The IRS Streamlined Filing Compliance Procedure, whether foreign (SFOP) or domestic (SDOP), offer a crucial opportunity for taxpayers to become compliant with their US tax obligations. However, the process is nuanced, and common mistakes can lead to processing delays, rejection, or worse, a potential audit. Here, we outline the most frequent errors taxpayers make during the streamlined process and how to avoid them.
1. Misstating Non-Wilfulness
The cornerstone of eligibility is the taxpayer’s non-wilful conduct – that is, a failure to comply due to negligence, inadvertence, mistake, or a good-faith misunderstanding.
Mistake: Submitting a vague or inconsistent explanation of non-wilfulness on Form 14653 (SFOP) or Form 14654 (SDOP).
How to Avoid: Provide a clear, detailed, and honest narrative explaining the circumstances that led to non-compliance. Avoid generic language. Include facts like changes in residence, misunderstanding of filing requirements, or lack of professional advice.
2. Incorrect Filing of FBARs
The FBAR (FinCEN Form 114) is a required disclosure for foreign financial accounts exceeding $10,000 in aggregate at any time during the year.
Mistake: Submitting incomplete or inaccurate FBARs, such as missing account numbers, incorrect maximum balances, or omitting accounts.
How to Avoid: Gather complete account information, including account numbers, institution names, and highest balances. Use the BSA E-Filing System and double-check all entries before submission.
3. Including Ineligible Tax Years
The streamlined procedures require the submission of three years of tax returns and six years of FBARs.
Mistake: Including the wrong tax years, especially if filing late in the calendar year.
How to Avoid: Ensure that the most recent three tax years for which the return due date (including extensions) has passed are included. Similarly, for FBARs, include the most recent six calendar years.
4. Overlooking Required Forms and Schedules
International information returns such as Form 8938, Form 3520, Form 5471, and others must be filed when applicable.
Mistake: Omitting required forms, which could invalidate the streamlined submission.
How to Avoid: Carefully assess your foreign assets and financial interests. Include all relevant international forms with your amended or original returns. When in doubt, consult a tax professional.
5. Underreporting Foreign Income
Many taxpayers forget to include all foreign income sources such as rental income, dividends, pensions, or interest.
Mistake: Assuming foreign income is not taxable in the US because it is taxed abroad.
How to Avoid: Report all worldwide income. Use Form 2555 or Form 1116 to claim relief through the Foreign Earned Income Exclusion or Foreign Tax Credit.
6. Incorrect Penalty Calculations (SDOP Only)
Under SDOP, a 5% penalty is applied to the highest aggregate balance of unreported foreign financial assets.
Mistake: Miscalculating the penalty base or excluding reportable assets.
How to Avoid: Include all relevant assets—foreign accounts, pensions, life insurance with cash value, and mutual funds. Carefully calculate the highest aggregate value over the six-year FBAR period.
7. Submitting Incomplete Packages
Each streamlined submission must be complete and coherent.
Mistake: Mailing tax returns separately, forgetting to include the certification form, or not labelling the submission clearly.
How to Avoid: Include all necessary documents in one package. Mark it clearly as either “Streamlined Foreign Offshore” or “Streamlined Domestic Offshore” on the top of the first page. Ensure all returns are signed and dated.
Final Thoughts
The streamlined procedures offer a generous opportunity for non-wilful taxpayers to get back into compliance. But to take full advantage, accuracy and thoroughness are essential. Avoid these common mistakes by carefully reviewing all forms, keeping detailed records, and consulting with a tax professional if needed. A clean, complete submission can save you time, money, and stress in the long run.
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.
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