Streamlined filing compliance procedures: how the two tracks work

What are the streamlined filing compliance procedures?

The streamlined filing compliance procedures are an IRS program for individuals, and estates of individuals, whose failure to report income from foreign financial assets, pay the related tax and file information returns such as the FBAR (FinCEN Form 114) was not willful. In exchange for catching up on a defined set of years, the taxpayer gets fixed penalty terms.

The IRS defines non-willful conduct as “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.” Every streamlined filer certifies that their conduct meets that definition.

General rules for both tracks:

• No open examination. A civil examination of your returns for any year, even one unrelated to foreign assets, makes you ineligible, and so does a criminal investigation by IRS Criminal Investigation.
• A valid taxpayer identification number. A Social Security number or, for people not eligible for one, an ITIN. A complete ITIN application can go with the submission.
• Earlier penalties stay. After a so-called quiet disclosure you can still use the procedures, but penalties already assessed are not abated.
• No closing agreement. The returns are processed like any other: the IRS does not acknowledge receipt, and they can still be selected for audit.

Foreign or domestic: which track applies?

The procedures split into two tracks, and the dividing line is a non-residency test that looks at the most recent three years for which the US tax return due date (or a properly extended due date) has passed.

• US citizens and green card holders meet the test if, in any one or more of those three years, they did not have a US abode and were physically outside the United States for at least 330 full days.
• Everyone else meets it if, in any one or more of those three years, they did not meet the substantial presence test of IRC section 7701(b)(3).

Meeting the test points to the Streamlined Foreign Offshore Procedures; on a joint return, both spouses must meet it. Failing it points to the Streamlined Domestic Offshore Procedures, which add a condition: you must have already filed a US tax return, if one was required, for each of those three years. The domestic track does not accept late original returns.

See the IRS pages for taxpayers residing outside the United States and taxpayers residing in the United States.

What gets filed: 3 years of returns and 6 years of FBARs

For each of the most recent 3 years for which the tax return due date has passed, you file the returns with every required international information return, for example Forms 3520, 5471 and 8938 (the domestic track also lists Forms 3520-A, 5472, 926 and 8621). For each of the most recent 6 years for which the FBAR due date has passed, you file any missing FBARs.

The IRS says that if its instructions are not followed, the returns are processed in the normal course, without the streamlined terms:

1. Write “Streamlined Foreign Offshore” or “Streamlined Domestic Offshore” in red at the top of each return and information return.
2. Sign the certification (Form 14653 or Form 14654), send the original, and attach a copy to each return and information return, but not to the FBARs.
3. Pay all the tax due plus statutory interest. On the domestic track, also pay the miscellaneous offshore penalty.
4. Mail the package on paper to the IRS address in Austin, Texas listed for each track.
5. E-file the FBARs through the FinCEN BSA E-Filing System, choosing “Other” as the late-filing reason and entering “Streamlined Filing Compliance Procedures.”

Previously unreported income related to specified foreign corporations must also address the section 965 transition tax where it applies. Which exact years fall inside each window depends on the submission date and any extensions, so that is confirmed case by case.

How the 5% miscellaneous offshore penalty works

The penalty exists only on the domestic track. The IRS sets it at 5 percent of the highest aggregate balance or value of the taxpayer's foreign financial assets that are subject to the penalty, looking across the 3-year covered tax return period and the 6-year covered FBAR period.

The calculation: add up the year-end balances and values of the assets subject to the penalty for each year, then take the highest annual total. An asset is subject to the penalty in a year if it should have been reported on an FBAR or on Form 8938 and was not, or if it was reported but its income was not.

A hypothetical illustration: if the qualifying year-end totals were $80,000, $120,000 and $95,000 in three different years, the base is $120,000 and the penalty is $6,000.

Foreign financial assets can include accounts at foreign financial institutions or at a foreign branch of a US institution, foreign stock or securities held outside an account, and foreign mutual, hedge and private equity funds. Form 14654 includes a year-by-year table of these assets, and you must keep the records behind it.

In exchange, a compliant domestic filer is not subject to accuracy-related, information return or FBAR penalties. A compliant foreign-track filer pays no offshore penalty and is also free of failure-to-file and failure-to-pay penalties. On either track, those protections do not hold if a later examination finds fraud or a willful FBAR violation.

Non-willful is a legal determination, not a box to tick

The certification is the core of the submission. Form 14653 and Form 14654 require a narrative statement of facts with specific reasons, including “the whole story including favorable and unfavorable facts.” Without that narrative, the submission is incomplete and does not qualify. The form is signed under penalties of perjury.

Whether conduct was willful is a legal question. Taxpayers concerned that it was, and who want assurance about criminal liability or substantial penalties, are pointed by the IRS to the IRS Criminal Investigation Voluntary Disclosure Practice and to their legal advisers.

In practice, a tax attorney should review the facts before anyone signs when, for example, the person had been told about the reporting requirement and did not act, when accounts were held in ways that kept them out of view, or when the facts can reasonably be read more than one way. A CPA can reconstruct balances, prepare the returns and compute the penalty. Deciding whether the facts support a non-willful certification belongs with counsel, and the accountant works alongside the attorney, not in place of one.

How streamlined differs from the delinquent submission procedures

The IRS currently lists three options for people with past offshore noncompliance: the Criminal Investigation Voluntary Disclosure Practice, the streamlined procedures and the delinquent international information return submission procedures.

The delinquent information return procedures are for someone who is not under civil examination or criminal investigation, has not been contacted by the IRS about the missing forms, and needs to file late information returns. They go in through normal filing procedures, most attached to an amended return. A reasonable cause statement can be attached, but penalties may be assessed without considering it, except for Forms 3520 and 3520-A, where it is considered first. There is no fixed penalty term and no certification.

A note for readers of older articles: the IRS used to publish separate Delinquent FBAR Submission Procedures for people whose only problem was missing FBARs. That page is no longer available on irs.gov and is not among the options listed today. The IRS FBAR page now says that if you have not been contacted and are not under investigation, you should file late FBARs as soon as possible and explain the reason, noting that late filing may bring penalties.

Streamlined is different in scope: it is built for unreported income from foreign assets, not only missing forms, and it trades an open-ended penalty analysis for defined terms in exchange for the certification.

Frequently asked questions

Sources

General information, not tax, legal or immigration advice for your situation. Figures and dates were checked on official sources on the date shown and can change; a licensed CPA has not yet reviewed this draft. MTroncone CPA is not affiliated with the IRS or any government agency.