A Better Alternative for Filing Foreign Assets Tax Returns
Individuals who have foreign-source income or assets can now have a better option for reporting such offshore financial accounts.
The “streamlined” procedures for filing foreign assets offer taxpayers the chance to move away from the strict compliance procedures under the traditional Offshore Voluntary Disclosure Programs (OVDPs). Aside from avoiding criminal offenses, qualified taxpayers may acquire less penalties, or in some cases for nonresidents, even avoid any penalty.
Individuals who can satisfy the requirement of being “nonwillful” in their failure to file the tax returns are eligible for these amended processes. Read further to find out how to avail of these improved procedures.
Taxpayers residing either inside or outside the United States are eligible to utilize these streamlined procedures to lessen the penalties required from them due to their non-compliance.
There are two available procedures which the IRS currently uses to replace the traditional OVDP. Those living in the United States may avail of the Streamlined Domestic Offshore Procedures while those US taxpayers residing outside the country may avail of the Streamlined Foreign Offshore Procedures. The following are the general conditions before one can avail either of these streamlined procedures:
- Individual must declare under perjury regulations that his failure to disclose his foreign assets, pay tax, and submit all other required information and forms are due to negligence and good-faith misunderstanding of the rules.
- Concurrent to the time of application, the individual must not be subject to any IRS examination for whatsoever type of audit.
- Pertinent documents from foreign financial institutions must be submitted for verification purposes.
If you fit the above criteria, the next consideration will be if you are a U.S. resident or non-resident according to the provisions of these revised procedures.
Requirements for Taxpayers Outside the United States
The streamlined foreign procedures allow taxpayers who have failed to report foreign assets to be free from all penalties related to the non-filing. The following rules apply in determining your residency:
U.S. citizens and green card holders are considered nonresidents if within three years within the taxable period, they did not have an abode in the United States or were outside the country for at least 330 days. Section 911 specified “abode” as a domestic place rather than a tax or business home. It pertains to the place where you keep economic, family, and personal relationships.
Individuals who are not citizens or green card holders can be considered as “residents” through the substantial-presence test under Section 7701. Under this condition, the individual stayed in the United States for at least 31 days in a year. If adding these days and one-third of the days present in the preceding year and one-sixth of the days present in the next preceding year adds up to at least 183, the individual is considered a resident.
If considered as a nonresident, the foreign streamlined procedures are available for the reporting of your foreign income and assets and penalties can be waived. Here are the steps to follow:
- Amend tax returns
- Indicate “Streamlined Foreign Offshore” in red on top of the first page of each return
- Sign and accomplish IRS Form 14653 with a detailed explanation of the reason/s for noncompliance
- Pay tax and interests
- Obtain an Individual Taxpayer Identification Number
- Submit as E-file the delinquent Report of Foreign Bank and Financial Accounts (FBARs)
- Request extension in consideration to retirement or savings plans
- Send all documents in paper form and payments to Internal Revenue Service
Requirements for Taxpayers Living inside the United States
Resident taxpayers may avail of the domestic streamlined procedures once the general eligibility requirements are fulfilled. They can do so only if they have filed U.S. tax returns in the most recent three years.
If approved, the U.S. resident may be waived of criminal and civil liabilities except for the flat 5% penalty computed from the highest year-end value of one’s assets. Even if there was a disclosure, but the individual failed to include an asset or the asset’s income in Form 8938, the 5% penalty is applied. But unlike the OVDP, no penalty is placed for unreported foreign real estates.
Requirements for domestic streamlined procedures include:
- Amended tax returns
- International information forms (even those not necessary for Form 1040)
- Indication of “Streamlined Domestic Offshore” in red on top of the first page of each return
- Completed and signed Form 14654 with detailed explanation of the reason/s for noncompliance
- Payments of tax and interests
- Delinquent Report of Foreign Bank and Financial Accounts (FBARs) submitted through E-file
- May request extension in consideration to retirement or savings plans
- All documents in paper form and payments to be sent to Internal Revenue Service
Other General Benefits
The revised streamlined procedures allow the filing of delinquent FBARs without penalty as long as IRS has not audited nor contacted the individual concerning the unfiled FBARs. An absolute six-year limit is provided to file an FBAR from its due date.
To make use of this benefit, taxpayers must use the BSA E-Filing System and choose the “Other” option in their submission and indicate that these conditions were properly met.
If there is a failure to file international information forms, the same requirements apply. The individual must attach the reasonable and factual cause/s of such failure with the certainty that there was no tax evasion case filed against him. These documents must be attached to the revised returns except for Forms 3520 and 3520-A.
Taxpayers who unintentionally failed to file their foreign assets will also find these other benefits from the streamlined procedures:
- Substantially less penalties than the ones related to the traditional OVDP
- Deserving taxpayers to avoid penalties entirely
- Lower legal fees and accounting fees for those with small accounts and less complex filings
Remember that not all unreported foreign accounts can be processed under these streamlined guidelines. There must be proof of the “unwilful” failure to disclose such assets. Acting promptly to be considered eligible is also crucial for taxpayers. Otherwise, the OVDP is another option, although not as better as the streamlined procedures.