If you have undisclosed foreign financial accounts or unreported foreign income, you face heavy penalties for failing to comply with the IRS’s reporting requirements. Fortunately, the IRS offers a program that allows some taxpayers to avoid the harshest penalties.
If you have been non-compliant you can still become compliant through the Streamlined Filing Compliance Procedures. Qualifying for the Streamlined Filing Compliance Procedures depends on your residency, whether the non-compliance was willful, whether you currently face an IRS examination, and whether you file corrected returns.
There are two versions of the program, one for domestic residents and one for foreign residents. Taxpayers residing in the United States use the domestic version of the program and must pay a penalty worth 5% of the highest value of foreign financial assets. Taxpayers who reside outside the United States use the foreign version of the program and avoid the 5% penalty. A taxpayer needs to meet three requirements to qualify for either version of the program.
First, the failure to report foreign income or foreign financial assets must be non-willful. Non-willful means the conduct was due mistake, negligence, or a good-faith misunderstanding of the law. Common examples of non-willful conduct include someone living abroad not realizing they were required to file US tax returns, someone inheriting a foreign bank account and unaware of the FBAR filling requirement, or an immigrant to the US who keeps a bank account in a foreign country and failed to report it. You must certify a statement describing the facts and circumstances surrounding your non-compliance. The IRS will evaluate this statement to make sure your conduct was not reckless or willfully blind.
The second requirement is that you must not be under a current IRS examination. If the IRS has already started an examination of your returns for any year, then you do not qualify for the streamlined procedures. This is true even if the examination is not due to issues unrelated to offshore bank accounts or foreign income. Because of this requirement, it is imperative to act quickly and enter the streamlined procedures before the IRS starts an examination.
The third requirement is that you must file amended tax returns for the most recent 3 years. You need to amend your returns to include any previously unreported income along with any informational returns like Form 8938 (FATCA). Any additional tax and interest due to any underreported income must also be paid. You’re required to also file corrected FBARs for the most recent 6 years. Lastly, domestic residents must pay the 5% penalty on the highest value of foreign financial assets.
If you do qualify, you can avoid FBAR penalties, accuracy penalties, failure-to-file penalties, failure-to-pay penalties. 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.