The IRS has introduced the Streamlined Filing Compliance Procedures (SFCP) initiative to help taxpayers who have not met their information return obligations, such as IRS Forms 8938, 5471, 8865, and FBARs, due to ownership in foreign entities or interests in foreign bank accounts. The SFCP offers two programs: the Streamlined Foreign Offshore Procedures (SFOP) and the Streamlined Domestic Offshore Procedures (SDOP). These programs aim to help taxpayers avoid costly late-filing penalties by allowing them to make a compliance submission.
The key difference between the SFOP and the SDOP is the taxpayer’s residency in the U.S. during a three-year lookback period. U.S. citizens and green-card holders qualify for the SFOP if they meet residency requirements, while non-U.S. citizens must meet different criteria. Taxpayers who do not meet the SFOP residency tests can participate in the SDOP if they meet other requirements. The SFOP generally has reduced offshore penalties and less stringent filing requirements compared to the SDOP.
To participate in the SFOP or SDOP, taxpayers must certify under penalties of perjury that their failure to report foreign income and file information returns was due to non-willful conduct. This means negligence, inadvertence, or conduct resulting from a good-faith misunderstanding of the law. Taxpayers must also submit their streamlined submission before the IRS initiates any civil or criminal investigation and provide a valid Taxpayer Identification Number (TIN). Additional requirements apply to the SDOP, including having filed U.S. income tax returns for each year in the three-year lookback period.
Under the SFCP submission, taxpayers must submit three years of income tax returns, six years of FBARs, and IRS Form 14653 or 14654 depending on their residency status. Taxpayers must also pay all U.S. income tax and interest owed for the three-year lookback period. The benefits of the SFCP include avoiding civil penalties associated with late-filed information returns and accuracy-related penalties. While SFOP participants do not incur any civil penalties, SDOP participants must pay a 5% miscellaneous offshore penalty based on the value of undisclosed foreign assets.
The 5% miscellaneous offshore penalty under the SDOP is usually much less than other potential civil penalties that could apply outside the program, such as non-willful FBAR penalties. Due to the reduced civil penalties offered by the SFCP, taxpayers are encouraged to consider this program as a way to regain compliance with their federal tax reporting obligations. By participating in the SFOP or SDOP, taxpayers can rectify their late-filed information returns and avoid costly penalties, ultimately bringing them back into compliance with U.S. tax laws.
