Posted by: Adam Necelis, CPA
The IRS has recently made some changes to their streamlined offshore compliance program. These changes allow, for the first time, certain U.S. taxpayers that reside in the U.S. to be eligible for the program. Since this is the most significant change, we will first discuss which U.S. taxpayers that reside in the U.S. are eligible to participate in the program.
To be eligible for the program, U.S. taxpayers who reside in the U.S. must meet all of the following requirements:
(1) fail to meet the applicable non-residency requirement
(2) have previously filed a U.S. tax return for each of the most recent 3 tax years
(3) have failed to report gross income from a foreign financial asset and pay tax as required, and may have failed to file an FBAR and/or one or more international information returns
(4) such failures resulted from non-willful conduct.
Once we determine that a taxpayer is eligible to participate, the U.S. taxpayer will need to do three things to receive the favorable treatment under this program. The first thing the taxpayer will need to do is to amend the past 3 tax years’ tax returns to include the income from the foreign financial asset. This includes all foreign information returns as well. The taxpayer is required to pay the full amount of tax and interest due. It is important to note that for U.S. taxpayers residing in the U.S., this program cannot be used to file a delinquent return.
The taxpayer will then need to file any delinquent FBARs for the past 6 tax years to report the foreign financial asset. As of October 2013, all prior FBARS need to be reported on the FinCEN Form 114 and not on the TD F 90-22.1.
The third and final step is for the taxpayer to pay the Title 26 miscellaneous offshore penalty. The Title 26 penalty is equal to 5% of the highest aggregate year-end balance of the assets that are subject to the penalty during the covered FBAR period. An asset is considered to be subject to the penalty if it should have been reported on the FinCEN Form 114 or Form 8938, but was not, for that year. An asset is also considered to be subject to the penalty if the asset was properly reported, but the gross income from that asset was not reported.
By following the above procedures, the taxpayer will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties. These penalties can be very substantial, upwards of $10,000 per form, per year. So the 5% penalty, which may seem high at first, can actually save the taxpayer money.
This is a great opportunity for those who have unreported gross income from foreign financial accounts and would like to become tax compliant with reduced penalties. The IRS does state that to receive the favorable terms, all returns must be filed under very specific instructions. If you are eligible to participate in this program and would like to become tax compliant, please contact us to ensure that you do receive the beneficial treatment.
Now that we have discussed how U.S. taxpayers that reside in the U.S. can become tax compliant under the IRS Streamlined Offshore Compliance Program, in the next blog we will discuss how U.S. taxpayers that reside outside of the U.S. can become tax compliant.