How to Use the Streamlined Foreign Offshore Procedures

The Streamlined Foreign Offshore Procedures are an Internal Revenue Service (IRS) program for U.S. taxpayers to voluntarily report previously undisclosed foreign financial assets and income. By participating, individuals can align themselves with U.S. tax and information reporting laws. The procedures are intended to provide a resolution for these obligations with defined terms.

This path is for taxpayers whose failure to report was non-willful, meaning it resulted from negligence, inadvertence, or a good faith misunderstanding of the law. The program provides a method for filing amended or delinquent returns to resolve tax and penalty issues that might arise from unreported foreign assets.

Eligibility Requirements for the Streamlined Procedures

A primary requirement for using the streamlined procedures is that the failure to report foreign financial assets and pay associated taxes resulted from non-willful conduct. An example of what the IRS might consider non-willful is an individual who inherited a foreign account during their childhood and was unaware of the obligation to report it. Another instance could be a person who misunderstood complex international tax rules, while intentionally hiding funds to evade taxes would be considered willful.

The IRS offers two versions of the program based on residency: the Streamlined Foreign Offshore (SFO) procedures for taxpayers abroad and the Streamlined Domestic Offshore (SDO) for those in the U.S. This distinction is important because taxpayers qualifying for SFO may avoid certain penalties that apply under the SDO program.

To qualify for the SFO procedures, a U.S. citizen or lawful permanent resident must meet a non-residency test. This test requires that in at least one of the last three years for which the tax return due date has passed, the individual did not have a U.S. abode and was physically outside the U.S. for at least 330 full days. For individuals who are not U.S. citizens or permanent residents, they must demonstrate that they did not meet the substantial presence test for U.S. residency.

Taxpayers who do not meet these foreign residency requirements but are otherwise non-willful must use the SDO procedures. A taxpayer must have a valid Taxpayer Identification Number (TIN). A taxpayer also cannot be under an existing IRS civil examination or criminal investigation for any tax year, regardless of whether it relates to foreign assets.

Required Information and Documentation

Amended Tax Returns

Preparation for a streamlined submission involves amending U.S. tax returns for the most recent three years for which the due date has passed. These amended returns, filed using Form 1040X, must include all previously unreported income from foreign sources. This step ensures that the taxpayer’s income tax liability for the covered period is fully corrected.

Several other forms may need to be included with the amended returns, depending on the taxpayer’s specific situation. A common requirement is Form 8938, Statement of Specified Foreign Financial Assets, which is used to report certain foreign assets if their value exceeds specific thresholds. If the taxpayer received gifts or bequests from foreign persons or had transactions with foreign trusts, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, might be necessary. For those with an interest in foreign corporations, Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, could also be required.

Delinquent FBARs

A taxpayer must also prepare and file delinquent Reports of Foreign Bank and Financial Accounts (FBARs) for the most recent six years. The FBAR is filed using FinCEN Form 114 and is required if the aggregate value of all foreign financial accounts exceeded $10,000 at any point during the calendar year. This reporting requirement is separate from the income tax return and is filed with the Financial Crimes Enforcement Network (FinCEN).

For each of the six years, the FBAR must include detailed information about each foreign account. This includes the name of the foreign financial institution, the account number, and the maximum value of the account during the year, converted to U.S. dollars. The types of accounts that need to be reported are broad and can include checking, savings, investment, and certain foreign pension accounts.

Certification of Non-Willfulness

A required document in the submission package is the certification of non-willful conduct. Taxpayers using the SFO procedures must complete and sign Form 14653, while those using the SDO procedures use Form 14654. On these forms, the taxpayer formally attests, under penalties of perjury, that their failure to comply was not intentional.

The narrative section requires a detailed explanation of the facts and circumstances that led to the reporting failures. A simple statement of ignorance is insufficient. The narrative should be a clear and honest account, providing specific reasons for the oversight, such as a misunderstanding of filing obligations or reliance on incorrect advice.

Penalty and Tax Calculation

For taxpayers using the SDO procedures, a miscellaneous offshore penalty of 5% applies. This penalty is calculated on the highest aggregate balance of the taxpayer’s foreign financial assets during the covered period. The penalty base includes assets that should have been reported on an FBAR or Form 8938. Taxpayers using the SFO procedures are not subject to this penalty.

In addition to any applicable penalty, the taxpayer must calculate and pay the total tax due on the income reported on the amended returns. Interest must also be calculated and paid on the underpayment of tax for each year. The interest is compounded daily from the original due date of the return until the date of payment.

The Submission Process

Assembling the Submission Package

Once all documents are prepared, they must be correctly assembled for mailing. The package should include the amended tax returns for the three-year period, along with all required international information returns. The original, signed Certification of Non-Willfulness form should be attached to the first page of the corresponding amended tax return.

Mailing Instructions

The complete submission package must be mailed to a specific IRS address designated for streamlined procedures. This address is different from the standard processing centers used for regular tax filings and should be verified on the IRS website. To ensure proper processing, taxpayers must write “Streamlined Foreign Offshore” or “Streamlined Domestic Offshore” in red ink at the top of the first page of each tax return.

Filing Delinquent FBARs

The process for filing the six years of delinquent FBARs is entirely separate from the paper submission mailed to the IRS. These FBARs must be filed electronically through the Financial Crimes Enforcement Network’s (FinCEN) BSA E-Filing System. When completing the online form, the filer must select “Other” as the reason for filing late and enter “Streamlined Filing Compliance Procedures” in the explanation box.

Making Payment

Payment for the total amount of tax, interest, and the 5% miscellaneous offshore penalty (if applicable) should be submitted with the mailed package. This can be done by including a check made payable to the “United States Treasury,” and the IRS also offers electronic payment options. If paying by check, it should clearly identify the taxpayer’s name, address, and Social Security Number, along with the tax years to which the payment applies.

Post-Submission Expectations

IRS Processing

After the submission is mailed, the IRS will process the amended returns and associated documents. The streamlined procedures do not result in a formal closing agreement, and the IRS will not send an acknowledgment of receipt. Processing times can vary, often taking several months.

Review and Audit Potential

A submission under the streamlined procedures does not grant immunity from further IRS scrutiny. Returns are subject to the same audit selection processes as any other tax return. The IRS may also conduct verification checks, and if a submission is selected for a more detailed review, the IRS will focus on verifying the taxpayer’s eligibility and the facts supporting the certification of non-willful conduct.

Case Closure

If the IRS accepts the submission without further review, the taxpayer is considered compliant with respect to the disclosures made for the covered years. This is contingent on the accuracy and truthfulness of the information provided in the submission. The taxpayer can then move forward with proper, timely filing for future years.

Rejection of Submission

The IRS may reject a streamlined submission if it determines that the taxpayer’s conduct was actually willful. In such a scenario, the submission would be deemed invalid, and the case could be escalated to a standard civil audit or a criminal investigation. This outcome would expose the taxpayer to the full range of potential penalties, which are substantially higher than those offered under the program.