If you’re a US taxpayer residing in the United States and need to catch up on unreported offshore income, accounts or assets, the Streamlined Domestic Offshore Procedures (SDOP) offer a way to become compliant. However, unlike the foreign version (SFOP), SDOP includes a 5% miscellaneous offshore penalty. Let’s explore what this penalty involves, how it’s calculated, and which assets are included.
What Is the 5% SDOP Penalty?
The 5% penalty is a Title 26 miscellaneous offshore penalty, assessed on the highest aggregate balance/value of your unreported foreign financial assets during the covered tax years. This is the price of eligibility for reduced penalties and immunity from further IRS civil penalties and potential criminal charges.
How the Penalty Is Calculated
The penalty is calculated as 5% of the highest aggregate balance of all foreign financial assets that:
- Should have been reported on FBARs (FinCEN Form 114) or Form 8938;
- Were not reported timely;
- Are still unreported or were incorrectly reported;
- Are within the scope of the SDOP disclosure period (usually the last six years for FBARs).
Example:
Let’s say your unreported foreign assets over six years were:
- 2018: $40,000
- 2019: $55,000
- 2020: $75,000
- 2021: $60,000
- 2022: $50,000
- 2023: $80,000
The highest value is $80,000. The 5% penalty would be: $80,000 x 5% = $4,000
What Types of Assets Are Included?
Assets that are typically included in the penalty base:
- Foreign bank and financial accounts (savings, checking, brokerage)
- Foreign pension plans
- Foreign life insurance policies with cash value
- Foreign mutual funds or investment accounts
- Foreign stock or securities held in a non-US account
What Types of Assets Are Excluded?
Certain assets are not included in the penalty base, including:
- Foreign real estate held directly (not through a foreign entity)
- Tangible assets such as artwork or jewellery
- Foreign stock certificates held outside of a financial account
However, if these excluded assets generate income, that income still must be reported, and failing to do so could affect your SDOP submission.
Required Documentation
When submitting under SDOP, you must:
- File three years of amended US tax returns, including all required schedules and international information forms (e.g., Form 8938, Form 3520);
- File six years of FBARs;
- Submit Form 14654, which certifies non-willfulness and provides details of foreign asset values and penalty calculation;
- Pay all taxes due with interest, and the 5% penalty, at the time of submission.
Final Thoughts
The 5% penalty under SDOP is a compromise: a manageable cost in exchange for protection from more severe consequences. Understanding what’s included, and calculating it correctly, is essential. A qualified tax advisor can help ensure your penalty base is accurate and your submission complete, offering peace of mind and a clear path to compliance.
The information in this blog post is for general informational purposes only and does not constitute professional tax advice. We strongly recommend consulting a qualified tax professional before making any decisions. US Expat Tax Advisor is not liable for any actions taken based on this content.
If you would like more information or want to schedule a one-on-one consultancy call, please get in touch using our contact form.
