Streamlined Foreign Offshore Procedures with Examples (2024)

Streamlined Foreign Offshore Procedures with Examples

When a Taxpayer is a U.S. person for tax purposes and has not previously reported their foreign income on their U.S. tax returns and failed to file accurate international information reporting forms, they may be subject to extensive IRS fines and penalties.  Some of the more common international reporting forms that Taxpayers may be aware of are the FBAR (FinCEN Form 114) and FATCA Form 8938 (Foreign Account Tax Compliance Act). Non-willful Taxpayers who have not yet been penalized and are not under audit may qualify for the Streamlined Filing Compliance Procedures to get into compliance and minimize or avoid penalties.  The streamlined procedures have two different programs: Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP).  This article will focus on the Streamlined Foreign Offshore Procedures, which offers Taxpayers the opportunity to file original tax returns (or amend prior returns) and avoid all Title 26 miscellaneous offshore penalties. Let’s walk through the basics of the streamlined procedures for Taxpayers who qualify for the foreign offshore program — along with providing examples explaining the different requirements.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Non-Willfulness Requirement

The most important aspect of qualifying for the Streamlined Filing Compliance Procedures (either domestic or offshore) is that the filer is non-willful. Taxpayers will find a lot of information online explaining the difference between willful and non-willful — and unfortunately many of those resources are inaccurate or designed to simply fear-monger unsuspecting Taxpayers:

• • • Example: Adam is a U.S. citizen who has been living in the United States his entire life. His grandfather lives overseas and when his grandfather passed away he left Adam money in two different foreign bank accounts. These are the only foreign accounts that Adam has and other than these two foreign accounts Adam’s tax return is relatively straightforward. He has not made any deposits or withdrawals from the account and only very recently learned about the reporting requirements. Adam should qualify as non-willful.

    • Example: Adrian is an L-1 visa holder who recently relocated to the United States a few years ago. When he relocated to the United States, he began using a local CPA who claimed to be knowledgeable in international tax.  Adrian had several foreign accounts and assets that he told the CPA about, but the CPA told Adrian there was nothing he needed to do because he was not a permanent resident or a citizen. Adrian relied on this information and only recently learned that he was required to report this information to the IRS in prior years. Adrian should qualify as non-willful.

    • Example: Alicia is a lawful permanent resident who has been filing tax returns for the past several years. A few years ago she learned that she was supposed to report her foreign accounts on the FBAR and Form 8938 but chose not to do so because she did not want to have to pay any penalty. When Alicia’s CPA asked her if she had any foreign accounts, she told the CPA no — even though she was aware she had foreign accounts and that they were required to be reported. Alicia would not qualify as non-willful.

Taxpayer is Not Under Audit or Already Penalized

To be eligible for the streamlined procedures, the Taxpayer must not be under audit or already penalized regarding the foreign accounts.

• • • Example: Brian is a U.S. citizen who learned earlier in the year that he had foreign accounts that were required to be reported to the U.S. government on the FBAR and Form 8938. He was planning on submitting under the streamline procedures but in the interim, he found himself under IRS examination — including for one of the years involving the foreign accounts. Brian would no longer be eligible for the streamlined procedures.

    • Example: Brenda is a lawful permanent resident who received a foreign gift but was unaware that she had to report the foreign gift on Form 3520 until very recently. She was also unaware that she was required to report the foreign accounts that the gift was deposited into. Before learning about the streamlined procedures, Brenda’s accountant submitted a late form 3520 and she received a CP15 notice. Since Brenda has already been penalized, she may not be eligible for the streamlined procedures.

Foreign Resident 330-Day Rule or Substantial Presence Test

The benefit of the Streamlined Foreign Offshore Procedures compared to the Streamlined Domestic Offshore Procedures is that Taxpayers who qualify for the Streamlined Foreign Offshore Procedures are not penalized (they are also eligible to file original tax returns which they are not able to do under the Streamlined Domestic Offshore Procedures). But to qualify for the Streamlined Foreign Offshore Procedures, the Taxpayer must qualify as a foreign resident:

• • • Example: Charlene is an H-1B visa holder, but only just started to meet the substantial presence test last year. Recently, she learned that she was required to report her foreign accounts. Since she is not a U.S. citizen or lawful permanent resident and is still a visa holder — and did not meet the substantial presence test in at least one of the three years included in her streamlined foreign application — she may qualify for the Streamlined Foreign Offshore Procedures.

    • Example: Christopher is a lawful permanent resident who has been living in a foreign country for the past five years. He has several foreign accounts and assets but was unaware that he was required to report this information to the U.S. government since he lives overseas and all of his money is sourced in a foreign country. Since Christopher has been out of the United States for at least 330 days in the last year, he should also qualify for the Streamlined Foreign Offshore Procedures.

    • Example: Charlie is a lawful permanent resident who travels back and forth between the United States and different foreign countries. He recently learned that he should have been reporting his foreign pension plan and bank accounts on his U.S. tax return. He has been out of the country for 365 days but it was not in the same 12-month year, but instead split over two years. Since Charlie was not out of the United States for at least 330 days in a single tax year, the IRS takes the position that he does not qualify for the Streamlined Foreign Offshore Procedures.

No Title 26 Offshore Penalty under SFOP

One of the key benefits of qualifying for the Streamlined Foreign Offshore Procedures is that Taxpayers are exempt from having to pay any Title 26 miscellaneous offshore penalty. This means that the Taxpayer can circumvent penalties such as FBAR penalties and Form 8938 Penalties. In recent years, the IRS has discussed eliminating this program and so especially for Taxpayers who qualify for the Streamlined Foreign Offshore Procedures, they should consider getting into compliance while the program is still available.

SFOP Allows for Original Tax Return Filing

Another key benefit to the streamlined foreign offshore procedures is that, unlike the Streamlined Domestic Offshore Procedures, in the streamlined foreign program Taxpayers are eligible to file original tax returns. Therefore, Taxpayers who have not filed tax returns for multiple years can file tax returns under the Streamlined Foreign Offshore Procedures and safely get into compliance — whereas under the Streamlined Domestic Offshore Procedures, non-willful Taxpayers cannot file original returns and are only eligible to amend previously filed timely returns.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.