U.S. taxpayers are increasingly facing international tax compliance issues as the world becomes more interconnected. Many individuals discover their obligations to file various U.S. information returns only after the deadlines have passed, resulting in costly penalties. To address this issue, the IRS has been offering the Streamlined Filing Compliance Procedures (SFCP) for more than a decade. This initiative allows eligible taxpayers to avoid penalties through the Streamlined Foreign Offshore Procedures (SFOP) or the Streamlined Domestic Offshore Procedures (SDOP).
The key difference between the SFOP and the SDOP lies in the taxpayer’s residency in the U.S. during a three-year lookback period. U.S. citizens and green-card holders can qualify for the SFOP if they meet certain residency requirements, while non-citizens must not meet the substantial presence test to be eligible. Taxpayers who do not meet the SFOP residency criteria can participate in the SDOP, which has different penalties and filing requirements.
Both the SFOP and the SDOP have general requirements that must be met by taxpayers looking to participate in the program. These include being an individual or an estate, certifying non-willful conduct, submitting the streamlined submission before an IRS investigation starts, and having a valid Taxpayer Identification Number. Additionally, SDOP participants must have filed U.S. income tax returns for each year in the three-year lookback period.
Under the SFCP, taxpayers must submit three years of original or amended income tax returns, six years of Foreign Bank Account Reports (FBARs), and a certification form depending on their residency status. Taxpayers must also pay any U.S. income tax and interest owed for the three-year lookback period. The benefits of making a submission under the SFCP include avoiding civil penalties associated with late-filed information returns and paying reduced penalties compared to potential penalties outside the program.
Individuals who qualify under the SFOP do not have to pay any civil penalties, while those who choose the SDOP must pay a 5% miscellaneous offshore penalty based on the value of undisclosed foreign assets. This penalty only applies to the highest aggregate end-of-year balance over a six-year period, making it generally less than potential non-willful FBAR penalties. Due to the reduced penalties offered by the SFCP, taxpayers are advised to consider this program as a way to regain compliance with their U.S. tax reporting obligations.
