Streamlined Filing Compliance Procedures

Are you facing confusion over your foreign account reporting requirements? Streamlined filing compliance procedures provide a path to rectify past omissions without severe penalties. In this article, we discuss how this IRS program helps eligible taxpayers settle unfiled tax obligations associated with foreign assets. You’ll also find out if you qualify for these procedures, the benefits they offer, and the essentials of navigating the process.

>> Frequency ask questions

Understanding Streamlined Filing Compliance Procedures

What Is The Streamlined Filing Compliance Procedure?

The Streamlined Filing Compliance Procedure is an IRS program designed to provide a simplified and less punitive option for taxpayers who have failed to meet their U.S. tax obligations, particularly regarding foreign assets and income. It is tailored for both individual taxpayers and estates of individual taxpayers who qualify as non-willful violators, meaning they were unaware of their filing requirements or made mistakes due to negligence rather than willful intent to evade taxes.

This program serves as an avenue for taxpayers to come into compliance with U.S. tax laws without facing severe penalties. It requires participants to file amended or delinquent tax returns for the past three years, as well as FBAR (Foreign Bank Account Report) forms for the past six years if applicable. Additionally, participants must provide a certification statement explaining their non-willful conduct.

The Streamlined Filing Compliance Procedure was introduced as an alternative to the more rigorous Offshore Voluntary Disclosure Program (OVDP). It aims to encourage taxpayers to voluntarily disclose and correct their tax reporting errors while avoiding substantial penalties, making it a valuable option for those seeking to resolve their tax issues efficiently and responsibly.

Who Qualifies for Streamlined Procedures?

To be eligible for these procedures, taxpayers must:

• Certify that their failure to report foreign financial assets and pay all taxes due was non-willful, meaning it stemmed from negligence, inadvertence, or misunderstanding of the law.

• Have a valid Social Security Number (SSN) or Taxpayer Identification Number (TIN).

• For the Streamlined Offshore Procedures, taxpayers must have been outside the U.S. for at least 330 full days in any one of the last three years.

• Note that individuals under civil examination or criminal investigation by the IRS are not eligible.

Key Benefits of Using Streamlined Filing

Exemption from all late-filing and late-payment penalties stands out as a key benefit of using the streamlined filing process. It provides relief to taxpayers who have inadvertently failed to comply with U.S. tax obligations, allowing them to correct their filing status without facing severe penalties.

For taxpayers using the Streamlined Domestic Offshore Procedures, a 5-percent penalty is assessed on the highest aggregate balance of unreported foreign financial assets over six years for FBAR and three years for tax returns.

Navigating the Process: How to Utilize Streamlined Filing

Before utilizing the Streamlined Filing Compliance Procedures, you must determine your eligibility. You cannot be under civil examination by the IRS for any taxable year. If you meet these criteria, you can then gather the necessary documentation and follow the streamlined filing compliance procedures.

After determining eligibility and understanding the initial requirements, the next steps include preparing documentation, completing required forms, and submitting the streamlined filing package to the IRS.

Preparing Your Documentation

The streamlined procedures mandate the filing of the most recent three years of federal tax returns and six years of FBARs (Foreign Bank and Financial Accounts Reports). Your documents should include:

• Original or amended tax returns

• Informational returns

• Reporting forms

• A signed certification on Form 14654 (Certification by U.S. Person Residing Outside of the U.S.)

Ensure that all necessary taxes, interest, and penalties are included with your streamlined filing documentation.

Common international information returns often required for streamlined filing include FATCA Form 8938, Form 3520, Form 3520-A, Form 5471, and Form 8865.

Completing the Required Forms

To apply for the streamlined procedures, you must:

• Use a valid Taxpayer Identification Number (TIN), such as a Social Security Number (SSN) or a telephone number for contact purposes

• If you don’t have an SSN, a complete ITIN application is required

• Certify non-willfulness concerning your failure to report foreign financial assets and pay due taxes under penalty of perjury.

You’re required to file the last three years of federal tax returns and the last six years of FBARs. In the amended Form 14654 for the streamlined filing process, all facts and circumstances concerning the errors in the original submission must be included.

Submitting Your Streamlined Filing Package

The process concludes with the submission of your streamlined filing package to the IRS. The IRS typically processes the Streamlined Filing Compliance Procedures within 180 days. Returns submitted under the streamlined procedures are treated like regular tax returns, and the IRS does not provide any special acknowledgment of their processing.

Understanding Tax Obligations and Foreign Assets

For those using the streamlined procedures, comprehending the impact of owning foreign financial assets on U.S. income tax obligations becomes indispensable. You’re required to report your foreign financial assets on Form 8938 and may need to complete additional forms depending on your specific circumstances.

Reporting Requirements for Foreign Financial Assets

U.S. persons with a financial interest in or signature authority over foreign financial accounts must file an FBAR when the aggregate value exceeds $10,000 at any point during the calendar year. U.S. citizens, resident aliens, and certain non-resident aliens with specified foreign financial assets exceeding filing thresholds must file Form 8938 alongside their tax returns.

You may file an FBAR electronically via the BSA E-Filing System. Professionals like attorneys and CPAs must register as BSA E-Filers to file on behalf of a client.

