An Overview of the IRS’ Streamlined Filing Compliance Procedures

High-income and high-net-worth U.S. taxpayers who have assets held overseas have an obligation to report these assets to the U.S. Treasury Department. Specifically, taxpayers must report their offshore accounts to the Treasury’s Financial Crimes Enforcement Network (FinCEN), and they must report their “foreign financial assets” (which include offshore accounts) to the Internal Revenue Service (IRS). Failing to make either of these filings can lead to steep penalties; however, taxpayers can mitigate their liability by making a “streamlined filing” in many cases. Texas international tax attorney Lawrence Brown explains:

How U.S. Taxpayers Can Use Streamlined Filings to Mitigate the Costs of Offshore Disclosure Violations

The IRS’s Streamlined Filing Compliance Procedures provide a way for high-income and high-net-worth U.S. taxpayers to remedy offshore disclosure violations while avoiding the inherent risks of leaving tax violations unresolved. However, submitting a streamlined filing is only an option in specific circumstances, and taxpayers who submit a streamlined filing when they are ineligible to do so can find themselves facing consequences that they could have avoided. As a result, an informed approach is key, and this starts with understanding when streamlined filing compliance is an option.

So, when is it an option?

The IRS’s Streamlined Filing Compliance Procedures are available to U.S. taxpayers living domestically and abroad who need to remedy non-willful foreign asset disclosure violations. This includes both:

• Non-willful FBAR violations under the Bank Secrecy Act (BSA); and
• Non-willful IRS Form 8938 violations under the Foreign Account Tax Compliance Act (FATCA).

As the IRS explains, “[n]on-willful 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.” Crucially, while taxpayers must certify the non-willfulness of their violations when making streamlined filings, the IRS also independently assesses willfulness when evaluating taxpayers’ filings. If the IRS determines that a taxpayer’s violation was willful, it can reject the filing and initiate an audit or investigation.

U.S. taxpayers who own or control offshore accounts must file an FBAR with FinCEN annually. While there are minimum account value thresholds, these thresholds are fairly low, and if any one or more of a taxpayer’s offshore accounts exceed the threshold, then all of the taxpayer’s offshore accounts must be disclosed. The same generally applies to the filing thresholds under FATCA, which requires U.S. taxpayers to disclose their offshore accounts and other foreign financial assets (i.e., foreign stocks and other securities) to the IRS on an annual basis.

When submitting streamlined filings, taxpayers must also submit payment of any tax due plus the five-percent miscellaneous offshore penalty. However, as these costs can pale in comparison to the costs associated with facing an audit or investigation when a taxpayer has failed to proactively resolve known tax law violations, submitting a streamlined filing will be high-income and high-net-worth taxpayers’ best option in many cases. As the IRS also explains:

“A taxpayer who is eligible to use the[] Streamlined Foreign Offshore Procedures and who complies with all of the instructions . . . will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to [these] penalties with respect to amounts reported on those returns . . . unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.”

With all of that said, it is important not to assume that a streamlined filing is the best approach but instead to make an informed decision based on the advice of an experienced Texas international tax attorney. Submitting a streamlined filing is not the best option in all cases (and it is not an option at all in some cases). When submitting a streamlined filing is not the best approach, taxpayers will need to work with their counsel to determine how to move forward—whether this involves filing a delinquent FBAR or amended return, negotiating with the IRS, or submitting a voluntary disclosure to IRS Criminal Investigation (IRS CI).

Procedures for Resolving Offshore Disclosure Violations with the IRS

Let’s say you have concerns about your offshore disclosure filings (or lack thereof) with the IRS and FinCEN. What are the steps you can (and should) take to avoid unnecessary scrutiny? While individual circumstances vary, the primary steps generally involve:

• Determine Which Filings Are Delinquent or Improper – Before you do anything else, it is critical to ensure that you have a clear and comprehensive understanding of the filing delinquencies or errors you need to address.
• Assess Your Eligibility to Submit a Streamlined Filing – Once you have identified all pertinent issues, the next step is to assess your eligibility to submit a streamlined filing. This includes (but is not limited to) determining whether the IRS is likely to deem your violation(s) willful.
• Assess Your Alternatives – Along with assessing your eligibility to submit a streamlined filing, you should also assess all potential alternatives. Among others, these may include submitting a voluntary disclosure to IRS CI.
• Make an Informed Decision About How to Proceed Based on the Advice of Tax Counsel – After assessing your options, you can then make an informed decision about how best to proceed based on the advice of your tax counsel.
• Work with Your Tax Counsel to Achieve a Favorable Resolution – Finally, working closely with your tax counsel, you can submit the appropriate filing and then work with the IRS to achieve a favorable resolution that avoids unnecessary consequences.

Request an Appointment with Texas International Tax Attorney Lawrence Brown

If you are a high-income or high-net-worth taxpayer and you need to know more about how to resolve offshore disclosure-related issues with the IRS, we invite you to get in touch. To request an appointment with Texas international tax attorney Lawrence Brown, please call 888-870-0025 or tell us how we can contact you online today.