STREAMLINED FOREIGN OFFSHORE PROCEDURE
If you are a U.S. citizen or a green card holder, you may have been surprised to discover that you are required to continue filing U.S. tax reports while living abroad. Maybe you haven’t filed for several years and are concerned about penalties or fees associated with failing to timely file your taxes. The good news is the IRS offers a program to permit individuals to file delinquent taxes using the Streamlined Foreign Offshore Procedure. This article will provide an explanation of the procedure as well as its limitations. We can begin with a summary explanation.
What is the Streamlined Foreign Offshore Procedure?
As mentioned above, the Offshore Streamline Procedure permits a delinquent tax filer to submit taxes for a number of delinquent tax years without the consequence of paying certain penalties. The procedure is made available for tax payers who are able to certify that the failure to file and/or pay taxes derived from foreign financial assets, including foreign earned income, was not willful conduct.
Who is eligible to use the Streamlined Foreign Offshore Procedure?
The first five general requirements apply to both the Foreign Offshore Procedure and the Domestic Offshore Procedure.
1. The Streamlined Foreign Offshore Procedure is available only to individuals and estates. It is not available to corporations or other business entities. However, the procedure is available to an individual who operates a sole proprietorship, or a single member LLC and elects to be treated as a disregarded entity.
2. Failure to file must be non-willful conduct. This means the failure to file is a result of negligence, mistake, or ignorance of the requirement to file. Under the procedure, this non-willful failure extends to the requirements for filing FinCen form 114, commonly known as the FBAR (the FBAR filing requirements will be addressed in a future post).
3. An individual is not eligible to pursue the Streamlined Foreign Offshore Procedure if that person is currently involved in an IRS civil or criminal investigation.
4. It is important to note that any prior delinquent or amended filings resulting in tax penalties or liability will remain in effect regardless of whether those tax years fall within the coverage of the Streamlined Foreign Offshore Procedure.
5. The last, and perhaps obvious requirement for eligibility, is the possession of a valid Social Security Number (SSN) of Individual Tax Identification Number (ITIN).
What are the requirements specific to the Streamlined Foreign Offshore Procedure?
Non-residency requirement
The first eligibility requirement for the Streamlined Foreign Offshore Procedure in addition to the general requirements is non-residency in the United States. In other words, the individual must establish residency in a foreign country by one of two methods.
Individuals who are U.S. citizens or lawful permanent residents
A person is a “qualified individual” under Internal Revenue Code (IRC) §911 if that individual has a tax home in a foreign country and who is a U.S. citizen and a bona fide resident of a foreign country for an entire tax year, or the individual may be either a U.S. citizen or a resident of the U.S. and has been physically present in a foreign country for 330 days out of the prior consecutive 12-month period.
Individuals who are not U.S. citizens or lawful permanent residents meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3).
Filing Requirements for the Streamlined Foreign Offshore Procedure
Once an individual has determined their eligibility to participate in the Streamlined Foreign Offshore Procedure, the individual is required to submit the following tax reports and other documents.
1. File delinquent or amended returns for the 3 years for which the applicable tax deadline has already passed.
2. In addition to the individual tax return (form 1040) the tax filer must also provide all necessary information returns.
3. File all required FBAR reports for the most recent 6 years for which their due date has passed.
4. Submit payment for any taxes due according to the individual income tax returns.
An eligible individual who complies with the filing requirements, specified below, will not be subject to failure-to-file or failure-to-pay penalties, information return penalties, or FBAR penalties.
Specific Instructions for the Streamlined Foreign Offshore Procedures
The following instructions are drawn directly from the IRS website, at:
Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
1. 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:
o if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time, or
o if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.
2. Include at the top of the first page of each delinquent or amended tax return and at the top of each information return “Streamlined Foreign Offshore” written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.
3. Complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. (Form 14653) certifying (1) that you are eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 8 below); 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. You must submit the original signed statement and you must attach copies of the statement to each tax return and information return being submitted through these procedures. You should not attach copies of the statement to FBARs. Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. Your taxpayer identification number must be included on your check. You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
5. If you are not eligible to have a Social Security Number and do not already have an ITIN, submit an application for an ITIN along with the required tax returns, information returns, and other documents filed under these streamlined procedures. See the ITIN page on www.irs.gov for more information.
6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:
o a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
o a dated statement signed by you under penalties of perjury describing:
- the events that led to the failure to make the election,
- the events that led to the discovery of the failure, and
- if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
- for relevant Canadian plans, see SDO FAQ 8 for current information (Form 8891 is no longer required).
7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:
Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn: Streamlined Foreign Offshore
Austin, TX 78741
8. For each of the most recent 6 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 these delinquent FBARs electronically at FinCen. On the cover page of the electronic form, select “Other” as the reason for filing late. An explanation box will appear. In the explanation box, enter “Streamlined Filing Compliance Procedures.” If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.
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