Calculating Taxes Owed on Foreign Income

In the 2023 tax year, taxpayers may exclude up to $120,000 of their foreign-earned income from their taxable income, thereby lowering the taxable income that they need to report to the IRS when filing their own taxes. This is applied through Form 2555, which helps automatically calculate the adjusted tax liability based on the taxpayer’s entries.

To calculate taxes owed on foreign income, follow these steps:

1. Initially tally all income, including foreign income.

2. Compute taxes based on the total income.

3. Recalculate income, excluding the foreign income.

4. Determine the difference between the two calculations.

5. Use the resulting difference to determine the tax amount due.

Addressing Common Concerns with Streamlined Filing

If you’re a U.S. resident who previously failed to properly report a foreign financial asset, you’re still eligible to make a streamlined submission. When making a streamlined submission, you must:

1. Write ‘Streamlined Domestic Offshore’ in red ink at the top of Form 1040X.

2. Provide an amended certification if you omitted a foreign financial asset on Form 14654.

3. Address any impact on your calculated Streamlined Domestic Offshore penalties.

4. E-file any necessary amended FBARs with FinCEN.

Dealing with Delinquent FBARs and Form 8938

U.S. expats certifying that failure to file delinquent tax returns and FBARs was a result of non-willful conduct can file late FBARs without being subject to penalties if they report and pay tax on all income, and have not been previously contacted by the IRS. Individuals who made undeclared ‘quiet disclosures’ outside of the streamlined procedures can still utilize these programs, but they must pay any previously assessed penalties without the possibility of abatement.

If you have made errors in your FBAR submissions, you must file amended FBARs via the FinCEN’s BSA E-Filing System to correct any mistakes.

Resolving Issues with Unreported Foreign Income

If you suspect you may have willfully failed to report foreign income, it’s vital to seek the advice of a tax advisor. They can assess the possibility of utilizing the IRS Criminal Investigation Voluntary Disclosure Practice.

The Role of Tax Professionals in Streamlined Filing

Specialized tax professionals in expatriate taxes play a vital role in ensuring compliance with U.S. tax laws. They provide expat tax services designed to assist U.S. citizens living overseas. Engaging with a CPA with expertise in expatriate affairs aids in the accurate reporting of foreign assets, crucial for streamlined filing compliance.

When to Consult a Tax Advisor

Consult a tax advisor if you are uncertain about whether your failure to report income or submit information returns was non-willful, a factor that is integral to your eligibility for the streamlined filing compliance procedures. In certain cases, if you have previously attempted to rectify your tax obligations via delinquent or amended returns, it’s recommended to seek professional advice before considering the streamlined procedures.

Engaging a tax advisor is recommended to adeptly manage the intricacies involved in the streamlined filing compliance process and to mitigate the risk of audits.

Selecting the Right Tax Professional for Your Needs

Selecting a tax professional with extensive knowledge about the IRS’s streamlined filing compliance procedures is vital for correct certification and managing complex tax situations. CPAs who specialize in international taxation provide valuable tax-saving strategies and assist in maintaining accurate financial records for U.S. expatriates. 

Hiring inexperienced tax professionals can lead to hidden hourly fees, complicating the streamlined filing experience.

Planning Ahead: Strategies for Maintaining Compliance

Expatriates must strategize for compliance with U.S. tax laws that apply to their worldwide income to evade legal and financial penalties. Keeping investment assets such as:

• stocks

• bonds

• mutual funds

• ETFs

in U.S. brokerage accounts is a strategic move for reducing compliance risks.

Integrating U.S. tax obligations into your financial planning is essential to maintain compliance and manage your international investments effectively.

Keeping Accurate Records

For U.S. expats, it’s critical to maintain precise and accurate financial records to manage their ongoing tax obligations and facilitate informed financial decision-making. You’re encouraged to use electronic bookkeeping systems or cloud-based storage solutions to organize your financial records for accessible and secure record keeping. Scanning and digitally storing critical documents is a proactive strategy to ensure that backup records are available in case of loss or damage to original paperwork.

Applying AI technology in financial bookkeeping can enhance the accuracy and efficiency of managing and maintaining financial records for U.S. expats. After completing the streamlined filing procedures, you’re expected to continue complying with U.S. tax laws and maintain regular filing practices.

Staying Informed on Changes to Tax Laws

Tax software used by accountants for U.S. expatriates often includes real-time updates and alerts about changes in tax laws within the same tax year, which assists both the accountants and their clients in staying current with the latest information.

Keeping abreast of changes in tax laws is essential for expatriates and resident aliens to maintain compliance and capitalize on potential benefits.

Streamlined Procedure IRS Audit

After submission of your Streamlined forms, the IRS will not automatically subject you to an audit. However, you will still be within the system that can trigger any auditing if need be. Auditing is only necessary to check information against what you reported on your tax returns, FBARs, and other financial sources.

Therefore, like any other tax return, you may be subject to appropriate IRS examination or civil penalties by submitting your work under the Streamlined Program.

