The Internal Revenue Service recognizes that some US citizens and resident aliens living overseas have failed to report foreign accounts and income as required under US tax laws. To encourage voluntary disclosure of non-compliant behaviour, the IRS initiated the Streamlined Foreign Offshore Procedure (SFOP) in 2012. The SFOP allows eligible taxpayers living outside the US to report certain foreign assets and come into compliance with US tax obligations in a simplified and expedited manner.
What is the SFOP?
The Streamlined Foreign Offshore Procedures is a program offered by the IRS for taxpayers who have failed to report foreign financial assets and pay taxes on foreign income in the past. This program is designed to help taxpayers, who have non-wilfully evaded taxes, get back into compliance with U.S. tax laws and avoid potential penalties and legal actions.
What is the purpose of the SFOP?
The purpose of the SFOP is to help taxpayers who have non-wilfully failed to comply with their U.S. tax obligations to come into compliance without facing excessive penalties or other consequences. By participating in the program, taxpayers can avoid potential criminal charges and reduce their financial exposure. The SFOP is also designed to help the IRS identify taxpayers who have not previously reported their foreign income and assets. By identifying these taxpayers, the IRS can ensure that everyone is complying with U.S. tax laws and that all taxpayers are contributing to the U.S. tax system in a fair and equitable manner.
Who is eligible for the SFOP?
To be eligible for the SFOP, taxpayers must meet several criteria, including:
- They must be non-wilful in their failure to comply with their U.S. tax obligations.
- They must have previously filed a U.S. tax return for at least one of the past three years.
- They must have foreign income and assets that were not previously reported to the IRS.
- They must not be currently under audit or examination by the IRS.
- They must not have previously participated in the OVDP or other similar programs.
Wilful vs Non-Wilful Evasion of Taxes
Non-wilfully evading taxes means that a taxpayer did not intentionally and knowingly fail to report or pay taxes that they knew they owed. Wilful evasion of taxes generally involves intentional acts of fraud, deception, or concealment in an attempt to avoid paying taxes.
Examples of actions that may be considered wilful tax evasion include:
- Filing a false or fraudulent tax return
- Intentionally failing to report all income earned.
- Concealing assets or income from the IRS
- Destroying or altering financial records to avoid detection.
- Making false statements to the IRS or tax preparer
On the other hand, non-wilfully evading taxes may involve unintentional errors or omissions on a tax return, such as misreporting income or claiming improper deductions due to a misunderstanding of tax laws or regulations.
Notably, even unintentional errors on a tax return can still result in penalties and interest charges, but the penalties will generally be less severe than those imposed for wilful tax evasion. Taxpayers who are unsure about whether their actions may be considered wilful or not should consult with a tax professional or seek guidance from the IRS.
Specifically, the Streamlined program is available to two groups of taxpayers:
- Eligible U.S. taxpayers residing outside the United States who have not filed a U.S. tax return and who are not U.S. citizens or green card holders.
- Eligible U.S. taxpayers who are U.S. citizens or green card holders who have been residing in the United States but meet the non-residency requirement, which means they have not met the substantial presence test for the past three years.
It is worth noting that taxpayers who have wilfully failed to comply with U.S. tax laws may face more severe penalties and legal consequences.
How does the SFOP work?
The SFOP is a multi-step process that requires taxpayers to complete several forms and provide documentation to the IRS. The process typically involves the following steps:
To participate in the Streamlined Foreign Offshore Procedures program offered by the Internal Revenue Service (IRS), eligible taxpayers must meet specific filing requirements. These requirements include:
- Filing delinquent or amended tax returns: Eligible taxpayers must file delinquent or amended tax returns for the past three years, including all required international information returns, such as Forms 3520, 5471, 8621, 8865, and FinCEN Form 114 (FBAR).
- Submitting FBARs: Taxpayers must also submit Foreign Bank Account Reports (FBARs) for the past six years. FBARs are used to report foreign bank and financial accounts to the IRS.
- Certifying non-wilfulness: Taxpayers must provide a certification statement, under penalty of perjury, that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-wilful conduct.
- Paying any taxes due along with interest and other applicable penalties: Taxpayers must pay any taxes due, including interest and any applicable penalties. Penalties for non-wilful failures to file international information returns can be waived or abated under certain circumstances.
Penalties for Misuse of SFOP
The penalties for wrongly using the Streamlined Foreign Offshore Procedure can be significant. If a taxpayer who is not eligible for the Streamlined Foreign Offshore Procedure uses the program, they may face additional penalties and even criminal prosecution. Specifically, if the IRS determines that a taxpayer intentionally submitted false or fraudulent information, the taxpayer may be subject to civil penalties of up to $10,000 per violation, plus additional penalties of up to 40% of the amount of tax owed. In addition, the taxpayer may also face criminal charges, which could result in fines, imprisonment, or both. The penalties for criminal charges can be even more severe, including potential imprisonment for up to five years and fines of up to $250,000 for individuals and up to $500,000 for corporations.
Conclusion
The Streamlined Foreign Offshore Procedures is a program offered by the IRS that allows eligible taxpayers to come into compliance with their U.S. tax obligations for foreign income and assets. By participating in the program, taxpayers can avoid costly penalties and other consequences while ensuring that they are contributing to the U.S. tax system in a fair and equitable manner. If you are a taxpayer who has non-wilfully failed to comply with your U.S. tax obligations for foreign income and assets, it’s important to understand the SFOP and how it can benefit you. Consulting with a tax professional or attorney can help ensure that you are eligible for the program and that you are meeting all the necessary requirements.
