Streamlined Voluntary Disclosure IRS

The Voluntary Disclosure Practice

In March 2009, the IRS instituted the Offshore Voluntary Disclosure Program (OVDP) specifically for taxpayers with secret foreign bank accounts and/or other types of offshore financial assets. The program allowed non-compliant taxpayers to avoid criminal action and limit civil penalties on account of wilful failure to report and pay taxes on financial transactions or assets.?The main condition for such protection was that the taxpayer must come forth and declare these instances of non-compliance before the IRS learns of them. The IRS closed the OVDP on September 28, 2018, and announced a new disclosure program in November 2018 under which both offshore and domestic disclosures were included. While the program essentially remained the same, the processes involved and civil penalty structures were different. If you had wilfully defaulted in filing tax returns or pay taxes, you can still use the following programs to ensure compliance:

• IRS-Criminal Investigation Voluntary Disclosure Program
• Delinquent FBAR submission procedures
• Delinquent international information return submission procedures

The new?IRS Voluntary Disclosure Program, updated in 2019, was essentially meant to avoid criminal tax investigations. The main consideration was that income could not have been generated by illegal means. This was to ensure that the Voluntary Disclosure Program is not used to launder dirty money.

Those taxpayers who had no likelihood of criminal liability/civil penalties but had failed to file returns or not reported income inadvertently have other options to comply with the tax laws such as the Streamlined Filing Compliance Procedures, Report of Foreign Bank, and Financial Accounts(FBAR)?procedures, etc.

Procedure for filing Streamlined Voluntary Compliance

There are only two countries in the world that collect taxes from their citizens on their global income irrespective of their place of residence.?These are the United States of America and Eritrea. Many expatriates do not know this and do not file tax returns leading to queries from the tax authorities.

The IRS Streamlined Procedures (first offered on September 1, 2012) are meant for taxpayers who delayed or never filed tax returns and can convince the authorities that the lapse was unintentional.?The IRS requires that the taxpayer certify that their failure to previously file tax information returns including FBARs, disclose all incomes, and pay correct taxes were the result of non-wilful conduct.

The current modified streamlined procedures are meant only for individual US residents or lawful permanent residents (green card holders), including estates of individual taxpayers both residing outside the US and those within the US. Partnerships and corporates are not included.?Let us look at the features of the streamlined procedures for both U.S. residents “Streamlined Domestic Offshore Procedures”?(SDOP) and non-US residents “Streamlined Foreign Offshore Procedures” (SFOP).

(i) For US taxpayers residing in the US

U.S. taxpayers have to first meet the substantial presence test to be eligible for filing under the SDOP.?For passing the test, you should have been physically present in the USA for at least 31 days in the immediately preceding year and for more than 183 days during the preceding three years.?This is calculated thus: suppose you have been resident in the US for 150 days each for the three years 2020, 2019, and 2018 – full 150 days for 2020 will be counted (being more than 31 days), one-third of the 150 days of 2019 i.e., 50 days and one-sixth of 2018 i.e., 25 days would be counted totaling to 225 days.

Second, you must have filed tax returns for each of the previous three years within the due date.

Third, you have not reported and paid tax on gross income from foreign financial assets nor did you file FBAR or any one of the international information returns in respect of the foreign asset.

Fourth, such lapse in reporting or paying tax was not wilful but was unintentional, inadvertent, or due to misunderstanding of the tax laws.

Once you have established your eligibility, you have to file accurate and complete amended returns for the last three years together with all required information returns even if the information returns were not required to be filed earlier; file any delinquent FBARs for each of the last six years and pay Title 26 miscellaneous offshore penalty.?These returns should be accompanied by payment of the full amount of the tax, interest, and miscellaneous offshore penalty. The five percent miscellaneous offshore penalty is to be paid on the foreign financial asset which was either not reported in FBAR or form 8938 in any given year or taxes were not paid though it was reported.

To calculate the 5-per cent miscellaneous offshore penalty: first, identify your foreign financial accounts and assets for the years when you have not reported or not paid taxes during the last six years.?Second, compute the year-end balances for these accounts and assets (December 31) and total them for each year.?Select the annual exchange rate for the respective years to convert your foreign financial accounts and assets into USD. Calculate a 5% penalty payable on the highest year-end aggregate balance.

“Streamlined Offshore Disclosure” should be written in red ink on the first page of the amendment tax returns of each year.

You have to complete and sign form 14654 “Certificate by US person residing in the US” certifying that you are eligible to file under SODP, that all required FBARs have been filed (these have to be filed electronically only at https://www.fincen.gov), that failure to report and pay the tax were non-wilful and that miscellaneous offshore penalty is accurate.

You need to indicate your Tax Identification Number on the check for payment of taxes due along with statutory interest for late payment and the Title 26 penalty.

(ii) For US taxpayers residing outside the US

U.S. taxpayers who are US citizens or lawful permanent residents are considered non-residents if, in any one or more of the most recent three years for which the US tax return due date has passed, you did not have a U.S. abode and were physically outside the United States for at least 330 full days. US taxpayers who are neither US citizens nor lawful permanent residents are also considered non-residents if, during any one of the last three years, they have failed the substantial presence test. To be eligible for filing under the Streamlined Foreign Offshore Procedure, you should meet the non-residency requirement, failed to file FBARs, or failed to report income from foreign financial assets and pay taxes on them as per US law inadvertently. You are required to comply with the following:

File a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns for each of the most recent three years for which the due date has passed if you have not filed a US tax return previously. If you have filed returns previously, use Form 1040X, Amended US Individual Income Tax Return, and information returns for each of the most recent three years even if you have submitted them along with the Tax return.

“Streamlined Foreign Offshore” should be written in red ink on the first page of the amendment tax returns of each year.

You have to complete and sign form 14653 “Certificate by US person residing outside of the US” certifying that you are eligible to file under the SFOP, that all required FBARs have been filed (these have to be filed electronically only at https://www.fincen.gov/report-foreign-bank-and-financial-accounts), that failure to report and pay the tax were non-wilful.

You need to indicate your Income Tax Identification number on the check for payment of taxes due along with statutory interest for late payment. If you do not have an ITIN or are ineligible for social security number, you should apply for an ITIN along with all the documents filed under this procedure.

Pitfalls of Streamlined Voluntary Compliance

You should use the Streamlined Procedure only if you can convince the tax authorities that failure to report or pay taxes was not willful and that they were inadvertent.?Else the IRS would charge you with filing a false “Streamlined Submission” which, if convicted, carries a prison sentence.?You should remember that the certification given by you in form 14654 or 14653 is a statutory form and any misrepresentation would be construed as perjury.

Filing streamlined compliance is a complex exercise and therefore seeking professional help of a Certified Public Accountant or a competent tax attorney is essential.

Every taxpayer’s financial transactions and assets, especially foreign holdings, are unique and require a detailed analysis of the nature of these assets and the tax treatments afforded to them by the IRS.?This requires a professional interpretation of the rules and regulations to submit streamlined compliance to the IRS.

The Streamlined Procedures are not permanent.?The IRS has the right to modify or even discontinue such tax amnesty schemes.?So if you have been late on filing your tax returns or FBARs, it would be ideal to take advantage of these procedures earlier than later.?You would not be eligible for the Streamlined Procedure if you have received a notice from the IRS.