Streamlined Procedure Criminal Investigation

Consider participating in the IRS Criminal Investigation Voluntary Disclosure Practice if you are concerned that your failure to report income, pay tax, and submit required information returns resulted from willful conduct. Consult with your professional or legal advisers to explore this option further, as it relates to the Internal Revenue Code.

Potential Pitfalls and How to Avoid Them

A crucial aspect of the streamlined procedures involves accurately completing the certification statement, where you must affirm that your past failures to report income, pay tax, and submit required information returns resulted from non-willful conduct. Common mistakes include filing incomplete forms, miscalculating tax due, and failing to stay current with IRS program changes which can nullify the benefits of the Streamlined Procedures.

For a successful submission, gather all relevant documents, including those concerning foreign income and accounts from the foreign country, and scrupulously verify your forms for accuracy before filing.

Common Mistakes in Streamlined Filing

Common mistakes in Streamlined Filing Compliance Procedures often stem from misunderstanding the requirements or not providing accurate and complete information. Here are some frequent errors taxpayers make:

1. Failure to qualify: Some taxpayers mistakenly believe they qualify for the Streamlined Filing Compliance Procedure when they do not meet the eligibility criteria. For example, they may not be able to demonstrate non-willful conduct or may not meet the residency requirements for U.S. taxpayers living abroad.

2. Incomplete disclosure: Participants may fail to disclose all relevant foreign assets, income, or accounts. This can lead to inconsistencies in their filings and may raise red flags during the IRS review process.

3. Incorrect calculations: Errors in calculating tax liabilities, penalties, or interest can result in inaccurate submissions. It's crucial to double-check all calculations and seek professional assistance if needed.

4. Missing or improper documentation: Participants may forget to include required documentation such as bank statements, investment records, or income statements. Providing incomplete or incorrect documentation can delay the processing of their Streamlined Filing submission.

5. Inaccurate certification statement: The certification statement accompanying the Streamlined Filing submission must accurately reflect the taxpayer's non-willful conduct. Making false statements or omitting crucial information in the certification statement can have serious legal consequences.

6. Late or missed deadlines: Failing to meet the deadlines for filing amended tax returns, FBARs, or the certification statement can result in penalties or disqualification from the Streamlined Filing Compliance Procedure.

To avoid these common mistakes, taxpayers considering the Streamlined Filing option should thoroughly understand the program requirements, gather all relevant documentation, seek professional guidance if needed, and ensure accuracy and completeness in their submissions.

Ensuring Full Compliance

Although filings under the streamlined procedures are processed like ordinary submissions without explicit acknowledgment of receipt, they may be audited and verified for accuracy, which underscores the importance of complete and correct filing. For the Streamlined Domestic Offshore Procedures, you’re not required to include in the penalty base any assets over which you merely have signature authority, or any assets not reportable on FBAR or IRS Form 8938, avoiding penalties on these excluded assets.

Following successful navigation of the streamlined procedures, you’re expected to maintain future compliance with U.S. tax laws using the standard filing processes, ensuring your tax affairs remain in good standing.

Summary

In conclusion, the Streamlined Filing Compliance Procedures offer a pathway for U.S. expatriates to rectify their tax situation without severe penalties. By understanding the process, eligibility, and benefits, you can confidently navigate these procedures. Remember the importance of maintaining accurate records, staying informed on changes to tax laws, and seeking professional advice when necessary. Compliance with U.S. tax laws doesn’t have to be a labyrinth. It’s a journey, and with the right tools, you can navigate it successfully.

How we can help you

At H&CO, our experienced team of tax professionals (CPAs) understands the complexities of income tax preparation and is dedicated to guiding you through the process. With excellent service and a personalized approach, we help you navigate US and international income tax laws, staying up to date with the latest changes..

With offices in the US in Miami, Coral Gables, Aventura, Fort Lauderdale, Orlando, Melbourne, Tampa as well as offices in over 29 countries, our CPAs and International Tax Advisors are readily available to assist you with all your income tax planning, tax preparation and IRS representation needs. To learn more about our accounting firm services take a look at our individual tax services, business tax services, international tax services, expatriate tax services, SAP Business One, entity management, human capital, and audit and assurance services.  

Frequently Asked Questions

What are the Streamlined Filing Compliance Procedures?

The Streamlined Filing Compliance Procedures are an IRS program designed to help individuals who were unaware of their filing requirements to update their expat taxes without penalties. It is an amnesty program that offers a way to become compliant with IRS requirements.

Who is eligible for the streamlined procedures?

Taxpayers who certify non-willful conduct in failure to report foreign financial assets and have a valid SSN or TIN are eligible for the streamlined procedures.

What are the key benefits of using streamlined filing?

The key benefits of using streamlined filing include exemption from late filing and late-payment penalties, providing relief for taxpayers who have inadvertently failed to comply with U.S. tax obligations.

How can I maintain compliance with U.S. tax laws?

To maintain compliance with U.S. tax laws, it's crucial to keep accurate financial records, stay informed about tax law changes, and seek professional advice when needed.

What are the common mistakes in streamlined filing?

To avoid common mistakes in streamlined filing, make sure to gather all necessary documents, check forms meticulously, and stay updated on IRS program changes. These steps will help ensure accuracy in your filing.