Changes made to IRS streamlined offshore compliance procedures

The IRS updated its streamlined offshore compliance program to provide procedures taxpayers residing both inside and outside the United States should use to participate in the program. The streamlined offshore compliance program is for taxpayers whose failure to comply with requirements to report offshore assets is nonwillful. It is designed to allow U.S. taxpayers with offshore assets to become tax compliant with reduced or no penalties.

Eligibility

To be eligible for the streamlined offshore procedures for U.S. residents, taxpayers (1) must fail to meet the nonresidency requirement described below (if the taxpayer filed a joint return, one or both of the spouses must fail to meet the requirement); (2) have previously filed a U.S. tax return (if required to file) for each of the most recent three years; (3) have failed to report gross income from a foreign financial asset and pay tax, and may have also failed to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (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) for the foreign financial asset; and (4) these failures resulted from nonwillful conduct.

To be eligible for the streamlined offshore program for taxpayers residing outside the United States, taxpayers must (1) meet one of the nonresidency requirements described below (for joint return filers, both spouses must meet this), and (2) have failed to report the income from a foreign financial asset and pay tax, and may also have failed to file an FBAR, and those failures resulted from nonwillful conduct.

Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, are nonresidents if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.
 
Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the nonresidency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly extended due date) has passed, the individuals did not meet the Sec. 7701(b)(3) substantial-presence test.

Scope and effect of new procedures

Under the streamlined offshore procedures for both U.S. residents and nonresidents, taxpayers must (1) file delinquent or amended tax returns, together with all required information returns (see above) for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, and (2) for each of the most recent six years for which the FBAR due date has passed, file any delinquent FBARs. Under the streamlined offshore procedure for U.S. residents, the taxpayer must also pay a miscellaneous offshore penalty of 5% of the highest aggregate balance or value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. The IRS clarified that the 5% penalty will not apply to assets in which the taxpayer has no financial interest but only signature authority.

Both U.S. resident and nonresident taxpayers are required to remit the full amount of the tax, interest, and, where applicable, miscellaneous offshore penalty due when they file the returns.

Eligible taxpayers who comply with all of the requirements to participate in the program (which include a certification under penalties of perjury) will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. If returns that were properly filed under these procedures are subsequently selected for audit, the taxpayer will not be subject to penalties on amounts reported on those returns, or to information return penalties, unless the examination uncovers fraud in the original tax noncompliance and/or determines that the FBAR noncompliance was willful. Any previously assessed penalties will not be abated under these procedures. Also, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert additions to tax and penalties on that additional deficiency.

Taxpayers can also qualify for retroactive relief from failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted under a treaty. The proper deferral elections for those plans must be made with the submission.

The IRS also posted FAQs for U.S. resident taxpayers, one FAQ for nonresidents, and compliance procedures and an FAQ for submitting delinquent information returns for taxpayers who do not need to use the streamlined procedures or the offshore voluntary disclosure program.

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.