Streamlined Procedure – The IRS Amnesty Program

The Streamlined Procedure is an IRS amnesty program that allows expats who are non-willfully behind with their US tax filing to catch up without facing any penalties.

If you have not filed your tax return for many years you may be eligible for IRS amnesty by filing the last 3 years of delinquent returns and the last 6 years of FBARs. Phinch's team of US tax specialists and Enrolled agent and can help you resolve this issue before the IRS sends you a notice, in which case you might not be eligible for this amnesty program. Don’t delay though, as the program may not be available indefinitely.

What Are the Streamlined Filing Procedures?

The Streamlined Filing Procedures were created in 2012 as an alternative to the IRS’s other disclosure programs as a means of encouraging US expats to catch up on their delinquent taxes.

In 2014, the IRS then expanded the Streamlined Procedures, allowing taxpayers to participate if they can explain in a written statement how their delinquency was not intentional.

This lenient approach has allowed many delinquent taxpayers to successfully regularise their tax affairs, without penalty. The latest IRS statistics show that the Streamlined Procedures continue to be a popular and effective method for delinquent taxpayers to catch up with the IRS. According to the IRS, since inception, tens of thousands of taxpayers have used the Streamlined Procedures to resolve their tax issues.

What is the Aim of IRS Streamlined Procedures

The IRS Streamlined Procedures are designed for delinquent taxpayers, those who are late or have never filed, who can certify that that their failure to file was non-wilful conduct, to regularise their tax affairs with the IRS. This relatively low threshold simply requires that your delinquency was not intentional.

The benefit of the Streamlined Procedures is that it allows taxpayers to become compliant whilst avoiding a number of potential penalties for late filing.

Penalties Avoided under IRS Streamlined Procedures

Participants in the IRS Streamlined Procedures avoid a number of potential onerous penalties, including:

• Failure to file penalty – 5% of the taxes owed for each month outstanding (capped at 25% of the total tax liability)
• Failure to pay penalty – 0.5% of the taxes due for each month outstanding (no cap)
• Accuracy-related penalty – an additional 20% penalty may apply if your income is substantially understated
• International return (e.g., Forms 5471/8865/8858) civil penalties – $10,000 penalty per year per entity
• Negligent or “non-willful” FBAR penalty of $10,000 per account per year
• Criminal Penalties – A willful violation can result in the imposition of criminal penalties, which include additional fines and jail time

Eligibility and Results

The IRS Streamlined Procedures are designed only for individual taxpayers (including estates of individual taxpayers). Entities, such as corporations and partnership, cannot participate in the program.

There are two types of IRS Streamlined Procedures, one for U.S. taxpayers residing outside the United States (the “Foreign Offshore Procedures”), and the other for U.S. taxpayers residing in the United States (the “Domestic Offshore Procedures”).

Foreign Offshore Procedures

Under the Streamlined Foreign Offshore Procedures (for taxpayers residing outside the United States), the taxpayer is required to submit:

• 3 years of tax returns and information returns
• 6 years of FBARs
• Non-wilful certification (Form 14653).

Under the program, the participant avoids all penalties, but is required to pay the unpaid taxes & Interest.

Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures (for taxpayers residing in the United States) have the same submission requirements as the Foreign Offshore Procedures, namely 3 tax returns, 6 FBARS, and the non-wilful certification.

However, the Domestic Offshore Procedures differ from the Foreign Offshore Procedures in two main ways:

1. A domestic resident taxpayer that has failed to file a U.S. income tax return in any of the three most recent tax years cannot participate in the domestic offshore procedures (while a foreign resident taxpayer that has been similarly delinquent can participate in the foreign offshore procedures).
2. In addition to the requirement to pay unpaid taxes interest, the domestic offshore procedures bear a 5% penalty on the highest aggregate balance/value of one’s foreign financial assets (while the foreign offshore procedures have no such penalty).

Non-Wilful Certification

The Form 14653 non-wilful certification is submitted with your IRS Streamlined submission and gives you the opportunity to explain how your conduct was non-wilful. The forms asks you to include the following:

• Specific reasons for your past failure, whether favourable or unfavourable to you, including your personal background, financial background, and anything else you believe is relevant to your failure.
• An explanation as to the source of funds in all of your foreign financial accounts/assets. For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.
• An explanation of your contacts with the account/asset including withdrawals, deposits, and investment/ management decisions.
• A complete story about your foreign financial account/asset.
• If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice (this requirement was previously included).
• If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts (this requirement was also previously included).

Other Important Considerations

When participating in the IRS Streamlined Procedures, various tax issues need to be analysed in order to file previous returns in the best manner possible and mitigate the payment of back taxes to the IRS. Some of the issues that are normally addressed in the case of U.S. expats include:

• The Foreign Earned Income Exclusion
• The Foreign Housing Exclusion
• The Foreign Tax Credit
• The Passive Foreign Investment Company (“PFIC”) rules
• The Controlled Foreign Corporation (“CFC”) Rules
• Income Tax Treaty provisions

FAQs on IRS Streamlined Procedures

The following are some the more frequently asked questions that we receive about the IRS Streamlined Procedures.

Do I need to disclose my entire tax history?

No. One of the main benefits of participating in the Streamlined Procedures is that you can become completely compliant with your expat taxes without having to disclose your entire past. The IRS recognized that gathering financial information about the distant past can be cumbersome, if not impossible, so in order to encourage disclosure, it limited the tax years that require filing. Under the Streamlined Procedures, taxpayers are required to file only the prior 3 years of tax returns, including required information returns, and 6 years of FBARs.

Can I completely reduce or avoid penalties under the IRS Streamlined Procedures?

A taxpayer who qualifies for the foreign offshore Streamlined Procedures can come clean with the IRS and suffer no penalties. In order to qualify, a taxpayer must fulfill a non-residency requirement and certify that that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

Unpaid taxes and interest must be paid, if due, but in many cases, taxpayers can utilize the Foreign Earned Income Exclusion and/or foreign tax credits to reduce or eliminate taxes due.

Are the IRS Streamlined Procedures my only option for tax amnesty?

No. While the Streamlined Procedures is the most popular tax amnesty program, there are a number of additional options available to delinquent taxpayers.

For example, there are special programs and procedures for taxpayers who have only failed to file FBARs or have failed to include an informational form with their tax return, such as the form for ownership of a foreign corporation.

Are the IRS Streamlined Procedures a permanent feature of the IRS?

No. Contrary to popular belief, the IRS has given no certainty that it will maintain its tax amnesty programs on a permanent basis. In a recent interview, IRS Commissioner did express that the IRS is a long way from moving away from the voluntary disclosure programs, but at some point, once ignorance is no longer a valid excuse, the programs will come to an end or become significantly modified.

For this reason, if you are an expat who is late on filing your U.S. tax returns or FBARs, you should consider coming clean sooner rather than later. A number of options are currently available to you, including and in addition to the IRS tax amnesty programs. Each option has its advantages and disadvantages, and choosing the best way forward requires a careful analysis of your particular facts and circumstances.