Expat Eligibility for Streamlined Filing Procedures
When a US Person is out of compliance for not properly reporting their foreign accounts, assets, investments, and income to the US government, the Internal Revenue Service has developed various offshore tax amnesty programs to assist them with getting into compliance. This is a common situation for expats because most expats are (understandably) under the misimpression that if they residing outside of the United States and earning most if not all of their money from foreign sources, they would not be subject to US tax on their foreign income. Unfortunately, this is incorrect as the United States is only one of a few countries that follows a worldwide income tax model based on the citizenship or US person status — and not on the residence of the taxpayer. Depending on whether the Expat qualifies as a foreign resident under the strict definition in the Streamlined Foreign Offshore Procedures will determine whether or not they qualify for the Streamlined Foreign or Streamlined Domestic Offshore Procedures, noting the latter does not involve domestic accounts per se — but refers to the residence of the taxpayer. Let’s look at some of the Pros and Cons of the Streamlined Domestic and Streamlined Foreign Offshore Procedures.
Pros to the Streamlined Procedures
There are many positive benefits to submitting to the Streamline Filing Compliance Procedures. Here are three important pros to the program:
Less Complicated Procedures than Offshore VDP
Unlike the offshore version of the Voluntary Disclosure Program, the Streamline Filing Compliance Procedures are less complex. There are fewer requirements and fewer steps needed to complete a Streamlined submission than Voluntary Disclosure — and unless the Taxpayer is audited or subject to examination by the IRS, they do not have to undergo an examination by an IRS agent/examiner. Since the program is less complex than other tax amnesty programs, Taxpayers are able to effectively obtain the necessary information and make their way through the program while regaining peace of mind.
Fewer Tax Returns Required than in Offshore VDP
Most Taxpayers do not hold on to their own tax returns, because quite frankly, there is really no need for it beyond the general three-year statute of limitations. By entering the Streamlined Filing Compliance Procedures, Taxpayers only have to amend three years of tax returns, which means less time digging through the crates, trying to piece together old returns. In the old days, Taxpayers had to amend eight (8) years of returns (and it could be very difficult to obtain that information); so the Streamlined Procedures are a welcome change.
Lower Penalties than Offshore VDP
Unlike the voluntary disclosure program that carries a baseline 50% FBAR penalties, under the Streamlined Filing Compliance Procedures, Taxpayers are only penalized 5% — or even a complete penalty waiver if they qualify for the Streamlined Foreign Offshore Procedures.
Cons to the Streamlined Procedures
While the Streamlined Procedures are a great program, there are some negatives to submitting to the program that Taxpayers should be aware of:
No Closing Letter
One great benefit of the Offshore Voluntary Disclosure Program is that Taxpayers receive a closing letter Form 906—which essentially recognizes that the matter is complete from the IRS standpoint — presuming the Taxpayer made full and truthful disclosure. Under the Streamlined Domestic Offshore Procedures (for US Residents with foreign accounts), taxpayers receive an acknowledgment letter but it is not a closing letter. Under the Streamlined Foreign Offshore Procedures, there is no penalty letter received since there is no penalty.
By entering the Streamlined Procedures, a Taxpayer can still be audited even if they make their way successfully through the program. For this reason, it is important that Taxpayers retain experienced tax preparation and counsel in a flat-fee, full-service model.
Were You Really Willful?
If a Taxpayer qualifies as willful, they are no longer eligible for the Streamlined Procedures. There are some attorneys and tax practitioners who will still take a client through the Streamlined Procedures, even if they are willful. Unfortunately, this puts the client in an incredibly difficult position, since it is the client who gets in the most trouble.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax and specifically, IRS offshore disclosure.
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