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Streamlined Foreign Offshore Procedure

Last Update Date : April 29, 2019
Estimated Read Time: 5 min

Streamlined Foreign Offshore Procedure

We’ve all seen movies where the character in the movie walks into a foreign bank and withdraws huge sums of unaccounted money. However, what most movies don’t show are the tax implications of having foreign bank accounts or withdrawing the cash held in such accounts.

For U.S. expats and American Indians living and earning in a foreign country, he/she has to ensure they continue to be compliant with U.S. tax laws or face penalties and prosecution by the IRS and even the Department of Justice in certain scenarios. To ensure U.S. citizens and permanent residents, who were unaware of the U.S. tax laws applicable to them, the IRS introduced the Streamlined Foreign Offshore Procedure to allow taxpayers to file missed U.S. tax returns and missed FBAR’s.

What is Streamlined Foreign Offshore Procedure?

The Streamlined Foreign Offshore Procedure (SFOP) came into effect on July 1st, 2014. The program allows US expats, who hold foreign offshore assets and have failed to report Foreign Bank Account Reporting (FBAR) for the past six years and missed to file US tax returns for the past three years, to do so, without facing any penalties. However, the onus of proving that non-compliance was non-willful is on the taxpayer.

Meaning of Non-Willful

A key factor to SFOP is proving that non-filing was non-willful. The taxpayer has to certify, with facts, that he/she unintentionally, due to the listed reasons below, did not file.

  • Misunderstanding of the law
  • Negligence
  • Inadvertently
  • Mistakenly

If it is found by the IRS that he/she perjured his/her testimony, then he/she will be liable to face penalties.

Non-Resident Status

U.S. citizens/permanent residents – those who during one or more of the past three years, where the due date for filing U.S. tax return had passed, the taxpayer did not have a place of residence in the U.S. and was physically absent from the U.S. for 330 full calendar days.
Non-Resident Aliens – An individual who did not meet the substantial residency test, for one or more of the past three years, for which the U.S. tax return due date had passed.

Eligibility Criteria

The following criteria must be met to qualify for the SFOP:

  1. You must be:
    1. Individual U.S. taxpayer or an estate of U.S. taxpayer and have a valid SSN
    2. For individuals who have ITIN and do not have a home in the U.S.
  2. Have missed one or more U.S. tax return due dates in the past three years
  3. Failed to file FBAR and report foreign financial assets as per U.S. law., in previous 6 years.
  4. The non-compliance was non-willful
  5. Meet non-resident criteria.

How to Apply for Streamlined Foreign Offshore Procedure

The process to apply for SFOP must be followed explicitly. Failure to follow the process exactly could result in your return being filed normally, thereby losing the benefits of the program.

  1. Must be labeled in red “Streamlined Foreign Offshore” on each page of the return.
  2. Form 1040 must be filled out along with all other relevant form such as form 8938.
  3. The U.S. tax person, who is living in a foreign country, must certify that:
    1. Is eligible for SFOP
    2. FBAR’s have been filed
    3. Failure to file tax returns and FBAR’s was non-willful
      1. Completed and signed statement of Certification by a U.S. Person residing abroad. Form 14653 must be sent along with the Streamlined returns and FBAR.
  4. You must submit the original signed statement and you must attach copies of the statement to each tax return and information return being submitted through these procedures. You should not attach copies of the statement to FBARs.
  5. Pay all outstanding taxes due, including any interest for late payment, ensuring ITIN is mentioned.
  6. File all delinquent FBAR’s for the past six years and ensure that it is clearly stated that the FBAR is being filed in accordance with SFOP
    1. Important step as it alerts the IRS that you have complied with the final step of the SFOP.
  7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:

Internal Revenue Service

Attn: Streamlined Foreign Offshore
3651 South I-H 35
Stop 6063 AUSC
Austin, TX 78741

Drawbacks of Streamlined Foreign Offshore Procedure

Unlike the Offshore Voluntary Disclosure Program (OVDP), which has penalties, but protects individuals from prosecution, individuals caught lying in SFOP will be liable for criminal prosecution. The IRS will be especially suspicious, if the account held a large amount of cash, as it is not easily forgettable or to be unaware of such an account. The main concern with Streamlined Foreign Offshore Procedure is proving the act of not filing was non-willful. A common scenario of “non-willful” is a taxpayer who was unaware of a foreign bank account opened on his behalf as a child from a family member. However, things get tricky when the taxpayer commits any of the following acts:

  • Accounts were held in offshore entities such as corporations or trusts
  • Identity of account was based in code or numbers only
  • Taxpayer asked bank to not send account related information to address in the U.S.
  • Money was moved from one account to another in entirety, especially if the transfer was after July 2008.
  • Complete withdrawal of cash and false reporting of the source of the cash in U.S. tax return
  • Frequent cash transactions on the account
  • Individual requested bank to not share information with IRS

Additionally, bank records may prove willful non-filing. Banks keep records of account openings, signatures, notes of calls and meetings etc. If the bank were to hand over its records to the IRS, the taxpayer would have to explain how his/her failure to report was non-willful, especially when the facts point to the contrary. The IRS will also question, why the taxpayer did not make use of the Offshore Voluntary Disclosure Program, as some taxpayer’s may, to avoid paying no penalties, choose SFOP and try to bend the rules of SFOP to benefit themselves.

If the IRS is able to prove that the act was willful then the taxpayer would be subject to penalties of fraud and criminal prosecution. If prosecuted, he/she would not only be held accountable for non-filing but committing perjury in SFOP.

Benefits of SFOP

If you are eligible for Streamlined Foreign Offshore Procedure, the most advantageous thing for a taxpayer is waiver of all penalties for non-filing of tax returns and FBAR’s. If you were to simply file all your delinquent tax returns, you would still be subject to fines and penalties. Similarly, filing missed FBAR ‘s normally, would also have penalties and consequences, that would be waived under SFOP.

Streamlined Domestic Offshore Procedure

For U.S. citizens and permanent residents who fail to meet the residency test, he/she can opt for Streamlined Domestic Offshore Procedure, which follows the same process as SFOP.

How Can H&R Block India Help You?

For American Indians and U.S. expats living abroad who find themselves in the perilous position of having to file missed tax returns and/or FBAR’s, the process can be complicated and overwhelming, resulting in consequences which may drastically alter your life. To ensure you are up to date on all your U.S. filing compliance requirements, enlist the guidance and aid of the international tax experts at H&R Block India, who will ensure to take the best of course of action in guiding and filing your delinquent U.S. tax returns and missed FBAR’s.

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Anshu Jain
Anshu Jain is the Manager, Offshore Operations at H&R Block (India). She holds an MBA in Finance and has an experience of over ten years in business operations, U.S. tax advisory and program management. When she is not working, Anshu enjoys reading and writing about U.S. taxation.

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