So, maybe you’ve heard of the Streamlined Filing Procedures for Americans living abroad who need to report their foreign financial assets and accounts to the IRS. But did you know that Americans residing stateside also have to report these foreign accounts? They do. Luckily, there’s an IRS amnesty program for them, too. It’s called the Streamlined Domestic Offshore Procedures. Read on to learn more about this domestic version of the streamlined filing program.
What Are the Streamlined Domestic Offshore Procedures?
The US has special reporting requirements for US persons that own foreign financial assets. To encourage compliance with these information-reporting obligations, the IRS can charge severe penalties for failure to disclose the existence of foreign financial assets and report income from these assets. To encourage taxpayers to come into compliance voluntarily, the IRS has programs in place to allow you to come into compliance without the fear of penalties. So, let’s talk about the Streamlined Domestic Offshore Procedures, which is designed especially for US residents. A US resident is a US citizen, Green Card holder, or any person that is considered a resident under the physical presence test.
Before jumping too far into the program, let’s cover what foreign financial assets are. Per the IRS website, all of the following are foreign financial assets:
- Financial accounts held at foreign financial institutions;
- Financial accounts held at a foreign branch of a US financial institution;
- Foreign stock or securities not held in a financial account;
- Foreign mutual funds; and
- Foreign hedge funds and foreign private equity funds.
Keep in mind that this isn’t an all-inclusive list.
How Do You Know If You Need the Domestic Streamlined Program?
As the owner of foreign financial assets, you must determine if you need to file an FBAR (Foreign Bank Account Report) and Form 8938—the form that satisfies the requirements of FATCA. If you directly own interest in a foreign corporation, partnership, trust, or other foreign entities, then you must determine if you need to file an information report disclosing the existence of these assets. These filings are protected under the procedure as well. You are required to file an FBAR if the highest aggregated balance in your foreign financial assets exceeds 10,000 USD at any point during the year. You are required to file Form 8938 if unmarried or filing a separated return, and the highest value of your financial assets exceeds 50,000 USD at year-end or 75,000 USD at any point. For a married person filing jointly, the year-end balance must exceed 100,000 USD or 150,000 USD at any point during the year. As a note, FBAR is a separate filing from the tax return, while Form 8938 is an information statement filed with your Form 1040.
How Do You Qualify For Domestic Streamlined Program?
You can take advantage of Streamlined Domestic procedure only if your returns aren’t under review with IRS and your failure to report the existence of your foreign assets is non-willful. If you intentionally tried to hide foreign financial assets, then you are disqualified from using the program. You must have timely filed all required income tax returns, so you can’t use this procedure for delinquent income tax returns. It can only be used to amend tax returns to attach information reports such as Form 8938 and to report income tax from those foreign financial assets. Under the procedures, you can file three years of income tax returns (usually the three most recent) and up to six years of delinquent FBARs. If the procedure is followed, then you will be protected from the failure to file penalties. Most penalties start at 10,000 USD for failure to file and then increase from there, so the disclosure program is valuable.
The instructions must be followed carefully, or the IRS will not process the filing under the streamlined procedure, so your penalty protection will be lost. The IRS will not notify you that return wasn’t processed under the procedure, so you must get it right the first time!
The Streamlined Domestic Offshore Procedures require that you mail your income tax returns and information return to the streamlined processing unit in Texas. You must include Form 14654 with a full explanation as to why you didn’t report the existence of the financial accounts and include the income. You must also explain to the IRS where the funds in the account came from, the purpose of the financial assets, information about your background, and other details that apply. The IRS goes so far to state they want to know all circumstances even if they aren’t favorable to you. The IRS requires that you write in red across the first page of the 1040X “Streamlined Domestic Offshore.” The FBAR isn’t mailed in with the tax return; instead, it is filed online at the FinCEN website. On the electronic filing, you enter the explanation as “Streamlined Filing Compliance Procedure.”
What Else Should I Know About These Procedures?
This procedure could come with a cost if you have unreported income or financial assets not previously reported. Any tax figured on the amended income tax return, along with interest, must be paid with the procedure. The program protects you from penalties associated with the unpaid tax on the amended income tax returns. In addition to this, if your financial assets were not reported, then you must pay a 5% miscellaneous tax penalty. The penalty is based on the highest end-of-the-year balance reported on the delinquent FBAR or 8938 on financial accounts not disclosed. If you previously filed 8938 or FBAR but left out information, then only the new accounts would be subject to this penalty. Form 14654 is used to report and calculate the payment. The payment must be made with the filing in full.
Ready to Use the Streamlined Domestic Offshore Procedures to Get Caught Up Penalty-Free?
Your Greenback team is here to answer questions and help you determine if this is the right procedure for you. Set up a consultation with us today.