obligations do not stop because you reside outside of the US;
  • Even if your earnings are under the threshold of the foreign earned income exclusion, and you reside outside of the US, you may still have to file US tax returns;
  • Since the early 1970s, US persons have been obligated to report any foreign financial assets once the maximum aggregate balance exceeds a certain threshold.

Most professionals agree on three things

  1. It is critical to contact the IRS before they contact you.
  2. The idea of a “quiet disclosure” involves quietly filing prior year returns outside of any amnesty program. This is not advisable.
  3. Technology means that it is both possible and probable that any “quiet disclosure” will not go unnoticed.

Nanette Davis, a Department of Justice (DOJ), Tax senior litigation counsel, is on record cautioning taxpayers about quiet disclosures, with the threat that additional enforcement action may follow because

  1. (i) the DOJ program is helping identify quiet disclosures and
  2. (ii) “the patterns of late returns and FBARs are clear in the data.”

The ‘data’ referenced in that quote is apparently the data in the IRS records when entering the filing of delinquent or amended income tax returns and delinquent FBARs. Whether or not the streamlined procedures are right for your case depends on a number of factors. One of these factors is willfulness. Read more here https://htj.tax/willfulness

First, we would like to thank you for taking the time to get to know us. We are Hayden T Joseph & Co (https://www.htj.tax/).

We work on International Tax in general, and United States International Tax in particular.

  • We can help your family or your firm with international tax planning as well as international tax compliance. Especially within –
  • The UK
  • The USA
  • Parts of the Caribbean and
  • Asia.

Now let us talk more about the streamlined procedures in another article that we wrote – Streamlined Foreign Offshore Procedures – Advanced American Tax 

    1. We would need to prepare 3 years of Federal returns. The most recent 3 years for which the due date has already passed.
    2. We would need to prepare 6 years of FBARs https://htj.tax/fbars-and-form-8938
    3. If you have more than 10% in any non-US entities, we would need to prepare an information return such as Form 5471 declaring your interest https://htj.tax/the-scariest-us-tax-form-ever 
    4. A cover letter is also required. 95% of our clients write it themselves but if you require an attorney to assist, we can recommend accordingly.
    5. Investments outside of the US may be classified as PFICs and require special treatment – https://htj.tax/what-is-pfic

Aim of IRS Streamlined Procedures

The streamlined procedures are designed to provide taxpayers in such situations with :

  • a streamlined procedure for filing amended or delinquent returns, and
  • terms for resolving their tax and penalty procedure for filing amended or delinquent returns, and
  • terms for resolving their tax and penalty obligations.

As reflected below, the streamlined procedures that were first offered on September 1, 2012 have been expanded and modified to accommodate a broader group of U.S. taxpayers. 

Penalties Avoided under IRS Streamlined Procedures

The great news about the Streamlined Filing Procedures is that the IRS waives all late-filing and late-payment penalties for those who qualify and submit their completed Streamlined filing.

If you qualify for the program and comply with all the instructions for filing, you will not be subject to failure-to-file, failure-to-pay, or FBAR penalties.

Participants in the IRS Streamlined Procedures avoid a number of potential onerous penalties, including:

  • Failure to file penalty – 5% of the taxes owed for each month outstanding (capped at 25% of the total tax liability)
  • Failure to pay penalty – 0.5% of the taxes due for each month outstanding (no cap)
  • Accuracy-related penalty – an additional 20% penalty may apply if your income is substantially understated
  • International return (e.g., Forms 5471/8865/8858) civil penalties – $10,000 penalty per year per entity
  • Criminal Penalties – A willful violation can result in the imposition of criminal penalties, which include additional fines and jail time

Eligibility and Results

The modified streamlined procedures are designed only for individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. Descriptions of the specific eligibility requirements for the streamlined procedures for both non-U.S. residents (the “Streamlined Foreign Offshore Procedures”) and U.S. residents (“Streamlined Domestic Offshore Procedures”) are set forth below.

Taxpayers must certify that conduct was not willful. Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, will be required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to 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

IRS has initiated a civil examination of taxpayer’s returns for any taxable year. If the IRS has initiated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns must pay previous penalty assessments. Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the Offshore Voluntary Disclosure Program (OVDP) or its predecessor programs) may still use the streamlined procedures by following the instructions set forth below. However, any penalty assessments previously made with respect to those filing will not be abated. 

