How To Avoid IRS Penalties Under Streamlined Foreign Offshore Procedures (FSOP)
September 14, 2021
Are you a U.S. taxpayer with income from non-U.S. sources? If so, did you fail to report the income to the Internal Revenue Sources? More specifically, have you missed filing the FBAR (Foreign Bank Account Reporting) or FinCEN Form 114 on time? If so, the Streamlined Foreign Offshore Procedures program (FSOP) provides a way for certain international taxpayers to catch up on FBAR and FCAT filing requirements while avoiding penalties.
The program isn’t for everybody. If you willfully failed to file these tax forms and reports with the IRS, you won’t be eligible.
Streamlined Foreign Offshore Procedures Overview
Penalties for failure to comply can be stiff: The standard FBAR penalty for non-willful offenses $10,000 per year for non-willful offenses.
The Streamlined Foreign Offshore Procedures is an IRS amnesty program designed for those who unintentionally missed filing these forms entirely, or who filed forms with incomplete information.
Streamlined Foreign Offshore Procedures Eligibility
To be eligible for SFOP, you must meet three basic eligibility requirements:
1. You must have unreported income from non-U.S. sources. If your unreported income is all from sources within the U.S., you are not eligible for SFOP.
2. You are not a legal resident of the U.S. Legal U.S. residents and citizens are not eligible for FSOP. It’s only available to non-residents. Depending on your citizenship status, there are two possible non-residency tests:
- U.S. Citizens and Permanent Residents (Green Card holders): You may qualify if, during at least one of the past three years:
- You did not maintain an abode within the U.S., and;
- You were not physically present within the U.S. for at least 330 days out of the year.
- Non-U.S. Citizens and Non-Permanent Residents: You may qualify for FSOP if, during at least one of the past three years, you were not physically present in the United States as determined by the Substantial Presence Test.
Note: The IRS’s Substantial Presence Test criteria is complex and involves several interrelated factors. You can find more information here.
3. Your violation must not be willful.
When you apply for the SFOP, you must sign a form certifying that your failure to timely file your complete returns as required was non-willful. That is, you didn’t violate the law on purpose.
If your violation was willful, you should consider applying for the IRS’s Voluntary Disclosure Practice, or VPD.
Applying for SFOP
To catch up with your foreign income reporting requirements under FSOP, you must complete a full application with the IRS. You’ll need to include the following items:
1. Tax returns for the past three years. Submit either original or amended tax returns, as applicable.
2. Information Returns. These may include:
- Return of U.S. Persons with Respect to Foreign Partnerships (IRS Form 8865);
- Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts (IRS Form 3520).
- Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock (Schedule O, IRS Form 5471).
3. FBAR (FinCEN Form 114). Include these reports for the past six years, as applicable. Generally, you must file a FinCEN Form 114 if your assets totaled $10,000 more at any point in the year.
4. Completed IRS Form 14653: Certification by U.S. Person Residing Outside of the U.S. This form certifies that you meet the FSOP eligibility criteria, you have filed all required FBAR forms, and that your failure to submit these forms by their deadlines was not willful.
Escape IRS Penalties.
Under FSOP, you must pay any overdue tax resulting from foreign income. You must also pay any interest that has accrued. The longer you wait to file, the more interest you will owe. However, SFOP allows you to avoid paying penalties.
The Streamlined Foreign Offshore Procedures program isn’t necessarily permanent. We have seen the IRS abruptly shut down similar amnesty programs before. They recently shut down the Delinquent International Information Return Submission Procedures program without warning.
At AbitOs, we charge a flat fee for FSOP applications. This flat fee includes preparation of all required amended tax and informational returns.
Failure to comply with offshore tax requirements can carry significant penalties, and even involve criminal charges. If you’ve missed your filing requirements with the IRS, don’t let the problem fester, and don’t try to go it alone. Get experienced, professional help.
What Makes AbitOs Different?
AbitOs specializes in the unique accounting needs of high net-worth individuals with international lifestyles as well as for entities doing business in LATAM and across the globe. International tax compliance can be quite complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Alert, we encourage you to contact us right away.
Call us now at (305) 772-2945, or fill out our secure contact form. We will schedule a free, no-obligation consultation with a highly qualified tax professional with specific experience in international tax compliance.