IRS Procedures Streamline Certain Delinquent Filings Related to Foreign Activity

The IRS introduced the Offshore Voluntary Disclosure Program (‘OVDP’) in 2009 as a way to encourage U.S. taxpayers to come forward and report previously unreported foreign activity, mainly activity associated with foreign bank accounts and assets. The OVDP offered a reduced penalty structure and a way to avoid criminal prosecution. Fast forward five years and the OVDP is still going strong and has evolved along the way. Part of this evolution, was the creation of the Streamlined Filing Compliance Procedures (‘streamline procedures’), an offshoot of the OVDP.

The streamline procedures allow individual U.S. taxpayers, including estates, that meet certain requirements, an alternative approach to the OVDP for reporting previously unreported foreign activity relating to foreign financial assets and filing the related delinquent filings. The streamline procedures are available for use by individual U.S. taxpayers residing in and outside of the U.S. However, there are slight differences in the requirements for each type of residency. We are going to focus on the procedures for U.S. taxpayers residing in the U.S.

The general requirements for U.S. taxpayers residing in the U.S. to participate in the streamline procedures are as follows:

  • Taxpayers must have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed.
  • Taxpayers must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) 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.
  • Taxpayers must certify that conduct was not willful.
  • The IRS has not initiated a civil examination of taxpayer’s returns for any taxable year.
  • Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns must pay previous penalty assessments.

Taxpayers meeting the requirements will be required to file amended returns for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file all required informational forms (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with these returns, and for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs. Compare this to the 6 years of returns the OVDP requires taxpayers to file.

The regular tax and interest percentages will apply to these returns. However, the taxpayer will not be subject to late payment penalties, accuracy-related penalties, information return penalties, or FBAR penalties. They will, however, be subject to the Title 26 miscellaneous offshore penalty. The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the aforementioned years. This is significantly less than the 27.5% penalty assessed under the same manner in the OVDP. The amounts due under the streamline procedures are due with the returns when they are filed. This is unlike the OVDP, which requires payment to be made when all the returns have been reviewed and approved by the IRS.

In addition to the smaller coverage period and the significantly reduced penalty structure, the streamline procedures differ from the OVDP in another major way. The OVDP program assures the taxpayer that they will not be subject to criminal liability for the previous omissions. The streamline procedures do not offer such an assurance. As the decision to choose which program to participate in could drastically affect the taxpayer’s future, feel free to contact Brandon Poland to discuss via Email or by calling 301-652-6700.