Streamlined Filing Compliance Procedures for US Persons with Delinquent Int'l Tax Returns

The U.S. tax system’s requirement for worldwide income reporting applies to all U.S. citizens and resident aliens, regardless of where they live. However, many U.S. persons living abroad or with foreign financial assets may unintentionally fall out of compliance with their tax obligations, especially regarding international income, assets, and accounts. To help such individuals come into compliance, the IRS offers the Streamlined Filing Compliance Procedures (SFCP).

This program allows U.S. taxpayers who have failed to report their international income or file required international information returns (such as the Foreign Bank Account Report (FBAR)) to correct their noncompliance without facing significant penalties, provided they meet the program's eligibility requirements.

Who Can Use the Streamlined Filing Compliance Procedures?

The SFCP is available to U.S. taxpayers, both residing in the U.S. and abroad, who have not filed the necessary tax returns or FBARs but can certify that their noncompliance was non-willful. In this context, non-willful means that the failure to comply was due to negligence, inadvertence, mistake, or a good faith misunderstanding of the law. If the taxpayer's noncompliance is found to be willful, they may not be eligible for this program and could face more serious legal consequences.

The procedures are divided into two categories:

  1. Streamlined Foreign Offshore Procedures (SFOP) – For U.S. persons living outside the U.S. who have not filed U.S. tax returns or FBARs but meet certain residency requirements.

  2. Streamlined Domestic Offshore Procedures (SDOP) – For U.S. residents who have not properly reported their foreign income, assets, or accounts and failed to file the necessary international information returns.

Eligibility Criteria

To qualify for the SFCP, individuals must meet the following conditions:

  • Non-willful conduct: The taxpayer must certify that their failure to report foreign income or file required international returns was non-willful.

  • Residency status:

    • For SFOP: The taxpayer must have been physically outside the U.S. for at least 330 full days during one of the three most recent tax years for which the return deadline has passed.

    • For SDOP: U.S. residents who do not meet the 330-day requirement can use this procedure.

What Does the Streamlined Filing Process Involve?

The SFCP requires taxpayers to take the following steps to become compliant:

  1. File Three Years of Delinquent or Amended Tax Returns: The taxpayer must file or amend their most recent three years of U.S. federal income tax returns (Form 1040), reporting all previously unreported foreign income. Any applicable forms related to international reporting, such as Form 8938 (Statement of Specified Foreign Financial Assets) or Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations), must also be included.

  2. File Six Years of FBARs (FinCEN Form 114): Taxpayers must file or amend FBARs for the six most recent years in which they had foreign financial accounts exceeding $10,000 in aggregate value at any point during the year.

  3. Pay Any Tax and Interest Due: Any taxes owed on the newly reported income, along with interest, must be paid when the amended or original returns are filed.

  4. Certify Non-Willful Conduct: The taxpayer must complete Form 14653 (for SFOP) or Form 14654 (for SDOP), certifying that their noncompliance was non-willful and explaining the circumstances that led to the delinquency.

Penalties and Fees

One of the major benefits of the SFCP is the significant reduction in penalties for noncompliance:

  • SFOP (Foreign): There are no penalties for failure to file tax returns, international information returns, or FBARs if the taxpayer meets the program requirements.

  • SDOP (Domestic): The IRS imposes a 5% penalty on the highest aggregate balance of unreported foreign financial assets over the six years of FBAR filings. This is significantly lower than the typical FBAR penalties, which can range from $10,000 per violation to much higher amounts for willful violations.

For both procedures, any additional tax and interest on unreported income must be paid, but the streamlined procedures avoid harsher civil penalties and potential criminal liability that may arise under normal IRS enforcement actions.

Advantages of Using the Streamlined Filing Compliance Procedures

  1. Avoidance of Severe Penalties: Taxpayers who use the SFCP benefit from the IRS's leniency in reducing or eliminating penalties. This is especially advantageous for individuals who were unaware of their international reporting obligations.

  2. Certainty and Closure: Completing the SFCP provides a taxpayer with a clear resolution of past noncompliance, minimizing the risk of future audits or penalties for the specified years.

  3. Simplified Process: The streamlined process is less complex and formal than other IRS disclosure programs, such as the now-closed Offshore Voluntary Disclosure Program (OVDP), making it more accessible to individuals with straightforward filing issues.

The Streamlined Filing Compliance Procedures offer a vital opportunity for U.S. taxpayers with delinquent international tax returns or unreported foreign financial assets to correct their tax situation with minimal penalties. By taking advantage of this program, taxpayers can bring themselves into compliance with U.S. tax laws, avoid significant penalties, and gain peace of mind knowing that they have resolved their international reporting obligations.

Taxpayers who suspect they are out of compliance with their U.S. tax obligations related to foreign income or assets should reach us to us to determine if the SFCP is the best course of action for their situation.