Posted on: January 9, 2019 | By: Dunn Counsel | Bank Secrecy Act, Paths to Compliance, Streamlined Procedures, The FBAR Filing Requirement, Uncategorized
Many Americans become compliant with U.S. laws concerning foreign financial accounts by means of the Streamlined Filing Compliance Procedures (the “Streamlined Procedures”).
To qualify for the Streamlined Procedures, an individual must have underreported tax on a U.S. income tax return filed in the last three years, and such noncompliance must have been nonwillful. The “last three years” for this purpose means the last three years for which the tax filing deadline, as extended, has passed.
FinCEN Forms 114, Report of Foreign Financial and Bank Accounts, (“FBARs”), are not part of a Streamlined Procedures filing. A taxpayer is subject to substantial penalties if the Internal Revenue Service discovers the taxpayer’s failure to file FBARs before the taxpayer corrects the delinquency. The statute of limitations on assessment of a penalty with respect to an FBAR is six years, and it begins to run on the due date of the FBAR, whether the FBAR is timely filed or not (this differs from the statute of limitations on assessment of a penalty with respect to an income tax return, which does not begin to run until the tax return is filed). Therefore, when a taxpayer presents with unfiled FBARs, we arrange to have needed tax returns or amended tax returns prepared for the taxpayer, and we immediately prepare and file the taxpayer’s delinquent FBARs for the preceding six years.
There are two species of Streamlined Procedures submissions: those for residents of the United States, and those for nonresidents of the United States.
Streamlined Procedures for Residents of the United States
The Streamlined Procedures for Residents of the United States may be used to amend U.S. previously-filed income tax returns, but not to file tax returns which hacve not previously been filed (“delinquent” tax returns).
In a Streamlined Procedures submission for residents of the United States, the submission package consists of the following:
1. Form 1040X, Amended U.S. Individual Income Tax Return, including information returns, as needed for the last three years. Information returns which a taxpayer may need to file include Form 8938, Statement of Foreign Financial Assets, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, and Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. A separate series of articles examines international information returns.
2. Checks in payment of the taxpayer’s offshore penalty, and tax due for each year, and interest on the tax. We recommend a separate check for the taxpayer’s offshore penalty, and for the taxpayer’s tax and interest due for each of the amended income tax returns. The offshore penalty is 5% of the taxpayer’s high aggregate balance of foreign financial accounts as of the end of each of the last six calendar years. We advise having the taxpayer pay interest on each tax balance to a date which is 30 days beyond the date we make the Streamlined Procedures submission, as we do not know the date on which the IRS will receive and process the Streamlined Procedures submission. The IRS will refund any overpayment to the taxpayer. No interest is payable on the offshore penalty.
3. Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures. Form 14654—
4. reports the taxpayer’s tax and interest due for each of the last three years;
5. reports the taxpayer’s foreign financial account balances for each of the last six years, and the taxpayer’s offshore penalty; and
6. includes certification by the taxpayer that his noncompliance was not willful, and a statement of the taxpayer’s facts in support of the certification.
IRS acceptance of a Streamlined Procedures submission discharges the taxpayer of (1) tax for all years before the last three years, and (2) all penalties other than the offshore penalty.
Streamlined Procedures for Nonresidents of the United States
To qualify for the Streamlined Procedures for Nonresidents of the U.S., a taxpayer must have underreported tax in the last three years, and the individual must meet the nonresidency requirement. The Streamlined Procedures for Nonresidents of the U.S. may be used to file delinquent (late) income tax returns.
An individual meets the nonresidency requirement for the Streamlined Procedures for Nonresidents of the United States, if the individual (1) was physically outside of the United States for at least 330 full days in at least one of the last three years, and (2) does not have a U.S. abode. “Abode” or “tax home” is akin to domicile. It is where an individual lives, spends most of his time, and has personal, financial, and social ties. A temporary absence, such as for business or personal travel, or to attend school, does not change an individual’s tax abode if he intends to return. In a joint Streamlined Procedures submission for nonresidents of the United States, each spouse must satisfy the nonresidency requirement.
The submission package in a Streamlined Procedures submission for nonresidents of the United States consists of the following:
1. Form 1040X, Amended U.S. Individual Income Tax Return, including information returns, as needed for the last three years.
2. Checks in payment of the taxpayer’s tax due for each year, and interest on the tax.
3. Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures. Form 14653—
4. reports the taxpayer’s tax and interest due for each of the last three years;
5. includes boxes to checking whether the taxpayer has been physically outside of the U.S. in at least 330 days in at least one of the last three years, and
6. includes certification by the taxpayer that his noncompliance was not willful, and a supporting statement of the taxpayer’s facts in support of the certification.
There is no offshore penalty in a Streamlined Procedures case for nonresidents of the U.S.
IRS acceptance of a Streamlined Procedures submission discharges the taxpayer of tax for all years before the last three years, and all penalties including accuracy-related penalties, penalties for failure to timely file a tax return, and penalties for failure to timely pay tax.
A willful taxpayer is one who know and understands the law, and intentionally fails to follow it. The classic willfulness profile is a taxpayer who transfers assets to a foreign country intending not to report income from the assets on a U.S. income tax return. In my experience, most taxpayers are not willful. The Streamlined Procedures were intended to ameliorate the harshness of the former Offshore Voluntary Disclosure Procedures, and should be liberally construed to accomplish their ameliorative purpose.
Taxpayers Who Do Not Have Underreported Tax
A taxpayers who has not underreported tax does not qualify for either species of Streamlined Procedures. A taxpayer may file delinquent U.S. international information returns by means of a Delinquent International Information Return Submission Procedures submission. In such a submission, the taxpayer files the delinquent international information returns with a statement certifying that the taxpayer’s delinquency was not willful. The statement certifying nonwillfulness must specifically say that in failing to timely file international information returns the taxpayer was not seeking to evade U.S. income tax. There is no penalty for availing of the Delinquent International Information Return Submission Procedures.
A taxpayer who filed a tax return with “No” falsely checked in answer to the question on Schedule B, Line 7a, about whether the taxpayer had a financial interest in, or signature authority over, one or more foreign financial accounts during the year required to be reported on an FBAR. Often tax return preparers check this box without discussing it with the taxpayer, and the taxpayer does not see it reviewing the tax return. In other cases, the taxpayer sees the checked box, but does not understand it.
A taxpayer is subject to a $10,000 penalty for each unfiled international information return. The statute of limitations on assessment of a penalty with respect to an income tax return does not begin to run until the tax return is filed. In other words, there is no statute of limitations on assessment of the penalty for failure to file an international information return. Nor do the Delinquent International Return Submission Procedures provide the Streamlined Procedures’ cover against penalties. In my experience, the IRS does not go back more than five years looking for delinquent tax returns. So, a taxpayer making a Delinquent International Information Returns Submission should file any delinquent international information returns for the last five years.
Related posts of interest:
International Information Returns
Form 5471 and Closely-Held Foreign Corporations
U.S. Taxpayers’ Interests in Foreign Financial Accounts Reported on Form 8938
Forms 3520 and 3520-A and the Grantor Trust Rules
U.S. Taxpayers’ Interests in Foreign Partnerships Reported on Form 8865