The IRS Streamlined Procedures Q&A’s
There are many legitimate reasons United States persons may maintain foreign bank accounts or foreign assets. Perhaps an individual owns real estate in a foreign country, making payments via a foreign bank account easier. Alternatively, an individual has come to the United States for education and remained or married a United States citizen.
While many US Citizens, US Residents, or US Persons may maintain foreign bank accounts and assets, many are unaware of their obligations to report their foreign bank and financial statements and learn of these reporting and compliance obligations after the time to report has passed.
While there are stiff penalties for failing to report foreign accounts and financial assets, programs are available whereby an individual can register their foreign accounts and unreported foreign income and receive a much lesser penalty than what the IRS could assess under current tax laws.
This article discusses the Streamlined Offshore Voluntary Disclosure Program, an option for individual taxpayers. Initially, the Internal Revenue Service started the Offshore Voluntary Disclosure Program, which required a 27.5% penalty on the highest foreign asset balance over the look-back period on unreported foreign bank accounts and financial assets. To many, the 27.5% penalty was excessive when considering the offense, and in 2012, the Streamlined Offshore Voluntary Disclosure Program was initiated, which applies a 5% penalty to the highest account balance.
The Streamlined Offshore, Voluntary Disclosure Program, is for United States Persons whose failure to timely report all foreign assets is deemed non-willful.
What is the Procedure for the IRS Streamlined Offshore Voluntary Disclosure Program?
An individual applying for the Streamlined OVDP must: file amended tax returns for each of the most recent three years whereby the tax return due date has passed along with all informational returns (Forms 8938, 3520, 5471 are examples); file FBARs (Form 114) for each of the most recent six years whereby the FBAR due date has passed; and, pay the 5% miscellaneous offshore penalty. In addition to paying the 5% penalty, any amount of tax and penalty from the amended tax returns should be paid.
How is the 5% Streamlined OVDP Penalty Calculated?
The 5% offshore penalty is applied based on the highest aggregate year-end balance of the foreign financial assets during the covered tax periods. It is important to remember that the penalty is based on year-end balances of all accounts and not just the highest balance during the year. If the highest balance during the year was used, you could calculate a higher penalty if money were transferred from one foreign account to another. For example, if an individual had three foreign bank accounts and the highest year-end balance over their 6-year look-back period was $40,000, the offshore penalty would be $4,000.
What is “Non-Willful” for Purposes of the IRS Streamlined OVDP?
For purposes of Streamlined OVDP, the IRS has deemed “non-willful” to mean that your correct mistake in reporting all foreign assets and income was due to an error, inadvertence, negligence, or good faith misunderstanding the law. Given that you were not turning a blind eye to your reporting requirements, this could mean that you did not know you had a reporting requirement and had no real reason to know.
Perhaps your foreign accounts are already taxed abroad, and thus it could be logical to think you would have no reporting requirement in the US because you had already paid tax. Perhaps you inherited a foreign bank account from a family member or friend and only had the account open for a short period. The more an account or asset appears to have a useful purpose, or you have a tie to the foreign asset apart from tax avoidance, the better the failure to report appearing “non-willful.”
What is Form 14654?
Form 14654, Certification by US Person Residing in the US, is an additional form that is submitted through the Streamlined OVDP process. Form 14654 certifies that:
- you are eligible for the Streamlined Domestic Offshore Procedures;
- you have filed all required FBARs;
- your failure to report all income and pay all tax was due to non-willful conduct;
- that the 5% offshore penalty you have calculated is correct.
Form 14654 is filed with your amended tax returns and related forms and schedules through the OVDP process.
Where do I File FBARS When Going Through the Streamlined OVDP Process?
FBARS or Form 114 are filed directly with FinCEN (the Financial Crimes Enforcement Network) and may be filed online. It is important to note that current Streamlined OVDP procedures request that when filing a late FBAR through the Streamlined OVDP process, you report that you are filing the FBAR late and state “Streamlined Filing Compliance Procedures.”
How Do I Know if I Had or Have a Requirement to File the FBAR?
A US Person (defined below) has an FBAR requirement if they have a financial interest or signatory authority over a foreign bank account or reportable foreign asset and the total amount of all foreign assets exceeds $10,000 (in US Dollars) at any time during the year. Thus, it is essential to remember two key items.
First, the threshold of $10,000 applies to the total of all accounts, not each account. Therefore, you may have multiple foreign bank accounts or reportable foreign assets less than $10,000, but if they total more than $10,000, you likely have a reporting requirement.
Second, the reporting requirement applies even if you have an account or asset for a short period. Having signature authority or a financial interest over a foreign account for even a day would still require an individual to file an FBAR.
Who is a “US Person” for Purposes of FBAR Filing Requirements?
A US Person is defined as, (i) a citizen or resident of the United States, (ii) an entity that is formed, organized, or created in the United States or under the laws of the United States (or certain territories), and would include but not be limited to corporations, LLCs, partnerships, and trusts or (iii) an estate formed under the laws of the United States.
Based upon the definition of a US Person, businesses can have FBAR reporting requirements. Furthermore, because the definition considers a US Resident to be a US Person, you do not have to be a US Citizen to have an FBAR filing requirement.
What Are Common Forms Filed With Amended Tax Returns When Filing Streamlined OVDP?
Beyond the FBAR, Form 14654, and amended tax returns, we commonly see the following forms that need to be filed.
Schedule B is typically filed with a 1040X because the individual may not have appropriately claimed foreign interest or dividends and may need to check the appropriate boxes relating to foreign assets on Schedule B.
Form 8938, Statement of Specified Foreign Financial Assets, is another common form filed with an individual’s 1040X. Form 8938 is similar to the FBAR, whereby certain foreign assets and income are reported. The dollar threshold for filing Form 8938 is higher than the FBAR and changes based upon filing status and citizenship issues.
Form 3520, Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is another relatively common form. If you have received a foreign gift or inheritance over certain amounts, you have a Form 3520 filing requirement.
Other forms may need to be filed depending upon the circumstances, but Forms 8938, 3520, and Schedule B are some of the common forms and schedules you may be likely to see on a 1040X being filed pursuant to Streamlined OVDP.
Does the IRS Acknowledge the Streamlined OVDP Filing or Provide a Closer Letter?
No. While you should always track the filing of your Streamlined OVDP and the cashing of your checks is reasonable verification that IRS is in receipt, you do not receive any specific acknowledgment or acceptance by the IRS when going through Streamlined OVDP procedures.
When your applicable amended returns are processed, you may receive a notice for interest or penalty based upon any additional assessment of tax, which again is reasonable verification of receipt. Still, the IRS does not provide any further acknowledgment or acceptance letter.
Have More Questions? Contact Us
The above article has been provided for informational purposes only and should not be considered tax or legal advice. If you have unreported foreign financial assets, you should discuss your specific facts and circumstances with an international tax attorney. If you have questions regarding foreign investments or international tax matters, you can speak with an international tax attorney by contacting The McGuire Law Firm at 720-833-7705.