Streamlined Filing Compliance Procedures

U.S. taxpayers are required to report foreign assets. For those who have not, the IRS has offered various options for addressing these failures. One such option is the Offshore Voluntary Disclosure Program (OVDP), which is now in its fourth iteration. The distinguishing characteristics of this program are relatively steep penalties that include a 20% understatement penalty and a 27.5% offshore penalty but the benefit of being able to “generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs."

The other alternative is Streamlined Filing Compliance Procedures (SFCP), which are available to taxpayers who can certify that their "failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct." On June 18, 2014, the IRS announced major changes in its offshore voluntary compliance programs, a key change being that for the first time, SFCP are available to certain U.S. taxpayers residing in the United States. Thus, SFCP now have two subsets, Streamlined Foreign Offshore Procedures (SFOP) and Streamlined Domestic Offshore Procedures (SDOP), which are available to foreign taxpayers and domestic taxpayers, respectively.

The decision between whether to use the OVDP or SFCP depends in part on the taxpayer’s level of concern regarding whether their failure to properly report could be viewed as willful. If SFCP are selected and the IRS discovers evidence of willfulness, it may open an investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral for criminal investigation. Once the OVDP or SFCP option has been pursued, the option not pursued becomes unavailable.

In order to participate in SFCP, taxpayers must file any delinquent FBARs for most recent 6 years according to special IRS instructions and file an amended U.S. tax return for most recent 3 years. Foreign individuals using SFOP can file an original return, but domestic individuals must have already filed. The returns must be filed at a specially-designated IRS address and include a statement certifying SFCP eligibility, that the FBARs have been filed, and that the failure to file was non-willful. Finally, the taxpayer must pay all taxes, penalties, and interest and individuals using SDOP must include the 5% the Miscellaneous Offshore Penalty. As this has been a high-level overview, consult with a competent tax adviser before undertaking any of these programs.

Posted in: International Tax,IRS,Tax Controversy