The IRS’ “streamlined domestic offshore procedures” are available to individuals who have non-willfully failed to report foreign financial assets and pay all tax due in respect to those assets.
- 1 Streamlined domestic offshore procedures — eligibility
- 2 What is non-willful conduct?
- 3 Streamlined domestic offshore procedures — requirements
- 4 The streamlined domestic offshore penalty base
- 5 Audits of streamlined domestic offshore cases
- 6 Benefits of filing under the streamlined domestic offshore procedures
- 7 Form 14654 example and tips
Streamlined domestic offshore procedures — eligibility
- fail to meet the non-residency requirement for the streamlined foreign offshore procedures;
- have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;
- have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset;
- certify that the failures resulted from non-willful conduct;
- have a valid Taxpayer Identification Number.
What is non-willful conduct?
Under the terms of the Streamlined procedures, the IRS defines non-willful conduct as conduct that was due to negligence, inadvertence, or mistake, or conduct that was the result of a misunderstanding of the law.
Streamlined domestic offshore procedures — requirements
To participate in the 2014 Streamlined Procedures, a taxpayer is required to comply with the following general requirements:
- file FBARs for the most recent six years for with the FBAR filing deadline has passed;
- file amended tax returns for the most recent three years for which the U.S. tax return due date has passed;
- certify under the penalties of perjury that their failure to report all income, pay all tax or submit it all required returns was due to non-willful conduct; and
- pay a miscellaneous Title 26 offshore penalty equivalent to 5% of the value of the taxpayer’s foreign assets.
The streamlined domestic offshore penalty base
All applicants to the streamlined domestic offshore procedures may fully pay all taxes, including interest, owed on their amended tax returns.
In addition, they are required to pay a 5% ‘miscellaneous offshore penalty’, also known as the streamline penalty.
The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period.
So for example, if your covered tax return period is 2016-2018 and your covered FBAR period is 2013-2018, you would have a spreadsheet as follows:
- FBAR penalty base – List the December 31st values by year of all accounts that were not reported on the FBAR from 2013-2018
- Tax return penalty base – List the December 31st values by year of all accounts that were not reported on an information form (e.g., Form 8938), or if any income from the account was not reported. Do not duplicate accounts (i.e., if you already included the account on the FBAR penalty base, don’t include it again on the tax return penalty base)
- Then add up the December 31st values of all accounts
- Multiply the highest December 31st aggregate value by 5%
Audits of streamlined domestic offshore cases
Tax returns submitted under the streamlined procedures will be processed like any other tax return submitted to the IRS.
Returns will not be automatically subject to IRS audit, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.
Therefore, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Additional civil penalties are extremely rare and seen only in situations where the return was filed fraudulently or the FBAR violation was willful.
Benefits of filing under the streamlined domestic offshore procedures
If you’re non-compliant with foreign account and/or foreign income reporting, you may be subject to a number of civil penalties.
By voluntarily complying through the streamlined procedures, you:
- will be subject only to the Title 26 miscellaneous offshore penalty and will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties
- Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful.
Form 14654 example and tips
The Form 14654 is arguably the most important part of your streamline domestic offshore submission.
On the Form 14654 you will will certify under penalties of perjury that you non-compliance was non-willful.
While you do not need an attorney to draft one for you, it’s not recommended that you attempt it yourself. Taxpayers tend to ramble and provide useless and perhaps even self-incriminating statements.
Rest assured, the IRS doesn’t want to hear about your inner thoughts; stick to the facts.
A tax attorney who focuses their practice on offshore compliance cases will be able to craft a narrative that will be short, concise, and effective.
The Form 14654 should address the following:
- Your personal background: immigration history, travel history (if you opened an account while working abroad), immigration status, type of degrees possessed, your occupation
- The source of funds in your accounts: whether you inherited the account, opened it while residing in a foreign country, had a business reason to open or use it
- Contacts with the account: how did you withdraw and deposit money (e.g., wire, in person), did you transfer money to/from the U.S.
- Names of any professional advisors that were relied upon