Failed to Disclose Foreign Income/Assets? Streamlined Filing Procedures May Be the Answer

March 07, 2022

By Kristen De Noia

Streamlined Foreign Offshore Procedures allow qualifying U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, with undisclosed foreign income, investments, or accounts, to come into compliance with U.S. tax reporting obligations. These procedures offer taxpayers a streamlined procedure to submitting delinquent or amended returns under terms for resolving their tax and penalty obligations.

Qualified foreign residents living outside the United States may file under the Streamlined Foreign Offshore Procedures. Taxpayers in the United States may file under the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures

Eligibility Qualifications:

To be eligible to file under the Streamlined Foreign Offshore Procedures, the taxpayer must meet both nonresidency and failure to report requirements. These requirements must be met by both spouses where the return is being filed jointly.

1.Nonresidency for a U.S. citizen or lawful permanent resident: In any one or more of the most recent three years for which the U.S. tax return due date has passed:

    1. The individual did not have a U.S. abode, and
    2. The individual was physically outside the U.S. for at least 330 days.

  Nonresidency for individuals who are not U.S. citizens or lawful permanent residents: In any one or more of the most recent three years for which the U.S. tax return due date has passed, the individual:

    1. Was present in the U.S. less than 31 days during the calendar year, and
    2. The sum of days present in the U.S. during the current year and two preceding calendar years, when multiplied by the applicable multiplier, is less than 183.
Year Applicable multiplier
Current Year 1

1st preceding year
1/3
2nd preceding year 1/6



2. Failure to report: Taxpayer failed to report the income from a foreign financial asset and pay required tax, and may have failed to file an FBAR.

3. Non-willful conduct: Failures were the result of non-willful conduct.

Effect on Penalties: An eligible taxpayer who complies with these procedures will not be subject to failure-to-file, failure-to-pay, accuracy-related, information return, or FBAR penalties. Penalties may only be assessed in a subsequent audit if there is a determination that the original tax noncompliance was fraudulent and/or the FBAR violation was willful.

Procedures: In order for a submission to be processed under the Streamlined Foreign Offshore Procedures, it must include the following:

  1. An originally filed Form 1040, U.S. Individual Income Tax Return, or amended Form 1040-X, Amended U.S. Individual Income Tax Return (if originally filed return failed to report foreign income) and all required international information returns for each of the most recent three years for which the U.S. tax return due date has passed;
  2. “Streamlined Foreign Offshore” written in red text at the top of the first page of the income tax return and every accompanying international information return;
  3. Signed Form 14653, U.S. Person Residing Outside of the U.S., with a detailed statement explaining the failure (as explained below);
  4. Payment of all tax due as reflected on the tax returns and all applicable interest on late payments;
  5. A submission for an individual taxpayer identification number (“ITIN”) with the returns if the taxpayer does not already have a social security number (“SSN”) or ITIN; and
  6. For each of the most recent six years for which the FBAR due date has passed, delinquent FBARs with a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

Streamlined Domestic Offshore Procedures

Eligibility Qualifications: Taxpayers residing in the United States, or otherwise failing to meet the nonresidency requirement of the Streamlined Foreign Offshore Procedures, may qualify for the Streamlined Domestic Offshore Procedures where:

  1. Tax returns filed: A U.S. tax return (if required) was filed for each of the most recent three years for which the U.S. tax return due date has passed; and
  2. Failure to report: Taxpayer failed to report the income from a foreign financial asset and pay required tax, and may have failed to file an FBAR and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset; and
  3. Non-willful conduct: Failures were the result of non-willful conduct.

Effect on Penalties and Title 26 Miscellaneous Penalty: The taxpayer must pay a Title 26 miscellaneous tax penalty. However, the taxpayer will not be subject to failure-to-file, failure-to-pay, accuracy-related, information return, or FBAR penalties.

The Title 26 miscellaneous offshore tax penalty is calculated as 5% of the highest aggregate balance of the taxpayer’s foreign financial assets up to the most recent:

  • Three years (where the foreign financial asset should have been, but was not, reported on a Form 8938 for that year; or the foreign income was not properly included on the Form 1040), or
  • Six years (where the foreign financial asset was not properly reported on a filed FBAR).

The Title 26 miscellaneous offshore tax penalty is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the penalty for each of the years in the covered tax return and FBAR periods. The penalty is then calculated as 5% of the highest aggregate balance from among those years.

Procedures:

  1. File an amended Form 1040-X, Amended U.S. Individual Income Tax Return and all required international information returns for each of the most recent three years for which the U.S. tax return due date has passed;
  2. “Streamlined Domestic Offshore” written in red text at the top of the first page of the income tax return and every accompanying international information return;
  3. Submit a signed Form 14654, U.S. Person Residing in the U.S., with a detailed statement explaining the failure (as explained below);
  4. Pay all tax due as reflected on the tax returns and all applicable interest on late payments;
  5. Pay the Title 26 miscellaneous offshore penalty; and
  6. For each of the most recent six years for which the FBAR due date has passed, file delinquent FBARs with a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

Form 14653/14654 Narrative Statement

A narrative statement should be attached to Form 14653 for taxpayers filing under the Streamlined Foreign Offshore Procedures and attached to Form 14654 for taxpayers filing under the Streamlined Domestic Offshore Procedures. This narrative statement should include a comprehensive explanation of the taxpayer’s failure to report all income, pay all tax, and submit all required information returns. Facts that may be relevant to this explanation include the taxpayer’s background and knowledge of U.S. tax law; reliance on a professional advisor’s advice; and recent events that may have inhibited the taxpayer’s compliance. This narrative should also discuss the source of funds in all foreign financial assets and accounts, along with an explanation of the taxpayer’s use of each account.


Our Current Issue: Q1 2022

About Kristen De Noia

Kristen De Noia is a Tax Manager with tax compliance and planning experience focusing on personal and fiduciary income taxation, gift taxation and trusts and estates including high net worth families and closely held business owners.