Streamlined Offshore Procedures

The U.S. tax system, regulated by the Internal Revenue Service (IRS), has stringent requirements for reporting worldwide income, including income earned from foreign assets. To ensure compliance, various procedures have been established to help U.S. taxpayers fulfill their obligations. Among these, the Streamlined Offshore Procedures are particularly notable for individuals who may have inadvertently failed to report foreign financial assets and income. 

The Streamlined Offshore Procedures were introduced by the IRS as a way to encourage U.S. taxpayers to come into compliance with their tax obligations. These procedures are specifically designed for taxpayers who have failed to report foreign financial assets and income due to non-willful conduct. The non-willful nature of the failure to comply is a key component, as these procedures are not intended for individuals who have deliberately avoided their tax obligations.

The basis for the Streamlined Offshore Procedures is rooted in the Foreign Account Tax Compliance Act (FATCA) and other related regulations. FATCA, which became law in 2010, requires U.S. taxpayers to report their foreign financial accounts to the IRS. Failure to comply can result in significant penalties. The Streamlined Offshore Procedures offer a path to compliance that can mitigate these penalties for eligible taxpayers.

Obligations

The Streamlined Offshore Procedures are intended for U.S. taxpayers who:

• Have not filed one or more required international information returns, such as the Foreign Bank Account Report (FBAR).
  
• Failed to report income from foreign financial assets on their U.S. tax returns.
  
• Are non-willful in their noncompliance, meaning the failure to comply was due to negligence, inadvertence or a misunderstanding of the law.

It is important to note that both U.S. citizens and resident aliens are subject to these reporting requirements, regardless of where they reside. Non-resident U.S. taxpayers who are living abroad and have not complied with their tax obligations may also be eligible for the Streamlined Foreign Offshore Procedures, a subset of the streamlined procedures.

The Process Steps

The Streamlined Offshore Procedures involve several key steps, which are outlined as follows:

1. Determine Eligibility: Before beginning the process, it must be determined whether the taxpayer qualifies for the streamlined procedures. This involves assessing the non-willful nature of the non-compliance and ensuring that the taxpayer has not been under civil examination by the IRS for any tax year in question.
   
2. Gather Documentation: Relevant documentation, including foreign financial account statements, previously unreported income information and any other required forms or records, should be collected. This documentation will be necessary to complete the required filings accurately.
   
3. Prepare and Submit Tax Returns: Tax returns for the previous three years must be prepared or amended to include previously unreported foreign income. These returns should be accurate and reflect all income from foreign financial assets.
   
4. Submit FBARs: The taxpayer must submit FBARs (FinCEN Form 114) for the previous six years if they have not already been filed. The FBAR is required for taxpayers who have had a financial interest in or signature authority over foreign financial accounts exceeding $10,000 at any time during the calendar year.
   
5. Complete the Certification Form: A Certification by U.S. Person Residing Outside of the United States (Form 14653) or Certification by U.S. Person Residing in the United States (Form 14654) must be completed, depending on the taxpayer’s residency status. This form certifies that the failure to comply was non-willful.
   
6. Submit the Package to the IRS: The completed package, including amended tax returns, FBARs and the certification form, should be submitted to the IRS. It is important to ensure that all forms are completed accurately to avoid further complications.
   
7. Payment of Tax and Penalties: Taxes due on the previously unreported income must be paid, along with any applicable penalties. Under the Streamlined Domestic Offshore Procedures, a reduced penalty of 5% of the highest aggregate balance of the foreign financial accounts during the six-year period is typically applied. For those who qualify under the Streamlined Foreign Offshore Procedures, no penalties are generally assessed.

Key Takeaways

Understanding the nuances of the Streamlined Offshore Procedures is vital for U.S. taxpayers with foreign financial assets. Some key takeaways include:

• Non-Willful Conduct: The procedures are specifically for taxpayers whose failure to comply was not willful. If willful conduct is determined, other disclosure programs, such as the Offshore Voluntary Disclosure Program (OVDP), may be more appropriate.
  
• Penalty Mitigation: The streamlined procedures provide an opportunity to mitigate significant penalties that could otherwise be imposed for failure to report foreign income and assets.
  
• Scope of Compliance: Taxpayers are required to report foreign income and assets for the previous three years and submit FBARs for the previous six years. This period provides a reasonable timeframe to bring all relevant tax matters into compliance.
  
• Complexity of Documentation: The process involves detailed documentation and thorough preparation of tax returns and FBARs. Professional assistance may be highly beneficial in ensuring accuracy and completeness.

Our Services

The complexity and importance of the Streamlined Offshore Procedures necessitate a professional approach to ensure proper compliance. Our services include:

• Eligibility Assessment: A comprehensive review of the taxpayer’s situation to determine whether they qualify for the streamlined procedures and whether non-willful conduct can be appropriately certified.
  
• Document Preparation: Assistance in gathering and organizing all necessary documentation, including foreign financial account statements, unreported income information and any other required forms.
  
• Tax Return Preparation: Preparation or amendment of tax returns for the previous three years to accurately reflect all income from foreign financial assets.
  
• FBAR Submission: Preparation and electronic filing of FBARs for the previous six years, ensuring compliance with the relevant regulations.
  
• Certification Form Completion: Guidance in completing the necessary certification forms, including Form 14653 or 14654, to accurately represent the taxpayer’s non-willful conduct.
  
• IRS Submission: Compilation and submission of the complete package to the IRS, including all required forms and documentation, to ensure a smooth process.
  
• Tax Planning and Advice: Providing ongoing tax planning and advice to ensure continued compliance with U.S. tax laws, including the reporting of foreign financial assets in future tax years.

Conclusion

Compliance with U.S. tax laws is an important responsibility for taxpayers with foreign financial assets. The Streamlined Offshore Procedures offer a valuable opportunity for those who have unintentionally failed to meet their obligations to come into compliance with reduced penalties. However, the process can be complex, requiring careful attention to detail and thorough documentation. Engaging professional services would provide significant benefits and ensure that all steps are completed accurately and in accordance with IRS requirements.