Taxpayers who want to participate in the streamlined procedures need a valid Taxpayer Identification Number. All returns submitted under the streamlined procedures must have a valid Taxpayer Identification Number. For U.S. citizens, resident aliens, and certain other individuals, the proper TIN is a valid Social Security Number (SSN). For individuals who are not eligible for an SSN or ITIN, your tax return will not be processed under the streamlined procedures. However, for taxpayers who are ineligible for an SSN but do not have an ITIN, a submission may be made under the streamlined procedures if accompanied by a complete ITIN application. Additional information on getting an ITIN is available.  

If your lack of filing was “willful,” meaning you knew you had to file but decided not to, historically your next best option has been the OVDP. This program, unfortunately, has been closed as of September 2018.

However, because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options to address previous failures to comply with US tax return obligations:

  • IRS-Criminal Investigation Voluntary Disclosure Program
  • Delinquent FBAR submission procedures
  • Delinquent international information return submission procedures

Foreign Offshore Procedures

Under the Streamlined Foreign Offshore Procedures (for taxpayers residing outside the United States), the taxpayer is required to submit:

  • 3 years of tax returns and information returns
  • 6 years of FBARs
  • Non-willful certification (Form 14653).

Under the program, the participant avoids all penalties, but is required to pay the following:

  • Unpaid taxes
  • Interest

Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures (for taxpayers residing in the United States) have the same submission requirements as the Foreign Offshore Procedures, namely 3 tax returns, 6 FBARS, and the non-willful certification.

However, the Domestic Offshore Procedures differ from the Foreign Offshore Procedures in two main ways:

(1) A domestic resident taxpayer that has failed to file a U.S. income tax return in any of the three most recent tax years cannot participate in the domestic offshore procedures (while a foreign resident taxpayer that has been similarly delinquent can participate in the foreign offshore procedures).

(2) In addition to the requirement to pay unpaid taxes interest, the domestic offshore procedures bear a 5% penalty on the highest aggregate balance/value of one’s foreign financial assets (while the foreign offshore procedures have no such penalty).

Non-Willful Certification

The Form 14653 non-willful certification is submitted with your IRS Streamlined submission and gives you the opportunity to explain how your conduct was non-willful. The forms asks you to include the following:

  • Specific reasons for your past failure, whether favorable or unfavorable to you, including your personal background, financial background, and anything else you believe is relevant to your failure.
  • An explanation as to the source of funds in all of your foreign financial accounts/assets. For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.
  • An explanation of your contacts with the account/asset including withdrawals, deposits, and investment/ management decisions.
  • A complete story about your foreign financial account/asset.
  • If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice (this requirement was previously included).
  • If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts (this requirement was also previously included).

Other Important Considerations of IRS Streamlined Procedures

When participating in the IRS Streamlined Procedures, various tax issues need to be analyzed in order to file previous returns in the best manner possible and mitigate the payment of back taxes to the IRS. Some of the issues that are normally addressed in the case of U.S. expats include:

While the Streamlined Procedures are in some ways straightforward, our experience with has been that each individual has a unique story to tell and each story requires a unique interpretation of the rules and regulations to help prepare the ideal Streamlined submission to the IRS.

FAQs on IRS Streamlined Procedures

The following are some the more frequently asked questions that we receive about the IRS Streamlined Procedures. The more you know about the program, the better you can decide whether the IRS Streamlined Procedures are the best path towards amnesty for your particular circumstances.

Source: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures-for-u-s-taxpayers-residing-outside-the-united-states-frequently-asked-questions-and-answers

No.  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.

Under § 4.02 of Rev. Proc. 2014-55, you are treated as having made the election. See Rev. Proc. 2014-55, § 7. In the narrative statement of facts on Form 14653, please state that you are an “eligible individual” under Rev. Proc. 2014-55.
You may need to report your Canadian retirement plan on FBARs or Forms 8938. Please refer to the instructions for these forms for more information.

