Americans living abroad may discover years later that they were still required to file U.S. federal tax returns or report foreign financial accounts and assets. For taxpayers whose failure to comply was non-willful, the Streamlined Foreign Offshore Procedures may provide a way to address past filing issues and return to U.S. tax compliance.
The appropriate filing strategy depends on the taxpayer’s residence history, filing history, foreign income, financial accounts, assets, businesses, trusts, and other cross-border interests. Wakrim Law Firm helps Americans abroad evaluate their circumstances and understand which U.S. tax compliance options may be available.
What Are the Streamlined Foreign Offshore Procedures?
The Streamlined Foreign Offshore Procedures are part of the IRS Streamlined Filing Compliance Procedures. They are intended for certain U.S. taxpayers residing outside the United States whose failure to report income, pay tax, or submit required international information returns resulted from non-willful conduct.
The IRS defines non-willful conduct as conduct resulting from negligence, inadvertence, mistake, or a good-faith misunderstanding of the requirements of U.S. law.
The procedures are different from the streamlined procedures applicable to qualifying taxpayers residing in the United States.
Who May Qualify for the Streamlined Foreign Offshore Procedures?
Eligibility requires more than simply living outside the United States.
For a U.S. citizen or lawful permanent resident, the IRS non-residency test generally requires that, during at least one of the three relevant years, the individual had no U.S. abode and was physically outside the United States for at least 330 full days. Different rules apply to individuals who are neither U.S. citizens nor lawful permanent residents.
A taxpayer must also be able to certify that the failures being corrected resulted from non-willful conduct.
Because eligibility can depend on the taxpayer’s particular facts, residence, travel history, and reasons for noncompliance, qualification should be evaluated before making a streamlined submission.
Non-Willful Conduct and Form 14653
One of the most important parts of a Streamlined Foreign Offshore Procedures submission is Form 14653, Certification by U.S. Person Residing Outside of the United States.
The taxpayer certifies under penalties of perjury that the failure to properly report income, pay tax, file required information returns, or submit FBARs resulted from non-willful conduct. The IRS requires the certification to include the relevant facts and circumstances.
A generic explanation may not adequately describe an individual taxpayer’s circumstances. The certification should accurately explain how the filing failures occurred and how they were discovered.
What Tax Returns and FBARs Must Be Filed?
For eligible taxpayers using the foreign streamlined procedures, the IRS generally requires tax returns for the most recent three years for which the filing deadline, including a properly requested extension, has passed.
Depending on the taxpayer’s history, this may involve:
- delinquent Forms 1040 where no return was previously filed;
- amended Forms 1040-X where a return was filed but was incomplete or inaccurate;
- Form 8938;
- Form 3520 or 3520-A;
- Form 5471;
- other international information returns that apply to the taxpayer’s circumstances.
The forms required will depend on the taxpayer’s income, accounts, assets, companies, trusts, gifts, investments, and other foreign interests.
How Many Years of FBARs Must Be Filed?
The streamlined foreign procedures generally require delinquent FBARs for the most recent six years for which the FBAR filing deadline has passed.
FBARs are filed separately through FinCEN rather than being attached to the federal income tax return.
When delinquent FBARs are submitted as part of the Streamlined Filing Compliance Procedures, the IRS instructions direct taxpayers to identify them accordingly when explaining the reason for the late filing.
Are There Penalties Under the Streamlined Foreign Offshore Procedures?
This is one of the principal differences between the foreign and domestic streamlined procedures.
According to the IRS, a taxpayer who qualifies for the Streamlined Foreign Offshore Procedures and properly follows the requirements will not be subject to certain failure-to-file, failure-to-pay, accuracy-related, information-return, or FBAR penalties associated with the covered submission.
However, the taxpayer must still pay the tax and applicable interest due.
A streamlined submission is also not automatically immune from IRS review. The IRS states that streamlined returns can still be selected for examination under its ordinary audit-selection procedures.
What If You Have Never Filed U.S. Tax Returns?
Some Americans have lived abroad for many years without realizing that U.S. citizens generally remain subject to U.S. federal filing requirements even while residing overseas.
The Streamlined Foreign Offshore Procedures can potentially be used by qualifying taxpayers who did not previously file the required federal income tax returns. The IRS instructions specifically contemplate delinquent Forms 1040 for eligible foreign streamlined submissions.
However, simply having unfiled returns does not automatically establish eligibility. The taxpayer must satisfy the other requirements, including the applicable non-residency and non-willfulness requirements.
For more general guidance, see our page for Americans abroad with unfiled tax returns.
When the Streamlined Procedures May Not Be Appropriate
The streamlined procedures should not be treated as a universal solution for every taxpayer with offshore filing problems.
For example, the procedures require a certification of non-willful conduct. A taxpayer who is concerned that previous conduct may have been willful should carefully evaluate the available compliance options before making representations to the IRS.
The IRS also states that taxpayers currently under a civil examination for any taxable year generally cannot use the streamlined procedures.
The appropriate path depends on the facts of the individual case.
How Wakrim Law Firm Can Help Americans Abroad
Cross-border U.S. tax compliance can involve more than preparing late income tax returns.
Wakrim Law Firm can help Americans living abroad review issues involving:
- prior U.S. federal tax returns;
- foreign income;
- FBAR reporting;
- Form 8938;
- foreign corporations and business interests;
- foreign trusts and gifts;
- international information returns;
- IRS correspondence and compliance options;
- the Streamlined Foreign Offshore Procedures.
The goal is to evaluate the taxpayer’s complete filing history before determining an appropriate path toward compliance.
Frequently Asked Questions
Can I use the Streamlined Foreign Offshore Procedures if I never filed U.S. tax returns?
Potentially. The IRS foreign streamlined procedures allow qualifying taxpayers to submit delinquent federal income tax returns. Eligibility still depends on satisfying the applicable requirements, including non-residency and non-willfulness.
Do I have to file six years of tax returns?
Generally, no. The foreign streamlined procedures ordinarily cover the most recent three years of federal income tax returns and six years of delinquent FBARs
Is there a penalty for using the Streamlined Foreign Offshore Procedures?
Eligible taxpayers who properly complete the foreign streamlined procedures generally receive relief from the categories of penalties specified by the IRS for the covered submission, although tax and applicable interest remain payable.
What does non-willful mean?
The IRS describes non-willful conduct as negligence, inadvertence, mistake, or conduct resulting from a good-faith misunderstanding of legal requirements. Whether a taxpayer’s particular conduct meets that standard depends on the facts and circumstances.
Do I need to file Form 14653?
Yes, Form 14653 is the certification used by U.S. persons residing outside the United States for a foreign streamlined submission.
Speak With a U.S. Tax Attorney About Streamlined Foreign Offshore Compliance
If you live outside the United States and are concerned about unfiled tax returns, FBARs, foreign income, or international reporting requirements, Wakrim Law Firm can help you evaluate your filing history and available compliance options.