A Summary of the IRS’ Streamlined Filing Compliance Procedures
The IRS’ streamlined filing procedures were first offered by the IRS on September 1, 2012. Since that time, the IRS has made several revisions. A current summary of the IRS’ Streamlined Filing Compliance Procedures is discussed below.
Do I Qualify for the IRS’ Streamlined Filing Compliance Procedures?
To qualify for the IRS’ Streamlined Filing Compliance Procedures (either Domestic or Foreign), taxpayers must meet the following initial requirements:
- The taxpayer must be an individual taxpayer or an estate of an individual taxpayer.
- The taxpayer must certify in a narrative under penalties of perjury that the conduct was not willful. The relevant conduct requiring certification relates to not only the failure to report income and/or pay tax, but also to submit all required information returns, including FBARs (e., FinCEN Form 114).
- The IRS must not have initiated a civil and/or criminal investigation of the taxpayer for any tax year.
- The taxpayer must have a valid Taxpayer Identification Number (e., TIN).
For streamlined filings under the IRS’ Domestic procedure, the taxpayer must also meet the following requirements:
- The taxpayer must fail to meet the applicable non-residency requirement described below in the Foreign filing procedures (if the taxpayer is married and a joint filer, one or both of the spouses must fail to meet the applicable non-residency requirement discussed below in the Foreign filing procedures);
- The taxpayer must have filed a U.S. tax return for each of the most recent 3 years for which the tax return due date has passed; and
- The taxpayer must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law in addition to FBARs and international information returns (g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621).
For streamlined filings under the IRS’ Foreign filing procedures, the taxpayer must also meet the following requirements:
- The taxpayer must meet the non-residency requirement (if the taxpayer is married, both spouses must meet the non-residency requirement); and
- The taxpayer must have failed to report the income from a foreign financial asset and pay tax as required by law in addition to FBARs and other international information returns.
What is the Non-Residency Requirement under the IRS’ Foreign Procedure?
If an individual is a U.S. citizen or lawful permanent resident (i.e., a green card holder), the individual must show that in any one or more of the most recent three years for which a U.S. tax return due date has passed (or properly applied for extended due date has passed) that the individual did not have a U.S. abode and that the individual was physically outside the United States for at least 330 full days.
If an individual is not a U.S. citizen or green card holder, the individual must show that in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended date) has passed that the individual did not meet the substantial presence test under Section 7701(b)(3) of the Code and those regulations.
What is the Non-Willful Narrative?
The non-willful narrative is found in both the Form 14654 (for Domestic procedure filings) and the Form 14653 (for Foreign procedure filings). The non-willful narrative is extremely important. It requires the taxpayer to provide: (1) the specific reasons for the failure to report income, pay tax, and submit required information returns, including FBARs; (2) the specific facts surrounding the non-filings, including “favorable and unfavorable facts” such as the taxpayer’s personal background, financial information, and any other relevant facts; (3) the source of funds in the foreign accounts or certain foreign assets, such as whether the accounts/assets were inherited, whether an account was opened while residing in a foreign country, and whether there was a business reason for opening it; (4) any contacts with the account/asset including withdrawals, deposits, investment and management decisions; (5) to the extent the taxpayer relied on a professional advisor, the name, address, and telephone number of the advisor and a summary of the advice; and (6) if married taxpayers are submitting a joint filing, provide the individual reasons for each spouse’s non-willful conduct.
If the taxpayer fails to provide all necessary information, the taxpayer acts at his or her own peril. Indeed, the IRS has indicated both formally and informally that a failure to provide all relevant information in the narrative can result in the IRS not accepting the filing under its streamlined filing compliance procedures. Worse yet, the false or fraudulent filing can be viewed and used by the government as additional conduct of willfulness. In crafting the narrative, taxpayers should be particularly careful of recent federal court decisions that have held that “reckless disregard” is sufficient in and of itself to prove willfulness. See, e.g., U.S. v. Gentges, No. 18-CV-7910, 2021 WL 1222764 (S.D.N.Y. Mar. 31, 2021) (“Thus, ‘willful blindness or reckless disregard satisfies the required mental state’ for purposes of a willful violation of the FBAR reporting statute.”).
What Happens after I File a Streamlined Procedure Filing with the IRS?
The results differ depending on which procedure the taxpayer falls under. If the taxpayer makes a successful Streamlined Foreign procedure filing, the taxpayer is required to file the three most recent year returns and pay all tax and interest associated with those returns. Significantly, however, the taxpayer is not liable for any failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, information return penalties (e.g., Form 5471, Form 3520, etc.), or FBAR penalties.
If the taxpayer makes a successful Streamlined Domestic procedure filing, the taxpayer is similarly required to file the three most recent year returns and pay all tax and interest associated with those returns. Again, the taxpayer is not liable for any failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. However, the taxpayer is liable for a Title 26 miscellaneous offshore penalty, which is computed as 5% of the following assets: (1) 5% of any assets that should have been reported, but were not reported, on an FBAR in the prior 6 year period; (2) 5% of any assets that should have been reported, but were not reported, on a Form 8938 in the prior 3 year period; and (3) 5% of any foreign financial asset that although properly reported in the 3 year period on an information return, such income from the foreign asset was not properly reported to the IRS.
For related Insight posts, see:
- Everything That You Need To Know About International Tax Penalties
- The FBAR (Report of Foreign Bank and Financial Accounts): Everything You Need to Know
- Everything that You Need to Know about IRS Offers in Compromise
- Everything That You Need to Know About Federal Tax Liens
- The Rahman Case is a Cautionary Tale of What Can Go Wrong under the IRS Streamlined Filing Compliance Procedures
- The IRS’ Streamlined Foreign Offshore Procedures