If you submit income tax returns through the Streamlined Foreign Offshore Procedures, you will be afforded relief consistent with Rev. Proc. 2014-55 for the tax years included in your submission. In the narrative statement of facts on Form 14653, please state that you have met the other requirements to be an “eligible individual” under § 4.01 of Rev. Proc. 2014-55. See § 4.01 A), C), and D) of Rev. Proc. 2014-55.

You may need to report your Canadian retirement plan on FBARs or Forms 8938. Please refer to the instructions for these forms for more information.

If you submit amended U.S. Federal income tax returns through the Streamlined Foreign Offshore Procedures and meet the requirements discussed below, you will be afforded relief consistent with Rev. Proc. 2014-55 for the tax years included in your submission.

This procedure is not available if you reported as gross income on a U.S. Federal income tax return accrued but undistributed earnings in a Canadian retirement plan for one or more tax years beyond the scope of your Streamlined submission. Additionally, this procedure is not available if you failed to report any and all distributions received from the plan as if you had made an election under Article XVIII(7) of the U.S.–Canada income tax treaty. See § 4.01 D) of Rev. Proc. 2014-55. In these cases, you must seek the consent of the Commissioner as directed under § 4.04 of Rev. Proc. 2014-55.

In the narrative statement of facts on Form 14653, please state that you have met the other requirements to be an “eligible individual” under § 4.01 of Rev. Proc. 2014-55. See § 4.01 A), B), and D) of Rev. Proc. 2014-55. Please also state that the reporting of accrued but undistributed earnings was limited to the tax years in your Streamlined submission.

You may need to report your Canadian retirement plan on FBARs or Forms 8938. Please refer to the instructions for these forms for more information.

You should not use the Streamlined Foreign Offshore Procedures because you have no tax compliance issues beyond reporting accrued but undistributed earnings in your Canadian retirement plan. Therefore, you should follow normal procedures for filing amended income tax returns or seek the consent of the Commissioner as directed by § 4.04 of Rev. Proc. 2014-55.

You may need to report your Canadian retirement plan on FBARs or Forms 8938. Please refer to the instructions for these forms for more information.

Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Include the whole story including favorable and unfavorable facts. Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Additionally, explain the source of funds in all of your foreign financial accounts/assets. For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it. And explain your contacts with the account/asset including withdrawals, deposits, and investment/management decisions. Provide a complete story about your foreign financial account/asset.

The following points address common situations that may apply to you:

  • We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation.
  • We realize that some taxpayers that owned or controlled a foreign entity (e.g., corporation, trust, partnership, IBC, etc.) failed to properly report ownership of the entity or transactions with the foreign entity. If you (or your return preparer) inadvertently failed to report ownership or control of the foreign entity or transactions with the foreign entity, explain why and include your understanding of your reporting obligations to the IRS and to foreign jurisdictions.
  • If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. Also provide background such as how you came into contact with the advisor and frequency of communication with the advisor.

If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.

We understand that in certain cases (including but not limited to separation or divorce), your spouse/former spouse may not be willing to sign joint amended income tax returns or a joint certification on Form 14653.

You may submit a joint amended income tax return with only your signature to Streamlined Foreign Offshore Procedures so long as your joint amended return shows a net increase in tax. Please explain your inability to secure your spouse’s/former spouse’s signature in the narrative statement of facts on Form 14653. And write “SFO FAQ 7” in red ink in the area for your spouse’s signature on the amended returns and Form 14653.

As a matter of routine processing, the Service will request the other spouse’s signature on joint amended returns with only one signature. If at the time the Service makes a request for your spouse’s/former spouse’s signature on a joint amended return or joint certification you are still unable to secure your spouse’s/former spouse’s signature, please respond to the inquiry by referencing this FAQ.

You may not submit a joint amended income tax return with only your signature to Streamlined Foreign Offshore Procedures showing a net decrease in tax or an increase in credit.

If you have questions about the terms the Streamlined Filing Compliance Procedures or completing Form 14653, you may contact the OVDP Hotline at (267) 466-0020.

The OVDP Hotline will not provide case-specific or legal advice.

If you made a mistake in your submission to the Streamlined Filing Compliance Procedures and your returns previously submitted are not under examination, you may correct the error by providing amended returns and/or an amended Form 14653. On the top of the certification form, write “amended” in red ink, and on the top of the first page of each corrected amended tax return write “Amended Streamlined Foreign Offshore” in red ink. Explain all facts and circumstances concerning the error in the original Streamlined submission. See SFO FAQ 6 for relevant information to provide.

