LICENSED CPA FIRM | TRUSTED ACCOUNTING PROFESSIONALS
The streamlined filing compliance procedures are the procedures available to taxpayers who have previously failed to report their foreign financial assets and pay any respective tax due. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations. These procedures will be available for an indefinite period until otherwise announced.
As you may be aware, the United States has one of the most, and perhaps the most, complicated tax regimes in the world. One of the most complicated areas within U.S. tax law, and one that also carries with it some of the highest criminal and civil penalties, is foreign reporting. The complication is rooted in the compilation of various pieces of legislation, spanning over forty years, each of which is in response to perceived threats to the U.S. tax system at the time the legislation was passed by Congress. The Bank Secrecy Act of 1970 introduced the requirement to file the Report of Foreign Bank and Financial Accounts (FBAR). The Bank Secrecy Act was amended by the USA PATRIOT Act in 2001. More recently, the Foreign Account Tax Compliance Act (FATCA) provided the IRS and Department of Treasury with greater authority to enforce international tax compliance; it also introduced new reporting requirements—which, in many cases, requires duplicative reporting of information already required to be reported on the FBAR.
While many taxpayers initially may welcome government efforts to catch those who hide their money in offshore bank accounts, they are often surprised to learn that they themselves may be in violation of the law. The U.S. has a unique system of “worldwide income reporting,” whereby U.S. persons are required to report income that is earned outside the U.S., even if that income has already been taxed. This catches many taxpayers who have recently moved to the United States by surprise. If you have recently moved to the United States and maintain bank accounts in your home country or foreign income-generating assets, such as rental real estate (even if it is only partially owned by you or it was inherited) you must report the income from these assets and pay tax in the U.S. (including at the state level in many cases), even if tax has been paid in your home country.
As such, the IRS introduced Streamlined Compliance Filing Procedures in June 2014 as an alternative to its existing Offshore Voluntary Disclosure Program, which was designed more for taxpayers with evidence of willful failure to disclose foreign assets. Specifically, SFCP is for taxpayers who non-willfully failed to disclose foreign assets. Under the Streamlined Compliance Filing Procedures, non-willful conduct is specifically defined as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law”.
IRS UPDATES THE Streamlined Compliance Filing Procedures
The Internal Revenue Service recently modified the non-willfulness certification form that individual taxpayers, who have not previously disclosed foreign assets to the U.S. government, must submit to enroll in the streamlined filing compliance procedures.
The IRS has created two separate tracks for taxpayers wishing to enroll in SFCP—one track for taxpayers who reside in the United States (hereinafter “resident SFCP track”) and another track for taxpayers who reside outside the United States (hereinafter “non-resident SFCP track”).
If the taxpayer meets the non-residency test, then the taxpayer may enter the non-resident SFCP track, provided the taxpayer can certify that: (1) he or she failed to report income from a foreign financial asset and pay tax as required by U.S. law [and may have failed to file a report of foreign bank and financial accounts (FBAR)]; and (2) such failures resulted from non-willful conduct.
However, if the taxpayer fails the non-residency test, then the taxpayer must enroll in the resident SFCP track. The resident SFCP track imposes more stringent eligibility requirements. That is, the taxpayer must be able to certify that: (1) he or she has previously filed a U.S. tax return tax return (if required) for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed; (2) he or she has failed to report gross income from a foreign financial asset and pay tax as required by law (and may have failed to file an FBAR and/or one or more international information returns); and (3) such failures resulted from non-willful conduct.
If a taxpayer can certify that he or she meets the eligibility requirements, then the taxpayer may make a voluntary disclosure as part of the SFCP program.
The non-resident SFCP track requires the taxpayer to submit, in addition to filing any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed: (1) delinquent or amended tax returns, together with all required information returns for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date has passed); (2) the full amount of the tax and interest due in connection with the delinquent or amended returns; and (3) a completed and signed Certification by U.S. Person Residing Outside of the U.S. (Form 14653). Taxpayers who enter the non-resident SFCP track are generally not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, FBAR penalties, or a Title 26 miscellaneous offshore penalty.
The resident SFCP track has similar disclosure requirements. Specifically, in addition to filing any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed, the taxpayer must submit: (1) amended tax returns, together with all required information returns for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date has passed); (2) the full amount of the tax and interest due in connection with the amended returns; (3) a completed and signed Certification by U.S. Person Residing In the U.S. (Form 14654); and (4) the Title 26 miscellaneous offshore penalty (which is equal to 5 percent of the highest aggregate year-end balance/value of the taxpayer’s foreign financial assets that are in the SFCP penalty base). However, taxpayers who enter the resident SFCP track are generally not subject to failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties or FBAR penalties.