Streamlined Voluntary Disclosure Explained

The IRS offers a Streamlined Voluntary Disclosure program for taxpayers who can certify that their failure to file all information, report all income and pay tax was due to ‘non-wilful conduct’. Non-wilful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

This program is applied differently for US Persons who qualify under the offshore version of the program and those who must use the US resident program.

Foreign Offshore Procedure

Eligible taxpayers who comply with the procedures will not receive failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties or FBAR penalties unless, following an audit, the original noncompliance is deemed wilful.

Are you eligible?

To be eligible for this offshore procedure the taxpayer must meet a non-residency requirement. This requirement is met if, in any one or more of the most recent three years for which the US tax return due date or extended due date (if properly applied for) has passed (the ‘covered tax period’), the individual did not have a US abode and was physically outside the United States for at least 330 full days.

For each of the most recent three years for which the US tax return due date (or properly applied for extended due date) has passed, the new procedure requires that the taxpayer to:

• File delinquent or amended tax returns, together with all required information returns;
• File any delinquent FBARs (for each of the most recent six years for which the FBAR due date has passed); and
• Pay the full amount of tax and interest due with the delinquent or amended returns.

The Domestic Offshore Procedure

Taxpayers living inside the US will qualify under the new domestic procedure if they have previously filed a US tax return for each of the most recent three years for which the US tax return due date (or properly applied for extended due date) has passed, and – through non-wilful conduct the taxpayer:

• Failed to report gross income from a foreign financial asset and pay tax, and
• Failed to file an FBAR relating to the foreign financial asset.

The Domestic Offshore Procedure requires the taxpayer to:

• File amended tax returns, together with all required information returns for the covered tax period;
• File any delinquent FBARs for the covered FBAR period;
• Pay a “miscellaneous offshore penalty” (5% of relevant foreign assets); and
• Pay the full amount of the tax, interest, and the miscellaneous penalty along with the amended tax returns.

Controlled Foreign Corporations

As a result of the changes the law enacted in 2017, some taxpayers may need to include more than 3 prior years in their Streamlined filing.? In general, a Controlled Foreign Corporation (CFC) is a non-US corporation of which more than 50% of the vote or value of the outstanding shares are owned by US persons.? Taxpayers who own one or more CFCs using the Streamlined Filing Procedures must come into compliance for the transition tax in their submission and include the tax year in which the transition tax inclusion might occur (generally 2017 and/or 2018) even if that tax year would not be within the standard three-year lookback period. In other words, the lookback period for any submission to the Streamlined filing compliance procedures involving CFCs with a transaction tax inclusion in 2017 must include tax year 2017 and include all subsequent tax years.

Delinquent FBARS

Taxpayers who do not need to use Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

• Have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1);
• Are not under a civil examination or a criminal investigation by the IRS;
• Have not already been contacted by the IRS about the delinquent FBARs; Should file the delinquent FBARs according to the following:?
• Review the instructions;
• Include a statement explaining why you are filing the FBARs late;
• File all FBARs electronically at FinCEN; and
• On the cover page of the electronic form, select a reason for filing late.
• If you are unable to file electronically, contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

Coming Forward Has Its Benefits

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your US tax returns and paid all tax on the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

Delinquent Informational Returns

Taxpayers who do not need to file delinquent or amended tax returns to report and pay additional tax, but who:

• Have not filed one or more required international information returns;
• Have reasonable cause for not timely filing the information returns;
• Are not under a civil examination or a criminal investigation by the IRS;
• Have not already been contacted by the IRS about the delinquent information returns;
• Should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.

Reasonable cause

As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

• All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return.
• All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
• A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.

Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

Taxpayers who do not qualify under the Steamline Filing Procedures discussed above, may qualify for alternative disclosure programs offered by the IRS. These procedures are complex and require substantial information be provided to the IRS.

If you need advice to get back into the US tax system, please contact us .

PLEASE NOTE: The section on Controlled Foreign Corporations was added on the 25th of April, 2024.