How to File Streamlined Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures (SDOP) is an Internal Revenue Service program for U.S. taxpayers residing in the United States. It provides a pathway for individuals to report previously undisclosed foreign financial assets and the income generated by those assets. The program’s function is to bring taxpayers into compliance with U.S. tax obligations through a structured process.

This route offers a more lenient penalty framework than a standard IRS audit and is designed for taxpayers whose failure to report was non-willful. It is a voluntary process for eligible individuals to correct past filing omissions and resolve their tax obligations.

Eligibility for the Streamlined Domestic Procedures

To qualify for the SDOP, a taxpayer must meet a residency requirement. The program is for U.S. taxpayers who live in the United States and do not meet the non-residency requirements for the Streamlined Foreign Offshore Procedures, which applies to those living abroad.

Taxpayers must have filed U.S. tax returns, if required, for each of the last three years for which the deadline has passed. The program is for amending previously filed returns, not for submitting original, delinquent ones. Participants must also possess a valid Taxpayer Identification Number (TIN), such as a Social Security Number.

The past non-compliance must be from non-willful conduct, which the IRS defines as actions from negligence, mistake, or a good-faith misunderstanding of the law. Taxpayers must certify under penalty of perjury that their failure to report was not intentional. For example, an individual might be unaware of reporting obligations for an inherited foreign account or may have relied on incorrect advice from a tax professional not versed in international tax matters.

Willful conduct involves an intentional violation of a known legal duty, such as deliberately hiding foreign accounts. A taxpayer who is under an IRS civil examination or criminal investigation is not eligible to participate in the program.

Required Information and Form Preparation

A submission requires amended U.S. tax returns (Form 1040-X) for the three most recent years with a passed filing deadline. On these returns, the taxpayer must report all previously omitted income from foreign sources, including interest, dividends, and capital gains.

The taxpayer must also prepare any required international information returns that were not filed originally and attach them to the corresponding Form 1040-X. These can include:

• Form 8938, Statement of Specified Foreign Financial Assets
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations

Taxpayers must also prepare delinquent Report of Foreign Bank and Financial Accounts (FBARs), or FinCEN Form 114, for the most recent six years. For each foreign account, the FBAR must include the financial institution’s name and address, the account number, and the maximum account value during the year, converted to U.S. dollars.

Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, is a required part of the submission. On this form, the taxpayer provides their personal information and certifies their eligibility and non-willful conduct. It also requires a detailed narrative explaining the facts that led to the reporting failures.

Form 14654 is also used to calculate the Title 26 miscellaneous offshore penalty. This penalty is 5% of the highest aggregate year-end balance of the relevant foreign financial assets over the covered period. To calculate this, identify the total year-end value of all relevant assets for each of the six FBAR years and three tax years, and use the single highest aggregate value.

For instance, if the highest aggregate balance over the covered period was $350,000, the penalty would be $17,500. The most current version of Form 14654 should be obtained from the IRS website.

The Submission Process

The submission package must be assembled according to IRS instructions. Place the signed, original Form 14654 on top, followed by the amended Form 1040-X returns for each of the three years. All related international information returns should be attached to the corresponding year’s return.

To ensure correct routing, write “Streamlined Domestic Offshore” in red ink at the top of the first page of each Form 1040-X. This phrase must also be written on the front of the mailing envelope.

The complete package must be mailed to the specific IRS address listed in the official SDOP instructions, not to a standard IRS service center. A single check payable to the “U.S. Treasury” must be included. This payment must cover the total additional tax, calculated interest, and the 5% offshore penalty.

The delinquent FBARs for the past six years are not mailed with the tax submission. They must be filed electronically through FinCEN’s BSA E-Filing System. When filing, select “Other” as the reason for the late submission and enter “Streamlined Filing Compliance Procedures” in the explanation box.

Post-Submission Expectations

After submission, the IRS will process the returns similarly to other amended returns, but taxpayers will not receive a formal acknowledgment or approval letter. The processing of the amended returns and the cashing of the payment check serve as confirmation that the submission has been accepted into the program.

Submissions are not automatically audited but can be selected for examination, like any tax return. A review is more likely if the non-willful certification narrative is vague or unconvincing. The IRS may also verify the information against data from foreign banks and other third parties.

If the IRS examines a submission and determines the conduct was willful, the taxpayer is removed from the program’s protections. The returns will then be subject to a full-scope audit, which can lead to much higher civil penalties. These can include accuracy-related penalties, failure-to-file penalties, and the willful FBAR penalty, which can be up to 50% of the highest account balance per year.

In cases of a willfulness determination, the IRS may also consider a referral for criminal investigation. After completing the streamlined procedures, taxpayers must remain compliant with all U.S. tax and reporting laws in future years.