A U.S. individual is required to report their worldwide income and foreign financial assets, including foreign bank accounts, to the U.S. government; however, many U.S. taxpayers are not aware of this filing requirement and oftentimes are not aware of foreign investment income and/or foreign financial assets that they own. When an individual determines that they have not reported these assets or related income, perhaps for several years, they may feel very overwhelmed and have trouble determining how to correct the oversight. Fortunately, the IRS has a program in place to address many of these situations. It is called the Streamlined Filing Compliance Procedures Program (“Streamlined Procedures”). This program allows taxpayers residing in or outside the U.S. to file amended or potentially delinquent returns without being subject to many of the penalties that may come with nonfiling.
One of the key requirements under the Streamlined Procedures is that a taxpayer is required to certify that their “failure to report all income, pay all tax and submit all required information returns, including FBARs, was due to nonwillful conduct.” According to the IRS, “Nonwillful conduct is 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.” There are several requirements that must be met for a taxpayer to utilize this procedure.
A U.S. person or resident who chooses to file under the Streamlined Procedures must:
- For each of the most recent three years for which the U.S. tax return due date (or properly applied-for extended due date) has passed, submit a complete and accurate amended tax return together with any required information returns (e.g. forms 3520, 3520-A, 5471, 5472, 8938, 926 and 8612), even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return. In addition, the taxpayer must pay all tax due and interest as computed on these tax returns.
- For each of the most recent six years for which the FBAR due date has passed, file delinquent FBARs and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.
- Pay a penalty equal to 5% of highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the penalty during the three-year tax return period and six-year FBAR period described above.
A non-U.S. person or resident must also follow the above procedures, but would not be subject to the 5% penalty. Additional details and requirements can be found here.
A taxpayer that decides not to avail themselves of the potential benefits under the Streamlined Procedures needs to be well-versed in the potential negative implications of this choice. If eventually audited by the Internal Revenue Service, there can be significant penalties, including accuracy-related penalties and information return penalties as well as potential criminal penalties. Today’s global economy and mobile environment has helped to create an era in which many individuals live in countries other than the country of their birth. It is extremely difficult for individuals to understand all the laws and filing requirements of every country. If you are one of these taxpayers who recently became aware of the filing requirements with respect to foreign financial assets and income, the Streamlined Filing Compliance Procedures Program may be a very good option for you to use to get back on track with the IRS.