Streamlined Disclosure for U.S. Taxpayers Living Outside the U.S.
For many, U.S. taxpayers living outside of the U.S., keeping track of the rapidly developing changes to U.S. tax law such as the type and nature of required foreign disclosures can be extremely difficult. Aside from the complexity of determining which accounts are covered accounts and varying reporting thresholds for FATCA and FBAR obligations, taxpayers are also often challenged by emerging interpretations of the statutes. However, the opportunity to correct past mistakes regarding unintentional failures to disclose foreign accounts still exists.
Benefits an International U.S. Taxpayer Receives By Participating in Streamlined Disclosure
Before proceeding any further, it is essential to note that Streamlined Disclosure is only intended for situations where the taxpayer did not intentionally or voluntarily disregard a known legal duty to properly report their worldwide income and to provide worldwide information reporting. In other words, the taxpayer must not have acted willfully in getting out of compliance. After a careful and comprehensive consultation, a tax attorney can make this determination. And, please do meet with a CPA, E.A. or CTEC certified tax preparer when discussing issues of this type because only speaking with an attorney is under attorney-client privilege in order to protect the confidentiality of the disclosures you need to make to the attorney in order for the attorney to identify any underlying criminal tax and information reporting concerns.
However, for international taxpayers who simply made an error, did not realize that an account was covered, or who may have simply been unaware of their international filing obligations, utilizing the Streamlined disclosure process can confer an array of benefits. Compared to the Offshore Voluntary Disclosure process that results in either a 27.5% or 50% offshore penalty, the Streamlined Disclosure process results in no offshore penalty for taxpayers residing outside of the United States. Furthermore, barring an examination that discovers fraud or willfulness on the part of the taxpayer, there is no failure to file, failure to pay, or 20% accuracy penalty on the income tax reported as part of the disclosure. Additional advantages are related to the amount of tax and other filings required. These include:
- Only three years of income tax filing are required versus the relevant eight-year period under OVDP.
- The taxpayer is required to file only 6 years of deficient FBARs as compared to eight years under OVDP.
Furthermore, the taxpayer is not subject to an automatic audit under the Streamlined program. Thus, provided that the taxpayer living outside the U.S. qualifies, this process provides significant benefits as the taxpayer achieves compliance with their past FBAR and FATCA filing obligations and gets back into income tax compliance as painlessly as possible.
Qualifications of an International Taxpayer to qualify Under Streamlined Foreign Offshore Procedures
To qualify, the taxpayer must meet a number of qualifications. To start, one of the main requirements the taxpayer residing in a foreign nation must meet is the non-residency requirement. Furthermore, for most joint tax filers, both spouses must meet this requirement. The non-residency requirement applies to U.S. citizens, legal permanent residents and the estates of estates of U.S. taxpayers of the same must satisfy this requirement.
For U.S. Citizens and green card holders, the non-residency threshold is satisfied when for three years which the U.S. tax return due date has elapsed, the taxpayer was outside of the borders of the United States for a minimum of 330 full days in each tax year. Furthermore, the individual must not have a residence or abode within the United States during the relevant period. The term abode is defined under IRS Publication 54 in which it is held to mean:
…one’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home.” The location of your abode often will depend on where you maintain your economic, family, and personal ties
Thus, what qualifies as an abode turns on the character, nature, and use of a residence. Furthermore and when applicable, the timing regarding when the above is established in the United States is also relevant.
How Do I File My Disclosure Using the Streamlined Foreign Offshore Procedures?
Individuals considering use of the Streamlined procedures are again urged to use an experienced tax attorney to guide them through this process or to utilize one of the other approaches available to get back into international tax and information reporting compliance. What is basically required under the streamlined procedure is the filing of tax returns for each of the three most recent tax years. The exact procedures one must follow will differ depending on whether returns were previously filed. However, it is important to note that informational returns, such as IRS Forms 3520, 5471, and 8938, are required to be included with this filing. Furthermore, on the first page of each filing and each informational return, the taxpayer must indicate that the filing is part of a Streamlined filing in a certain manner. Additionally, the taxpayer must also:
- Remit all tax that is due, including interest.
- If the taxpayer is seeking relief due to a failure to defer income from eligible retirement or savings plans, certain statements including a description of events must be submitted under penalty of perjury.
Furthermore, one element of the Streamlined Disclosure is that the filer must certify non-willfulness under the penalty of perjury. Furthermore, the individual must also certify that they have complied with all program requirements. The willfulness determination is the most risky part of this procedure because if you certify that your actions were non willful and the IRS later determines you acted willfully you are at risk of criminal prosecution and none of the program terms will apply leaving you open to all the draconian civil and criminal penalties at the governments disposal. Only an experience criminal tax defense attorney can help you accurately gauge this risk.
Thus, working with an experienced tax lawyer is important because mistakes made regarding willfulness or filing procedures can result in the taxpayer inadvertently compounding penalties and problems.
IRS Guidance Permits Separated Spouse with Previous Joint Returns to Participate in Streamlined Disclosure
For most of the existence of the Streamlined program, problems have existed for couples who filed their taxes jointly but later divorced or separated. In these cases, one spouse can often have difficulty securing the signature of the other spouse. Unfortunately, typical IRS procedure requires the signature of both spouses who originally signed the joint return to amend the same return. Unfortunately, under earlier IRS guidance and handling, this meant that taxpayers who were unable to secure this signature were instead forced into the standard OVDP program. For taxpayers without willfulness concerns, this meant that the nevertheless were obligated to pay the 27.5% or 50% offshore penalty.
However, as evidenced by FAQ #7 in the IRS’ Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States Frequently Asked Questions and Answers, this policy has been altered. The FAQ states that IRS policy now recognizes, “…in certain cases (including but not limited to separation or divorce), your spouse/former spouse may not be willing to sign joint amended income tax returns or a joint certification on Form 14653.” IRS policy now holds that an individual affected by this scenario can also make use of Streamlined Disclosure to avoid the comparatively harsh penalties they would otherwise face.
To comply with the new policy and procedures, affected foreign filers must write “SFO FAQ 7” in red ink where the other spouse would ordinary sign their name. Routine processing will return a request for the other spouse’s signature. To this request, the taxpayer should once again reference “SFO FAQ 7.”This procedure can open up the benefits of Streamlined Disclosure to a group that formerly was limited to OVDP only.
Rely on an Experienced Tax Attorney When Making an International Streamlined Offshore Disclosure
If you have concerns regarding undisclosed accounts in foreign nations, the time to disclose is now. Through an array of information sharing agreements, the Swiss Bank Program, and other ongoing investigations the IRS and DOJ have greatly expanded their ability to identify and pursue undisclosed accounts. Making a disclosure before you are faced with serious, extremely costly penalties is now more important than ever. However, if you are contacted prior to making your disclosure, you will be ineligible to benefit from this offshore penalty-free disclosure method. To discuss your offshore tax situation confidentially, schedule a reduced-rate consultation with the experienced lawyers of the Tax Law Offices of David W. Klasing today by calling 800-681-1295 today or contact us online.