Form 14654 and the Streamlined Offshore Programs
There are two classifications of the offshore programs under IRS. These two programs – the Streamlined Foreign Offshore Program (SFOP) and the Streamlined Domestic Offshore Program (SDOP) available to US expats when it comes to filing of tax. The two programs differ in the requirements and in the penalties attached to them.
The Key Difference Between SFOP and SDOP
The main difference between the two is the requirement of meeting the non-residency test. The non-residency test is only for the Streamlined Foreign Offshore Program. The residency test is a Yes/No assessment of whether you were physically outside the United States for at least 330 full days in the last 3 years. A more lenient program is available if you want to avail the SFOP. You must be outside the U.S. for at least 35 days in 1 of the last 3 years.
These non-residency tests are not related to citizenship or your compliance of filing 1040 or 1040NR. If you did not pass the non-residency test, then you may qualify for the Streamlined Domestic Offshore Program. When it comes to leniency, the SDOP is less lenient. But the taxpayer has to agree on paying a penalty of 5% (Title 26 miscellaneous offshore penalty). The amount will come from the highest combined year-end balance of the taxpayer’s foreign earnings. This includes only the financial assets during the years in question.
How to calculate the highest aggregate balance?
1. Find all foreign financial assets for the years in question (generally 6 years) that should have been disclosed on FBAR (FinCEN 114)/FATCA (Form 8938) but were not.
2. Collect year-end asset values of all the foreign financial assets in question.
3. Select highest value for each.
4. Add sum of accounts, multiply by 5%.
Foreign Financial Assets include:
- Financial accounts held at foreign financial institutions;
- Financial accounts held at foreign branch of a U.S. financial institution;
- Foreign stock or securities not held in a financial account;
- Foreign mutual funds; and
- Foreign hedge funds and foreign private equity funds.
Note: If asset was reported, but gross income for asset was not reported in the year, account should be counted as well in the calculation.
Example – investment account in France reported on FBAR, but interest gains not reported on tax return.
The Benefit of Both Programs
The main benefit of these two programs is amnesty from penalties. The penalties include FBAR penalties, penalties related to accuracy, and penalties for non-filing.
For filing of Domestic Offshore Program, take note of the 5% penalty as stated above. You can make use of the DSOP if the examination results determined that the failure to file was not willful. The domestic offshore option still provides amnesty from the heavy penalties attributed to “failure to file”, FBAR penalties, and accuracy-related penalties.
The Requirements in Both Programs
Both SFOP and SDOP require 3 tax returns and 6 FBARs. Aside from these, a taxpayer must also submit any informational returns. Another document to prepare is Form 14654 or the certification letter where the taxpayer tells that his non-compliance is not willful. The assistance of tax expert is valuable when preparing these documents.
The following are the regular costs for streamlined procedure services:
3 years of Federal tax returns $350 * 3 = $1,050
6 years of FBARs $75 * 6 = $450
Situation analysis to find applicable program $150
TOTAL COST $1,650
These prices only include the preparation and filing of the Tax Returns and the FBAR. Another form is necessary. You can choose to accomplish the form yourself or ask for professional assistance. The price for these forms are:
$300 for the preparation of the IRS Certification by U.S. Person Residing Outside of the U.S. which is for the Streamlined Procedure.
$500 for the preparation of the IRS Certification by U.S. Person Residing in the U.S. which is for the Streamlined Procedure.