US taxpayers, even if living abroad, have reporting obligations to the IRS. These reporting obligations are complex and confusing, especially if the taxpayer owns any foreign accounts. Taxpayers who have foreign assets may have to file FBAR (FinCEN 114) or FATCA (Form 8938), or both, or neither, depending on the valuation. So, frequently a taxpayer living abroad finds that they have inadvertently failed to file a required tax form. That is where the Streamlined Foreign Offshore Procedures (SFOP) come in. They are a set of rules to allow a taxpayer who non-willfully failed to file certain tax forms become compliant.
For a taxpayer who is a US citizen or US permanent resident to qualify, a taxpayer must:
have physically resided outside the United States for at least 330 full days in one of the last three years and did not have a US abode that year;
certify that the failure to file was non-willful;
have filed returns for the most recent 3 years;
have unreported income from a foreign asset;
have failed to file informational returns such as FBAR or Form 8938; and
not be currently under audit.
For a taxpayer who is not a US citizen or permanent resident, a taxpayer must:
have failed to meet the substantial presence test in one of the last three years;
certify that the failure to file was non-willful;
have filed returns for the most recent 3 years;
have unreported income from a foreign asset;
have failed to file informational returns such as FBAR or Form 8938; and
not be currently under audit.
A taxpayer fails to meet the substantial presence test in a particular year if they spent less than 31 days in the US or spent less than 183 days using a 3-year weighted sum. The 3-year weighted sum is calculated as 100% of the days in the current year, 1/3 of the days in the prior year, and 1/6 of the days in the year before that.
A taxpayer who meets all those requirements can use the SFOP to become compliant. The taxpayer needs to
file amended returns, including any informational forms such as Form 8938;
file any delinquent FBARs for the prior 6 years;
file Form 14653 certifying the non-compliance was non-willful; and
pay the additional tax on the previously unreported income and any interest.
Unlike with the domestic offshore procedures, there is no 5% offshore penalty.
Before making a disclosure, taxpayers should consult with an experienced tax professional to evaluate their eligibility, calculate the penalty correctly, and prepare a complete and credible non-willfulness certification.
At Safeguard Law, PLLC, our team of experienced tax attorneys specializes in helping our clients navigate issues such as this. Contact us today to schedule a consultation! Our main business line is (202) 505-1741.