Mail the amended submission to:

IRS
3651 S. IH 35
MS 6063 AUSC
Attn.: Streamlined Procedures
Austin, TX 78741

Example 1 (amended tax returns and amended Form 14653): The taxpayer made an SFO submission on February 1, 2016, and she just realized she failed to address a foreign financial asset in the narrative statement of facts on Form 14653. Additionally, she failed to include income from that foreign financial asset on her Forms 1040 for the tax periods in her Streamlined submission, tax years 2012, 2013, and 2014. She must provide amended income tax returns for tax years 2012, 2013, and 2014, an amended Streamlined certification on Form 14653, and payment for increases in tax and interest. The amended Form 14653 must include all facts and circumstances concerning the error in the original Streamlined submission. Additionally, if the taxpayer made a mistake in filing her FBARs with FinCEN, she must efile amended FBARs with FinCEN.

Example 2 (amended Form 14653 only): The taxpayer made an SFO submission on February 1, 2016, and she just realized she failed to address a foreign financial asset in the narrative statement of facts on Form 14653. She fully reported all income from the foreign financial asset on her income tax returns in her original Streamlined submission. She must provide an amended Streamlined certification on Form 14653 including all facts and circumstances concerning the error in the original Streamlined submission. Additionally, if the taxpayer made a mistake in filing her FBARs with FinCEN, she must efile amended FBARs with FinCEN.

If you are eligible for an SSN but do not have one, you may not use the Streamlined Filing Compliance Procedures. The terms of the Streamlined Filing Compliance Procedures require a valid Taxpayer Identification Number (TIN). For U.S. citizens, resident aliens, and certain other individuals, the proper TIN is a valid SSN. If you make a submission to the Streamlined Filing Compliance Procedures without a valid SSN, then the IRS may process your returns after assigning an IRSN. See IRM 3.13.5.70 and 3.13.5.71. But taxpayers that make submissions to the Streamlined Filing Compliance Procedures without valid SSNs are not eligible for the favorable penalty provisions of the Streamlined Filing Compliance Procedures. The IRS will process such returns subject to penalties applicable outside of the Streamlined Filing Compliance Procedures.

No. In recent years, the IRS has made it clear to taxpayers that it is more interested in disclosure than in punishing late filers or non-filers.

This lenient approach has allowed many delinquent taxpayers to successfully enter its amnesty programs. The latest IRS statistics show that the Streamlined Procedures continue to be a popular and effective method for delinquent taxpayers to catch up with the IRS. According to the IRS, tens of thousands of taxpayers have used the Streamlined Procedures to resolve their tax issues.

No. One of the main benefits of participating in the Streamlined Procedures is that you can become completely compliant with your expat taxes without having to disclose your entire past. The IRS recognized that gathering financial information about the distant past can be cumbersome, if not impossible, so in order to encourage disclosure, it limited the tax years that require filing.

Yes. A taxpayer who qualifies for the foreign offshore Streamlined Procedures can come clean with the IRS and suffer no penalties. In order to qualify, a taxpayer must fulfill a non-residency requirement and certify that that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

Unpaid taxes and interest must be paid, if due, but in many cases, taxpayers can utilize the Foreign Earned Income Exclusion and/or foreign tax credits to reduce or eliminate taxes due.

No. While the Streamlined Procedures is the most popular tax amnesty program, there are a number of additional options available to delinquent taxpayers.

For example, there are special procedures for taxpayers who have only failed to file FBARs.

No. Contrary to popular belief, the IRS has given no certainty that it will maintain its tax amnesty programs on a permanent basis. The IRS Commissioner has recently expressed that the IRS is a long way from moving away from the voluntary disclosure programs, but at some point, once ignorance is no longer a valid excuse, the programs will come to an end or become significantly modified.

For this reason, if you are an expat who is late on filing your U.S. tax returns or FBARs, you should consider coming back into compliance with the IRS sooner rather than later. A number of options are currently available to you, including and in addition to the IRS Streamlined Procedures. Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances.