Are you an expat who is late filing your U.S. taxes or you’ve never even filed? Are you looking to avoid penalties? The Streamlined Procedures are a great way to get caught up with the IRS.
The Aim of the Streamlined Procedures
The Streamlined Procedures are designed for delinquent taxpayers – those who are late or have never filed – who can certify that that their failure to previously report all income, pay all tax, and submit all required tax information returns, including FBARs, resulted from non-willful conduct. This relatively low threshold simply requires that your delinquency was not intentional.
The Streamlined Procedures have been a monumental success for the IRS, bringing many tens of thousands of late taxpayers back into annual compliance. Taxpayers benefit from the Streamlined Procedures by avoiding a number of potential penalties for late filing.
Penalties Avoided under the Streamlined Procedures
Participants in the Streamlined Procedures avoid a number of potential onerous penalties, including:
- Failure to file penalty – 5% of the taxes owed for each month outstanding (capped at 25% of the total tax liability)
- Failure to pay penalty – 0.5% of the taxes due for each month outstanding (no cap)
- Accuracy-related penalty – an additional 20% penalty may apply if your income is substantially understated
- International return (e.g., Forms 5471/8865/8858) Civil Penalties – $10,000 penalty per year per entity
- Negligent or “non-willful” FBAR penalty of $10,000 per account per year (or a “willful” penalty equal to the greater of $100,000 or 50% of the balance in each unreported account)
- Criminal Penalties – A willful violation can result in the imposition of criminal penalties, which include additional fines and jail time
The Streamlined Procedures – Eligibility and Results
The IRS first makes clear that the Streamlined Procedures are designed only for individual taxpayers (including estates of individual taxpayers). Entities, such as corporations and partnership, cannot participate in the program.
There are two types of Streamlined Procedures, one for U.S. taxpayers residing outside the United States (the “Foreign Offshore Procedures”), and the other for U.S. taxpayers residing in the United States (the “Domestic Offshore Procedures”).
Streamlined Foreign Offshore Procedures
Under the Streamlined Foreign Offshore Procedures (for taxpayers residing outside the United States), the taxpayer is required to submit:
Under the program, the participant avoids all penalties, but is required to pay the following:
Streamlined Domestic Offshore Procedures
The Streamlined Domestic Offshore Procedures (for taxpayers residing in the United States) have the same submission requirements as the Foreign Offshore Procedures, namely 3 tax returns, 6 FBARS, and the non-willful certification.
However, the Domestic Offshore Procedures differ from the Foreign Offshore Procedures in two main ways:
(1) A domestic resident taxpayer that has failed to file a U.S. income tax return in any of the three most recent tax years cannot participate in the domestic offshore procedures (while a foreign resident taxpayer that has been similarly delinquent can participate in the foreign offshore procedures).
(2) In addition to the requirement to pay unpaid taxes interest, the domestic offshore procedures bear a 5% penalty on the highest aggregate balance/value of one’s foreign financial assets (while the foreign offshore procedures have no such penalty).
Non-willful certification (Form 14653)
The Form 14653 non-willful certification is submitted with your Streamlined submission and gives you the opportunity to explain how your conduct was non-willful. The forms asks you to include the following:
- Specific reasons for your past failure, whether favorable or unfavorable to you, including your personal background, financial background, and anything else you believe is relevant to your failure.
- An explanation as to the source of funds in all of your foreign financial accounts/assets. For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.
- An explanation of your contacts with the account/asset including withdrawals, deposits, and investment/ management decisions.
- A complete story about your foreign financial account/asset.
- If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice (this requirement was previously included).
- If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts (this requirement was also previously included).
Other Important Considerations
When participating in the Streamlined Procedures, various tax issues need to be analyzed in order to file previous returns in the best manner possible and mitigate the payment of back taxes to the IRS. Some of the issues that are normally addressed in the case of U.S. expats include:
While the Streamlined Procedures are in some ways straightforward, our experience with has been that each individual has a unique story to tell and each story requires a unique interpretation of the rules and regulations to help prepare the ideal Streamlined submission to the IRS.
Frequently Asked Questions on the Streamlined Procedures
The following are some the more frequently asked questions that we receive about the Streamlined Procedures. The more you know about the program, the better you can decide whether the Streamlined Procedures are the best path towards amnesty for your particular circumstances.
Question – Is tax amnesty rarely granted by the IRS?
Answer – No. In recent years, the IRS has made it clear to taxpayers that it is more interested in disclosure than in punishing late filers or non-filers. Back in 2014, the IRS expanded the Streamlined Procedures, allowing taxpayers to participate if they can explain in a written statement how their delinquency was not intentional.
This lenient approach has allowed many delinquent taxpayers to successfully enter its amnesty programs. The latest IRS statistics show that the Streamlined Procedures continue to be a popular and effective method for delinquent taxpayers to catch up with the IRS. According to the IRS, tens of thousands of taxpayers have used the Streamlined Procedures to resolve their tax issues.
Question – Do I need to disclose my entire tax history?
Answer – No. One of the main benefits of participating in the Streamlined Procedures is that you can become completely compliant with your expat taxes without having to disclose your entire past. The IRS recognized that gathering financial information about the distant past can be cumbersome, if not impossible, so in order to encourage disclosure, it limited the tax years that require filing.
Under the Streamlined Procedures, taxpayers are required to file only the prior 3 years of tax returns, including required information returns, and 6 years of FBARs.
Question – Can I completely reduce or avoid penalties under the Streamlined Procedures?
Answer – Yes. A taxpayer who qualifies for the foreign offshore Streamlined Procedures can come clean with the IRS and suffer no penalties. In order to qualify, a taxpayer must fulfill a non-residency requirement and certify that that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.
Unpaid taxes and interest must be paid, if due, but in many cases, taxpayers can utilize the Foreign Earned Income Exclusion and/or foreign tax credits to reduce or eliminate taxes due.
Question – Are the Streamlined Procedures my only option for tax amnesty?
Answer – No. While the Streamlined Procedures is the most popular tax amnesty program, there are a number of additional options available to delinquent taxpayers.
For example, there are special programs and procedures for taxpayers who have only failed to file FBARs or have failed to include an informational form with their tax return, such as the form for ownership of a foreign corporation.
Question – Are the Streamlined Procedures a permanent feature of the IRS?
Answer – No. Contrary to popular belief, the IRS has given no certainty that it will maintain its tax amnesty programs on a permanent basis. In a recent interview, IRS Commissioner did express that the IRS is a long way from moving away from the voluntary disclosure programs, but at some point, once ignorance is no longer a valid excuse, the programs will come to an end or become significantly modified.
For this reason, if you are an expat who is late on filing your U.S. tax returns or FBARs, you should consider coming clean sooner rather than later. A number of options are currently available to you, including and in addition to the IRS tax amnesty programs. Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances.
Question – Where can I find more information about the Streamlined Procedures?
Answer – You are welcome to visit the other areas of this website that cover a number of corollary issues related to the Streamlined Procedures. You can find articles here covering topics such as:
The IRS website also has a number of helpful web pages describing the Streamlined Procedures rules and procedures.