On June 18, 2014, the IRS announced major changes to its offshore voluntary compliance programs. Overall, the changes ease the burden and invite more taxpayers to come into compliance. The changes include an expansion of the streamlined filing compliance procedures announced in 2012 to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts. IRS Commissioner John Koskinen explained, “This opens a new pathway for people with offshore assets to come into tax compliance…We have made important adjustments to provide opportunities for all U.S. taxpayers to come in, including those who are not willfully hiding assets.”
The modified Streamlined Filing Compliance Procedures is a great improvement over prior programs and a terrific opportunity for eligible participants to become tax compliant. Essentially, if you are eligible for Streamlined Filing, you can file the three most recent tax returns (Form 1040) and six most recent FBARs (FinCEN Report 114) and be considered “in compliance” and up-to-date with the IRS. For eligible filers who reside outside the United States, all penalties will be waived. For eligible filers who reside in the United States, there will be a miscellaneous offshore penalty equal to five percent of the foreign financial assets that gave rise to the tax compliance issue.
Taxpayers using this procedure are required to certify that their failure to report income, pay tax and submit required forms was due to non-willful conduct. Non-willful conduct is defined as 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”. If you are uncertain whether your situation qualifies as “non-willful conduct”, you should arrange a consultation with a tax attorney.
Because most of our clients are foreign residents, we are focusing here on the Streamlined Foreign Offshore Procedures. Be aware that failure to follow the instructions or to submit the items described below will result in returns being rejected from the Streamlined program, and the taxpayer would be subject to all relevant fees and penalties.
Specific instructions for the Streamlined Foreign Offshore Procedures:
- Submit a complete and accurate U.S. tax return (Form 1040), either amended or original, for each of the most recent three years. Be sure to include any required information returns, such as Form 3520 (foreign trusts), 5471 (controlled foreign corporation), and 8938 (foreign financial assets).
- Include the words, “Streamlined Foreign Offshore”, at the top of the first page of each delinquent, amended, or information return. This must be written in red to indicate that the returns are being submitted through the Streamline Procedure.
- Complete and sign a statement on the Certification by U.S. Person Residing Outside of the United States (Form 14653). The form can be downloaded here: http://www.irs.gov/pub/irs-pdf/f14653.pdf and certifies (1) that you are 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, resulted from non-willful conduct.
- Submit payment of all tax due as shown on the tax returns, and all required interest on each of the late payment amounts. See instructions for making payment to the IRS here: http://www.irs.gov/Payments.
5. The documents listed above, along with payment, must be sent in paper form to: Internal Revenue Service 3651 South I-H 35 Stop 6063 AUSC Attn: Streamlined Foreign Offshore Austin, TX 78741 United States
- For each of the most recent six years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. You are required to file the FBARs electronically here: http://bsaefiling.fincen.treas.gov/main.html. On the cover page of the electronic form, select “Other” as the reason for filing late. In the explanation box, enter “Streamlined Filing Compliance Procedures”.