11 December 2019 - Article
For the first time, the Internal Revenue Service (IRS) streamlined filing procedures are available to US resident taxpayers who have unreported foreign income or financial accounts. The new streamlined procedures also eliminate the risk assessment process associated with the old streamlined procedures.
As an alternative to the more onerous Offshore Voluntary Disclosure Program (OVDP), taxpayers with unreported foreign income or financial accounts should consider a streamlined filing as part of their compliance effort. Click here read more about the OVDP.
Who should take advantage of this new guidance?
The new streamlined filing procedures were designed for taxpayers who can certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct. Whether certain conduct is willful or may be deemed willful by the IRS is a critical decision point and must be made with care.
Certain taxpayers currently participating in the OVDP may qualify for transitional treatment – a request to remain in the OVDP while taking advantage of the favorable penalty structure of a streamlined filing.
If the IRS has initiated a civil or criminal examination of a taxpayer’s returns, the taxpayer will not be eligible to use the streamlined procedures.
What IRS costs / penalties are involved in the new streamlined filing procedures?
Participants must file three years of income tax returns and six years of Foreign Bank Account Reports (FBARs), (FinCEN Form 114, previously Form TD F 90-22.1) and must pay any tax owed for the associated three years of filings together with interest.
US resident taxpayers must also pay a penalty equal to 5% of the highest aggregate balance/value of their foreign financial assets. For foreign residents, that penalty is reduced to 0%.
If the filing is accepted, the IRS waives accuracy-related penalties, information return penalties, and FBAR penalties.
Elimination of foreign residency requirement
Until recently, US resident taxpayers were barred from submitting a streamlined filing and forced into the OVDP (which now includes a 27.5% to 50% offshore miscellaneous penalty).
Elimination of risk analysis factors
The IRS will no longer vary the intensity with which a submission is reviewed based on its compliance risk. Under the prior streamlined program, taxpayers were susceptible to being deemed “high risk” and therefore subject to a more thorough review, or even a full examination, if certain risk factors such as owning stock in a company outside of their country of residence or having a small travel account in another country were present. In addition, taxpayers had to demonstrate tax liabilities no greater than $1,500 in each required income tax filing period.
For many taxpayers, the new streamlined program introduces a great chance to address inadvertent non-compliance through a quick and fairly painless process. Now is the time to enroll in this program to lock in these penalties – the lowest in years for many taxpayers.