The IRS expanded its streamlined filing compliance procedures in 2014 to allow more taxpayers with offshore bank accounts to take advantage of the program. The procedures are now available to some taxpayers living in the United States, as well as many U.S. taxpayers living outside the country.
Benefits of Streamlined Filing Compliance Procedures
The main benefit of the streamlined filing compliance procedures is that they allow taxpayers with unreported foreign financial accounts to become compliant with the law without facing severe criminal and civil penalties. Eligible foreign U.S. taxpayers will have all penalties waived, and eligible domestic taxpayers will pay only a miscellaneous offshore penalty of five percent of the balance of the foreign accounts.
The normal civil penalties for FBAR violations can be up to the greater of $100,000 or 50 percent of the account balance for willful violations, and criminal penalties can include fines up to $250,000 and up to five years in prison. Compared to these penalties, paying the IRS five percent of the account balance can seem like a great deal.
However, these streamlined procedures are only available to taxpayers who certify that their file to failure FBARs was non-willful. Taxpayers who willfully hid their offshore accounts are not eligible, but may have other options, such as the Offshore Voluntary Disclosure Program.
Eligibility for Streamlined Procedures
If the IRS has initiated an examination against you, you will not be eligible for the streamlined filing compliance procedures. This program also cannot be combined with the Offshore Voluntary Disclosure Program, so you will have to determine which program is a better fit for your tax situation by consulting with a tax attorney.
For domestic taxpayers, the following requirements must be met:
- they must not meet the non-residency requirement (explained below),
- required tax returns for the past 3 years must been filed timely,
- must have failed to pay tax on income from a foreign financial account, and
- the failure must be a result of non-willful conduct
To be eligible for the non-resident streamlined procedures, U.S. taxpayers must meet the above requirements, as well as the non-residency requirements. Citizens and U.S. residents can meet the non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.
Individuals who are not U.S. citizens or permanent residents can meet the non-residency requirements if, in any one or more of the last three years for which the U.S. tax return due date has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3).