Many U.S. citizens and green card holders living abroad are unaware of their U.S. tax obligations, especially regarding foreign bank accounts and assets. The IRS offers a lifeline to such individuals through the Streamlined Foreign Offshore Procedures (SFOP), a compliance program designed for taxpayers who non-willfully failed to report foreign financial accounts and income. This blog provides an in-depth explanation of the SFOP, including eligibility criteria, steps for filing, benefits, and tips for a successful submission.
What Are the Streamlined Foreign Offshore Procedures?
The IRS launched the Streamlined Foreign Offshore Procedures in 2014 to help U.S. taxpayers living abroad catch up with their tax filing obligations without facing severe penalties. It’s part of the broader IRS Offshore Voluntary Disclosure Program initiatives, but SFOP is specifically tailored for those who failed to comply due to non-willful conduct (i.e., negligence, inadvertence, or misunderstanding of the law).
Through SFOP, eligible taxpayers can file delinquent tax returns and FBARs (Foreign Bank Account Reports) and avoid the draconian penalties that normally apply for foreign account reporting violations.
Who Is Eligible for the Streamlined Foreign Offshore Procedures?
To qualify for SFOP, a taxpayer must meet the following requirements:
- Non-Willfulness: The failure to report foreign income and file FBARs must be non-willful. This is defined as conduct due to negligence, inadvertence, or misunderstanding of legal obligations.
- Non-Residency Test: The taxpayer must have been physically outside the United States for at least 330 full days in one of the last three years and must not have a U.S. abode during that period.
- No Prior IRS Contact: The taxpayer must not be under IRS civil or criminal investigation and must not have been contacted regarding the non-compliance before initiating the streamlined filing.
Spouses who file jointly must both meet the eligibility criteria to submit under the SFOP.
What Tax Forms Must Be Filed Under SFOP?
The Streamlined Foreign Offshore Procedures require the taxpayer to file or amend the following documents:
- Three years of U.S. tax returns: Either original or amended Forms 1040, including all necessary international information reporting forms such as:
- Form 8938 (Statement of Specified Foreign Financial Assets)
- Form 3520/3520-A (Foreign Trusts & Gifts)
- Form 5471 (Controlled Foreign Corporations)
- Form 8621 (Passive Foreign Investment Companies)
- Six years of FBARs: File FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) electronically via the BSA E-Filing System for each of the six most recent years.
- Form 14653: “Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures” – This form certifies eligibility and provides a personal statement explaining non-willful conduct.
Key Benefits of Using the Streamlined Foreign Offshore Procedures
There are several significant benefits of participating in the SFOP:
- No Penalties: Unlike the Domestic Streamlined Program or other voluntary disclosure options, the foreign streamlined procedures waive all late filing and FBAR penalties.
- Clean Slate: Taxpayers become fully compliant with U.S. tax laws going forward, reducing exposure to civil and criminal enforcement.
- Relief from OVDP Penalties: SFOP is an alternative to the harsher Offshore Voluntary Disclosure Program penalties, which could be 27.5% to 50% of account balances.
- Simplified Process: The process is streamlined with only three years of returns and six years of FBARs required.
How to Complete and Submit an SFOP Filing
Here’s a step-by-step breakdown of how to file under the Streamlined Foreign Offshore Procedures:
Step 1: Gather Documentation
Collect foreign bank account statements, investment reports, tax documents, and any prior tax filings to begin preparing the amended or delinquent returns.
Step 2: Prepare Three Years of Tax Returns
Use Form 1040 and attach any required international forms. The returns can be amended or original (if never filed). Clearly write “Streamlined Foreign Offshore” in red ink on top of the first page of each return.
Step 3: File Six Years of FBARs
Use the BSA E-Filing System to submit FinCEN Form 114. Select the box indicating the submission is part of a streamlined compliance filing. Note the reference to SFOP in the explanation section.
Step 4: Complete Form 14653
This form is the most critical component of your submission. It includes:
- Certification of non-willful conduct
- Explanation of how and why you failed to comply
- Declaration that the failure was not due to intentional disregard
Be truthful and specific. A vague or contradictory narrative may result in denial or future examination.
Step 5: Submit the Full Package
Mail all forms, including tax returns and Form 14653, in one package to the IRS at:
Internal Revenue Service
3651 South IH35
Mail Stop 4301, AUSC
Austin, TX 78741
Step 6: Monitor Your IRS Account
Keep records of your submission and watch for any IRS follow-up. Processing times can vary from a few months to over a year. The IRS may accept the filing as-is or ask for clarification.
When to Seek Help from a Tax Professional
Due to the technical and legal nuances of the streamlined program, consulting a tax attorney or accountant with experience in offshore compliance is highly advisable, especially in the following cases:
- You held significant foreign financial assets
- You owned interests in foreign businesses or trusts
- You received large foreign gifts or inheritances
- You previously filed incorrectly or incompletely
- You are unsure whether your conduct was non-willful
Potential Risks and Pitfalls
While SFOP offers a favorable route to compliance, there are still risks to consider:
- Misrepresentation: Submitting false or misleading information could result in penalties or criminal charges.
- Ineligible Participants: Taxpayers who don’t meet the non-residency or non-willfulness standards may be rejected.
- Incomplete Submissions: Leaving out required forms or years may invalidate your entire filing.
Be thorough, transparent, and conservative when preparing your submission.
Alternatives to the Streamlined Foreign Offshore Procedures
If you do not qualify for SFOP, other IRS programs may apply:
- Streamlined Domestic Offshore Procedures: For U.S.-based taxpayers who failed to report foreign income
- Delinquent FBAR Submission Procedures: For taxpayers who do not owe additional tax but failed to file FBARs
- Voluntary Disclosure Practice (VDP): For willful non-compliance and higher-risk taxpayers
Conclusion
The IRS Streamlined Foreign Offshore Procedures offer a lifeline for U.S. expatriates and dual citizens who inadvertently failed to report foreign income and assets. By meeting the eligibility criteria and properly submitting the required forms, you can come into compliance with little to no penalties. The process requires diligence, honesty, and often professional guidance—but the peace of mind gained from being in good standing with the IRS is well worth the effort.
For detailed instructions and official forms, visit the IRS streamlined procedures portal at: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.
