- 1 IRS Streamlined Domestic Offshore Procedures (SDOP)
- 2 Eligibility for Streamlined Domestic Offshore Procedures
- 3 How to Submit to Streamlined Domestic Offshore Procedures
- 4 3-Years of Amended Tax Returns
- 5 6-Years of FBAR Filing
- 6 Pay a Title 26 Miscellaneous Offshore Penalty
- 7 We Specialize in Streamlined & Offshore Voluntary Disclosure
IRS Streamlined Domestic Offshore Procedures (SDOP)
Streamlined Domestic Offshore Procedures (SDOP): The Streamlined Domestic Offshore Procedures are an IRS amnesty program for United States resident taxpayers. The program authorizes taxpayers file for prior year FBAR, FATCA and other required forms. The domestic version of the program is for U.S. residents, but still refers to foreign accounts, assets and income.
We have prepared an update for these IRS procedures for 2020.
In recent years, the Internal Revenue Service has taken an aggressive approach to unreported offshore accounts, assets, investments, and income. Recently, the IRS has also stated that they intend on ending the program sooner as opposed to later. The IRS Streamlined Procedures are part of the larger voluntary disclosure initiative.
Eligibility for Streamlined Domestic Offshore Procedures
In order to be eligible for the streamlined domestic offshore procedures, a person must meet the specific requirements of the program. In addition to the general requirements of the streamlined procedure, there are specific requirements for the streamlined domestic program.
U.S. taxpayers residing in the United States (or those who do not meet the foreign resident requirement) are eligible to submit to the streamlined domestic offshore procedures. Common questions we receive about the Streamlined Domestic Procedures, include:
- How to Qualify
- How to Apply
- Treatment in the Program
Streamlined Domestic Offshore Procedures Non-Residency Requirement
The first requirement is that the taxpayer is a U.S. Resident. Or, if using the IRS phraseology, the taxpayer did not meet the non-residency requirement.
Previously Filed U.S. Tax Returns, if Required
The IRS will not accept the filing of original tax returns in the streamlined domestic program. Therefore, in order to qualify for the domestic streamline procedures, the applicant must have filed original tax returns.
This presumes the Taxpayer filed the original tax returns, timely.
*We have spoken with IRS agents on multiple occasions regarding this issue. While the IRS agents would not provide confirmation in writing, they did acknowledge there is a spectrum involving, timeliness. If the returns were filed a few weeks late, a person may still qualify. Anything longer than that, and chances are the application will be rejected.
*If a tax return was not required, that will not render a person ineligible for domestic streamlined.
Failed to Pay U.S. Tax on Foreign Income and File FBAR
In order to qualify for the streamlined procedures, a person must have unreported “foreign” income. If a person only has unreported domestic income, they do not qualify for IRS streamlined.
Likewise, if a Taxpayer only has unreported accounts or assets, and no unreported income, he or she may qualify for a different program — Delinquent International Information Return Submission Procedures – and avoid all penalties.
Non-Willful Conduct for Streamlined Domestic Offshore Procedures
Non-willful conduct is a general requirement for all streamlined programs. The IRS reiterates that unless a person is not willful they would not qualify for the program.
How to Submit to Streamlined Domestic Offshore Procedures
The instructions concerning the streamline domestic offshore procedures as provided by the IRS are very dense.
We want to break it down for you into bite-sized pieces:
3-Years of Amended Tax Returns
In order to qualify for the program, a person must submit three (3) properly amended tax returns. Even with this relative my straightforward requirement, there is a bit of a nuance for current year filers.
For example, let’s say someone already filed their 2019 tax return, in April 2020.
-In late 2020 (2019 tax returns are filed in 2020), the person realizes they did not comply with foreign requirements.
-The 2020 tax return (which is not available until 2021) cannot be filed yet, and so the taxpayer amends tax years 2017, 2018 and 2019.
-If instead, let’s say the taxpayer does not find out that they are out of compliance until early 2021.
-The 2020 tax return is now coming due soon. Therefore, the person may be able to submit and original 2020 tax return, along with an amended 2018 in 2019 return.
*There are various complexities involving willfulness and timing, and you may consider speaking to a streamlined disclosure lawyer specialist before making any representation when determining your strategy.
International Information Returns
In addition to filing tax returns. a person may also have to file international information returns for the three-year compliance-period.
Some of the more common International information returns include:
6-Years of FBAR Filing
The FBAR is technically referred to as FinCEN Form 114. The form has been around for nearly 50 years – it is not new.
FATCA is a separate requirement that only came into existence for individual filers back in 2011. The forms are similar, but different – and not mutually exclusive.
The IRS requires that you electronically submit six (6) years of FBAR in accordance with the requirements of the streamlined domestic offshore procedures.
Pay a Title 26 Miscellaneous Offshore Penalty
With the domestic streamlined program, the IRS requires that you pay a 5% penalty. The 5% penalty is the full penalty required for the program.
There are no additional offshore penalties.
In other words, the 5% penalty is filed in lieu of the IRS issuing penalties for all the other untimely forms, such as FBAR, FATCA Form 8938, Form 5471, Form 8865, etc.
How to Calculate the 5% Penalty
The calculation for the penalty can be deceivingly complicated. This is primarily due to the fact that some assets are not penalized — such as individually owned real estate.
In addition, other penalties are exempt, such as the value of Canadian RRSP and RRIF.
We have prepared a detailed step-by-step summary about how to calculate the SDOP 5% Title 26 Miscellaneous Offshore Penalty.
Which Assets are Included in the Penalty Base?
Some common examples of assets which maybe penalized are foreign:
- bank accounts
- investment accounts
- mutual funds
- life insurance
- business and entity ownership
If I am Audited Later, is there an Increased Penalty?
If you are audited by the IRS at a future date, then the IRS is not going to automatically issue additional penalties for the portion of the assets, accounts, or investments associated with your streamlined domestic offshore procedure submission — it does not work that way. You will not be assessed additional FBAR penalties on accounts that were included in your SDOP submission, presuming you were non-willful.
But, if the IRS determines that your underlying streamlined application was fraudulent and that you were actually willful, your are fair game for additional fines and penalties.
This may even include a criminal prosecution, as seen in a recent submission by a former CPA, who was later indicted.
*It should be noted that if the agent determines there were inaccuracies in the underlying submission, the agent has the authority to resolve those inaccuracies, such as if the amount of tax was inaccurate.
We Specialize in Streamlined & Offshore Voluntary Disclosure
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure and Streamlined Domestic Offshore Procedures.
Contact our firm today for assistance with getting compliant.