The IRS Streamlined Filing Compliance Procedures offer a valuable opportunity for taxpayers with offshore compliance issues to come clean without facing the full brunt of penalties. However, the process can be confusing, especially for those unfamiliar with international tax obligations. Below is a comprehensive FAQ addressing the most common questions and concerns.

1. What are the Streamlined Procedures?

The streamlined procedures are IRS programmes designed for taxpayers who failed to report foreign financial assets or income but whose non-compliance was non-wilful. These procedures allow for simplified filing, reduced penalties, or none at all, depending on the taxpayer’s residency status.

2. What is the difference between SFOP and SDOP?

• Streamlined Foreign Offshore Procedures (SFOP): For non-resident US taxpayers. No penalties apply.
• Streamlined Domestic Offshore Procedures (SDOP): For US residents. A 5% miscellaneous offshore penalty applies.

Both options require the filing of:

• 3 years of tax returns (original or amended),
• 6 years of FBARs, and
• A certification of non-wilfulness (Form 14653 for SFOP, Form 14654 for SDOP).

3. What does “non-wilful” mean?

Non-wilfulness is defined by the IRS as conduct that is due to negligence, inadvertence, mistake, or a good faith misunderstanding of the law.

To qualify for the streamlined procedures, you must certify under penalty of perjury that your non-compliance was non-wilful. This statement must be detailed, consistent, and truthful.

4. Can I participate if I’m under IRS examination?

No. If you are currently under civil examination or criminal investigation by the IRS, you are ineligible to participate in the streamlined procedures, even if the audit is unrelated to offshore issues.

5. How are foreign pensions treated?

Foreign pensions must be disclosed as part of your foreign financial assets. Whether they are taxable in the US depends on:

• Whether the country of the pension has a tax treaty with the US,
• The structure of the pension (e.g., public vs. private), and
• Any contributions made by the taxpayer.

Some pensions may be tax-deferred in the foreign country but taxable in the US. Reporting is usually required on both the tax return and FBAR/Form 8938.

6. What is the 5% penalty under SDOP based on?

The 5% Title 26 miscellaneous offshore penalty is calculated on the highest aggregate value of foreign financial assets that should have been reported during the covered period (typically 6 years).

This includes:

• Foreign bank accounts
• Investment accounts
• Foreign pensions (in some cases)
• Non-US life insurance with cash value

7. How long does the IRS take to process streamlined submissions?

There is no formal timeline for the IRS to respond. In most cases:

• You will not receive confirmation of acceptance.
• If additional information is needed, the IRS may contact you.
• If the submission is audited, it could take months or even years.

Lack of response typically means your submission is accepted, but it’s advisable to keep thorough records.

8. Do I need to amend all past returns?

No. You only need to file or amend the most recent 3 years of US tax returns and 6 years of FBARs.

9. Can I file the streamlined procedures more than once?

Generally, no. The streamlined procedures are meant for a one-time compliance opportunity. Submitting again may be viewed as abuse of the programme and increase audit risk.

10. Do I still need to pay taxes and interest?

Yes. You must pay any tax owed and associated interest for the 3-year tax return period submitted.

Final Thoughts

The streamlined procedures offer a pathway back to compliance for eligible taxpayers, but the process must be handled carefully. Understanding the rules, and avoiding common pitfalls, can help you make the most of this opportunity. For complex cases or large foreign asset holdings, professional tax guidance is highly recommended.

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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