In 2009, the US government began a series of streamlined offshore voluntary disclosure programs (OVDP). These programs were aimed at taxpayers with offshore assets in order to make all, or most, U.S. taxpayers living outside the United States tax-compliant. It was also put in place to prevent tax evasion by taxpayers using offshore accounts.
Although the first program offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties, it imposed a single offshore penalty of 20% of the offshore assets. The OVDP was aimed at high-income taxpayers, however, many low and middle income U.S. citizens living outside the U.S. that had not been compliant with their filing requirements became aware of their obligations. Due to the success of the first program, the IRS initiated a second program in 2011 as well as passed the Foreign Account Tax Compliance Act (FATCA) legislation.
The second program increased the penalty to 25%, however, it offered a lower penalty for taxpayers in lower income brackets. In June 2012, the IRS initiated a third program that once again increased the highest penalty to 27.5, however, made it a permanent program. In addition, the IRS added an option to use a “streamlined procedure” that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes.
In June 2014, the IRS made major changes to the programs expanding the streamlined procedure for taxpayers whose failure to file was not a result of willful conduct. This prompted additional penalties for taxpayers whose failure to report income, pay tax, and submit required information returns was due to willful conduct.
At AG Tax LLP, we regularly receive inquiries from prospective clients wanting to learn more about Streamlined Compliance, and their eligibility for filing. Given the curiosity amongst various Canadian-U.S. taxpayers regarding the OVDP and Streamlined filing procedures, we have summarized the IRS’ Streamlined Procedure in this article.
*Check back soon for another article on Offshore Voluntary Disclosure Program (OVDP).
Note: This article is for reference purpose only. If you have recently been informed about your U.S. tax filing responsibility, or have undisclosed foreign assets, consider contacting a professional cross border tax accountant for assistance.
Streamlined Filing Compliance Procedure Overview
The IRS’ Streamlined compliance Procedures are made of two categories: taxpayers who reside in the U.S., and taxpayers that reside abroad. The program is offered to U.S. taxpayers who are yet to comply with their US tax filing requirements, report income and/or foreign assets that they previously failed to report due to qualifying reasons. For example: the taxpayer was unaware of their ownership in a foreign corporation or unaware of beneficiary status in a foreign trust resulting in unreported, foreign income.
The streamlined compliance procedure is designed to assist taxpayers with situations such as filing amended or delinquent tax returns, resolving tax & penalty procedures, and resolving penalty obligations.
Eligibility criteria for Streamlined Compliance Procedures
Only U.S. individuals or estates of U.S. individuals are eligible to use the streamlined compliance procedures. To be eligible for either of the two procedures, the individual is required to certify that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to non-willful conduct. In addition, if the IRS has initiated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures.
Types & Guidelines of Streamlined Compliance
Streamlined Foreign Offshore Filing Compliance Procedure
The Streamlined Foreign Offshore Filing Compliance Procedure is available for U.S. taxpayers residing outside of the United States. To qualify, non-resident U.S. citizens must comply with the following over the last 3 tax years:
- The taxpayer must not have or have had a home in US;
- Must not have filed a U.S. tax return;
- And must have resided outside the U.S. for at least 330 days.
The taxpayer needs to certify that he/she failed to report income from a foreign financial asset or from foreign bank & financial accounts (FBAR) and pay tax as required by U.S. law. The certification states that these failures resulted from non-willful conduct.
A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures, and who complies with the filing requirements, will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.
The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns. In addition to the above, it is extremely important to complete and sign Form: 14653, Certification by US Person Residing Outside of the US.
Streamlined Domestic Offshore Filing Compliance Procedure
The Streamlined Domestic Offshore Filing Compliance Procedure is for taxpayers residing in the United States, who fail to qualify for the Streamlined Foreign Offshore Filing Compliance Procedure discussed above.
To be eligible, the taxpayer must certify that he/she has previously filed a US tax return for each of the most recent three years. During those years, the taxpayer may have failed to report gross income from a foreign financial asset, failed to file foreign bank account reporting (FBAR) or failed to report one or more international information returns. They must pay tax as required. This certification also state that such failures resulted from non-willful conduct.
The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns. The taxpayer also needs to complete and sign Form 14654, Certification by US Person Residing in the US.
The taxpayer will generally not be subject to failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties or FBAR penalties, however, they will be subject to a miscellaneous offshore penalty equal to 5% of the highest aggregate year-end balance/value of the taxpayer’s foreign financial assets.
The Streamlined Offshore Filing Compliance Procedures both require the taxpayer to submit:
- FBAR FinCEN Form 114 for the last recent 6 years;
- Delinquent or amended US tax returns; along with
- Necessary information returns for the last 3 years.
- Corresponding Certification
The two programs, Streamlined Domestic Offshore Filing Compliance Procedure & Streamlined Foreign Offshore Filing Compliance Procedure have very similar disclosure requirements. Specifically, taxpayers are required to file any delinquent FBARs for each of the most recent 6 years and amended tax returns, along with the required information returns for each of the most recent three years for which the US tax return due date or extended due date has passed.
Other than the difference in penalty percentage, one should be aware that the rules under the Streamlined Domestic Offshore Filing Compliance Procedure are more stringent than Streamlined Foreign Offshore Filing Compliance Procedure. Nonetheless, it is highly advisable that taxpayers considering to disclose their foreign assets or unreported income and become tax compliant should reach out to a tax professional for assistance with filing under either of the streamlined filing compliance procedures.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.