How to Make a Streamlined Voluntary Disclosure
A guide to resolving non-willful foreign asset reporting issues and becoming tax compliant through the IRS's streamlined disclosure program.
The Internal Revenue Service (IRS) offers the Streamlined Filing Compliance Procedures for U.S. taxpayers to correct past failures in reporting foreign financial assets and income. This program is for individuals whose lack of compliance was not intentional, providing a simplified method to come into good standing with tax authorities regarding undisclosed offshore accounts and investments.
Eligibility Requirements for the Streamlined Procedures
The primary requirement for using the streamlined procedures is that the taxpayer’s past conduct must be non-willful. The IRS defines non-willful conduct as actions resulting from negligence, inadvertence, a mistake, or a good-faith misunderstanding of the law’s requirements.
The program has two tracks based on residency: the Streamlined Foreign Offshore (SFO) and Streamlined Domestic Offshore (SDO) procedures. To qualify for the SFO path, a U.S. taxpayer must meet a non-residency requirement. In at least one of the last three years, the individual must not have had a U.S. abode and must have been physically outside the United States for at least 330 full days.
The SDO procedures are for U.S. residents who failed to report foreign income or assets and do not meet the SFO non-residency requirements. To be eligible, a taxpayer must have previously filed U.S. tax returns for the three years being amended. All applicants need a valid Taxpayer Identification Number (TIN), but an Individual Taxpayer Identification Number (ITIN) can be applied for with the submission.
A taxpayer is not eligible for these procedures if the IRS has already initiated contact regarding their tax liabilities. This includes a civil examination of tax returns for any year or a criminal investigation by IRS Criminal Investigation. Any prior contact from the IRS about delinquent returns or unreported foreign accounts can make a taxpayer ineligible.
Required Information and Form Preparation
Tax Returns and FBARs
A taxpayer must prepare tax returns for the most recent three-year period. Those in the SDO program file amended returns using Form 1040-X, while SFO participants who have not filed before will submit original returns. Additionally, Reports of Foreign Bank and Financial Accounts (FBARs) must be filed for the most recent six years using FinCEN Form 114, which is submitted electronically.
Certification of Non-Willful Conduct
A formal statement certifying non-willful conduct, signed under penalties of perjury, is required. SDO participants use Form 14654, Certification by U.S. Person Residing in the United States, while SFO participants use Form 14653, Certification by U.S. Person Residing Outside of the United States. These forms require a detailed narrative explaining the facts of the failure to report, including the source of funds and the reasons for the compliance failure.
The submission package must also include any other required international information returns. Depending on the circumstances, this could involve forms such as Form 3520 for foreign trusts and gifts or Form 5471 for foreign corporations.
Calculating Associated Taxes and Penalties
The taxpayer is responsible for calculating and paying all back taxes and interest due on the unreported foreign income for the three-year period. After determining the unpaid tax, statutory interest must be computed and added to the total amount owed.
Individuals in the SDO program are subject to a 5% miscellaneous offshore penalty. This penalty is calculated on the highest aggregate year-end balance of the taxpayer’s foreign financial assets during the six-year FBAR period. The penalty base includes assets that should have been reported on an FBAR or Form 8938, but excludes assets like foreign real estate held directly by the taxpayer.
For example, if the highest aggregate balance of a taxpayer’s foreign accounts during the six-year period was $180,000, the 5% penalty would be $9,000. This penalty must be paid along with the back taxes and interest.
Taxpayers who qualify for the SFO program are not subject to the 5% miscellaneous offshore penalty. For these individuals, the financial obligation is limited to the unpaid taxes and associated interest.
The Submission Process
After preparing all forms and calculations, assemble the submission package. The certification form (Form 14654 for SDO or Form 14653 for SFO) must be attached to the front of the tax returns. Write “Streamlined Foreign Offshore” or “Streamlined Domestic Offshore” in red ink at the top of the first page of each tax return for proper processing.
The mailing addresses for SFO and SDO submissions are different, so verify the correct address on the IRS website before mailing. The complete package, including tax returns, certification, and other required information returns, is sent via postal mail.
The FBARs are not included in the mailed package. The six years of FBARs must be filed electronically through the FinCEN BSA E-Filing System. Taxpayers should retain confirmation of their electronic FBAR submission.
Payment for the total amount due, including back taxes, interest, and the SDO penalty if applicable, should be made with the submission. Include a single check payable to the “U.S. Treasury” for the full amount. Write the taxpayer’s Social Security Number and the relevant tax years on the check’s memo line.
Post-Submission Expectations
After the submission is mailed, the IRS will review it for completeness. The agency does not send an acknowledgment of receipt, and processing can take several months before returns are finalized and payments are applied.
A submission does not guarantee immunity from further scrutiny, as the IRS may select it for a more detailed review or a full audit. This is more likely if the non-willful certification narrative is weak or inconsistent. A credible explanation of the compliance failure is important for a successful submission.
The IRS may reject a submission if it determines the failure to report was willful. If rejected, the taxpayer will not receive the program’s benefits and could face higher penalties, including FBAR penalties and a potential criminal investigation.
A successful outcome means the IRS processes the returns and payments without further contact. The taxpayer is then considered compliant for the periods covered. When a submission is accepted as filed, the taxpayer may not receive any further communication from the IRS.