Streamlined Compliance Procedures

Since 2009 I have helped hundreds of individuals and companies become compliant with United States laws concerning foreign income, accounts, and entities, and defended them against penalties for alleged noncompliance. I call this area of practice “foreign accounts compliance.” I represent clients the world over in this practice.

Citizens and residents of the United States (“Americans”) must report their worldwide income on a U.S. income tax return. “Residents” of the U.S. for this purpose includes lawful permanent residents of the U.S. (“green card” holders), as well as individuals who satisfy the “substantial presence” test.

Americans whose interests in foreign financial accounts aggregate more than a specified threshold must report their foreign financial a must report their foreign financial accounts on a Form 8938, Statement of Specified Foreign Financial Assets, filed with their U.S. income tax return. The failure to file a timely, conforming Form 8938 is subject to a penalty of $10,000, or more if the noncompliance continues after the IRS notifies the taxpayer of it. Americans with an interest in a foreign corporation must report the interest on a Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, filed with their U.S. income tax return. The failure to file a timely, conforming Form 5471 is subject to a penalty of $10,000, or more if the noncompliance continues after the IRS notifies the taxpayer of it. A like penalty lies for failure to file a timely, conforming Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

Americans must report their interests in foreign trusts on Form 3320, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Forms 3520 and 3520-A and not filed with an income tax return but are filed separately under oath. The penalty for failure to file a timely, conforming Form 3520 or Form 3520-A tends to be much higher than the penalty for failure to file a timely, conforming Form 8938, Form 5471, or Form 8865—a percentage of the aggregate value of the assets held in the foreign trust. But keep in mind that most foreign financial asset custodial arrangements are not trusts, even though denominated a trust.

The statute of limitations on assessment with respect to an income tax return or international information return is three years from the date the income tax return or information was filed; the assessment statute of limitations does not begin to run on an income tax return or information return that has not been filed. The assessment statute of limitations is six years with respect to an income tax return which understates gross income (1) by more than 25 percent, or (2) by more than $5,000 attributable to income from a foreign financial asset reportable on Form 8938. There is no assessment statute of limitations with respect to a false or fraudulent tax return filed with intent to evade or defeat tax.

Under the Streamlined Compliance Procedures for Persons Residing in the United States, a taxpayer can file amended U.S. income tax returns as needed for the last three years, with a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures. On Form 14654, the taxpayer explains that his noncompliance was non-willful. Also on Form 14654, the taxpayer computes his miscellaneous Title 26 offshore penalty. To compute his miscellaneous Title 26 offshore penalty, the taxpayer computes the aggregate balance of his foreign financial accounts as of the end of each of the preceding six years. The highest year-end aggregate balance, multiplied by 5 percent, is the taxpayer’s miscellaneous Title 26 offshore penalty.

Foreign financial accounts held by a foreign corporation that is not a “disregarded entity” are not reportable on a shareholder’s Form 8938.

The taxpayer submits the Form 14654 and the amended income tax returns with payment of the miscellaneous Title 26 offshore penalty and the tax and interest believed due. If the Form 14654 is well-prepared, and the statement of non-willfulness is persuasive, the IRS will accept the submission, without assessment of any other penalties, and the taxpayer’s income tax noncompliance for years before the last three is forgiven.

I review the amended income tax returns. I prepare the Form 14654. I instruct the client on preparation of checks. I prepare a cover letter and submit it with the package to the IRS.

Under the Streamlined Compliance Procedures for Persons Residing in the United States, the taxpayer filed delinquent or amended U.S. income tax returns, as needed, with a Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, and pays the income tax and interest believed due. The taxpayer explains on the Form 14653 how his noncompliance was non-willful. If the submission is in order, the IRS accepts it, and the taxpayer is compliant with the law, without incurring a miscellaneous Title 26 offshore penalty or any other penalty.

A taxpayer “resides outside of the United States” for this purpose if he was physically outside of the United States for at least 330 full days in at least one of the last three years.

I review the client’s income tax returns. I prepare the Form 14654. I instruct the client on preparation of checks. I prepare a cover letter and submit it with the package to the IRS.

The Streamlined Procedures are an excellent means for a U.S. person to become compliant with the Internal revenue Code concerning foreign income, accounts, and entities. I have made hundreds of Streamlined Procedures submissions. The IRS has not rejected or even questioned any of them.