How to Use the Streamlined Tax Filing Procedures

The Internal Revenue Service (IRS) offers the Streamlined Filing Compliance Procedures for U.S. taxpayers to resolve previous filing omissions. This program is for individuals who unintentionally failed to report foreign financial assets and pay the associated tax. It provides a way to come into compliance and address liabilities from undisclosed foreign income.

The procedures are available to taxpayers whose past failures were not a result of willful tax evasion. By participating, individuals can correct their tax records and settle their obligations under a defined process.

Eligibility for the Streamlined Procedures

A primary requirement for using the streamlined procedures is that the failure to comply with tax laws must be non-willful. Non-willful conduct is defined as behavior resulting from negligence, inadvertence, a mistake, or a good-faith misunderstanding of the law’s requirements. An example is an individual who was unaware of an obligation to report a foreign pension plan.

The program is divided into two tracks with different residency tests. The Streamlined Foreign Offshore Procedures (SFOP) are for U.S. taxpayers residing outside the country. To qualify, a U.S. citizen or legal permanent resident must not have a U.S. abode and must have been physically outside the United States for at least 330 full days in at least one of the last three years.

For individuals who do not meet the non-residency requirement, the Streamlined Domestic Offshore Procedures (SDOP) are available. This program is for U.S. residents who failed to report foreign-sourced income or disclose foreign financial assets. Taxpayers can use these procedures to correct previous filings and become compliant.

Gathering Your Documents and Information

To prepare a submission, you must assemble the three most recent years of delinquent or amended U.S. tax returns using Form 1040. On these returns, you must report your worldwide income, which includes all earnings from U.S. and foreign sources. You will also need to include necessary schedules, such as Schedule B to report foreign accounts and Schedule E for foreign trusts. If you paid foreign taxes, you may need to complete Form 1116 to avoid double taxation.

You must also prepare the last six years of delinquent Report of Foreign Bank and Financial Accounts (FBARs). These reports are filed using FinCEN Form 114 and are required if the aggregate value of your foreign financial accounts exceeded $10,000 at any point during the year. For each account, provide the financial institution’s name, the account number, and the highest account value during the year in U.S. dollars.

An element of the submission is the certification of non-willfulness. For the SFOP, this is done using Form 14653, while those applying under the SDOP must use Form 14654. Both forms require a detailed narrative explaining the reasons for your failure to report. This explanation should cover your personal and financial background, how you discovered your filing obligations, and the steps you took to become compliant.

Taxpayers using the SDOP must also calculate and pay a miscellaneous offshore penalty. This penalty is 5% of the highest aggregate year-end balance of the unreported foreign financial assets. These assets include foreign financial accounts, foreign stocks or securities held outside an account, and foreign partnership interests. The penalty base is determined by reviewing the year-end values for the six-year FBAR period and selecting the year with the highest total.

Submitting Your Streamlined Application

When mailing your submission, the package must include the tax returns, the signed certification statement, and payment for any tax due, plus accrued interest. You must write “Streamlined Foreign Offshore” or “Streamlined Domestic Offshore” in red ink at the top of each tax return and on the mailing envelope.

The mailing addresses for the two programs are different. SFOP submissions are sent to the IRS campus in Austin, Texas. SDOP submissions are also sent to the Austin campus but to a different internal department. Checking the IRS website for the most current address is recommended before mailing.

The six years of FBARs are not included in the paper submission mailed to the IRS. Instead, these must be filed electronically through the Financial Crimes Enforcement Network’s (FinCEN) BSA E-Filing System.

After submission, the IRS will process the returns. If the agency determines the submission is complete and accepts the non-willful certification, the process is concluded without further penalties. However, the IRS can select any submission for a more detailed examination or a full audit.