Streamlined Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures provide a potential compliance path for qualifying U.S. taxpayers whose failures to report foreign financial assets, foreign income, FBARs, or international information returns resulted from non-willful conduct. Unlike the Streamlined Foreign Offshore Procedures, the Domestic procedure generally includes a 5% Title 26 miscellaneous offshore penalty.

Colorado Legal assists taxpayers with Streamlined eligibility, FBAR and international return analysis, amended tax returns, offshore penalty calculations, and the required non-willfulness certification. Philip M. Falco is both a Colorado attorney and Certified Public Accountant.

What Are the Streamlined Domestic Offshore Procedures?

The Streamlined Domestic Offshore Procedures are one branch of the IRS Streamlined Filing Compliance Procedures.

They are intended for qualifying taxpayers who fail the applicable Streamlined Foreign non-residency requirement and whose failures to report foreign income, assets, FBARs, or required international information returns resulted from non-willful conduct.

The IRS describes non-willful conduct as conduct resulting from negligence, inadvertence, mistake, or a good-faith misunderstanding of the requirements of the law.

Who May Qualify for Streamlined Domestic?

Among the current eligibility requirements, a taxpayer seeking Streamlined Domestic treatment generally must:

• meet the general Streamlined eligibility rules;
• fail to satisfy the applicable Streamlined Foreign non-residency requirement;
• have previously filed a U.S. income tax return, if required, for each of the most recent three covered tax years;
• have failed to report gross income from a foreign financial asset and pay the tax required by U.S. law;
• potentially have failed to file one or more FBARs or international information returns; and
• establish through the required certification that the failures resulted from non-willful conduct.

For joint filers, the residence rules require careful analysis because Streamlined Domestic can apply where one or both spouses fail the Streamlined Foreign non-residency requirement.

Can Streamlined Domestic Be Used for Completely Unfiled Tax Returns?

Generally no. The IRS requires a Domestic Streamlined taxpayer to have previously filed a U.S. income tax return, if required, for each of the three covered tax-return years.

The Domestic procedure uses complete and accurate amended returns, generally Form 1040-X, for the covered tax-return period.

The IRS expressly states that delinquent original income tax returns cannot be filed through the Streamlined Domestic Offshore Procedures.

This is a significant difference from the Streamlined Foreign Offshore Procedures, which can permit qualifying taxpayers abroad to submit delinquent original returns for covered years when returns were not previously filed.

How Many Years Are Included?

A typical Streamlined Domestic submission generally includes:

• three tax-return years — the most recent three years for which the U.S. tax return due date, or properly extended due date, has passed; and
• six FBAR years — the most recent six years for which the applicable FBAR due date has passed.

The exact covered years depend on the date of submission, extensions, and the taxpayer’s filing history.

What Must Be Filed?

Depending on the taxpayer’s circumstances, a Domestic Streamlined package can include:

• Form 1040-X amended income tax returns;
• FinCEN Form 114 FBARs;
• Form 8938;
• Form 5471;
• Form 8621;
• Form 3520 or 3520-A;
• Form 8865;
• Form 8858;
• other required international information returns;
• the required non-willfulness certification; and
• payment of additional tax, statutory interest, and the applicable miscellaneous offshore penalty.

The required forms depend on the assets, entities, transactions, income, and ownership interests involved in each year.

Form 14654 — Certification by U.S. Person Residing in the United States

A Domestic Streamlined submission requires Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.

The certification addresses eligibility, filing of required FBARs, non-willfulness, and the calculation of the miscellaneous offshore penalty.

The taxpayer must describe the specific facts supporting non-willfulness. This should be an accurate explanation of the taxpayer’s actual circumstances rather than generic language.

See our guide to willful vs. non-willful FBAR violations.

The 5% Streamlined Domestic Offshore Penalty

A qualifying Domestic Streamlined submission generally includes a 5% Title 26 miscellaneous offshore penalty.

The calculation is based on the highest aggregate balance or value of foreign financial assets subject to the penalty during the covered tax-return and FBAR periods.

For this calculation, the IRS compares the aggregate year-end account balances and asset values for the relevant years and selects the highest aggregate amount among those years.

Which Assets May Be Included in the 5% Penalty Base?

Depending on the facts, foreign financial assets potentially included in the penalty analysis can include:

• accounts at foreign financial institutions;
• certain accounts at foreign branches of U.S. institutions;
• foreign stocks or securities held outside a financial account;
• foreign mutual funds;
• foreign hedge funds;
• foreign private-equity interests; and
• other foreign financial assets subject to the Streamlined penalty rules.

An asset can be relevant because it should have been reported on an FBAR, should have been reported on Form 8938, or because gross income relating to a properly reported asset was not reported during the covered period.

The calculation therefore should not automatically be assumed to equal 5% of the balance in one foreign bank account.

Tax and Interest Still Must Be Paid

Streamlined Domestic does not eliminate the underlying income tax attributable to previously unreported foreign income.

The taxpayer generally must pay the additional tax shown on the amended returns, applicable statutory interest, and the 5% miscellaneous offshore penalty.

What Penalties Does Streamlined Domestic Replace?

A taxpayer who qualifies and fully complies with the Streamlined Domestic instructions generally receives the penalty treatment provided by that procedure rather than ordinary accuracy-related, international information-return, and FBAR penalties for the covered submission.

Previously assessed penalties generally are not automatically abated merely because the taxpayer later qualifies for Streamlined treatment.

Can the IRS Audit a Streamlined Domestic Submission?

Yes. Streamlined submissions do not receive an automatic closing agreement and are not immune from examination.

The IRS states that Streamlined returns are not automatically selected for audit, but they can be selected through normal audit-selection procedures and can be checked against information from banks, financial advisers, and other sources.

What If the IRS Has Already Started an Examination?

A taxpayer is not eligible for the Streamlined procedures if the IRS has initiated a civil examination of the taxpayer’s returns for any taxable year, even if that examination is unrelated to foreign assets.

A taxpayer under an IRS Criminal Investigation investigation is likewise ineligible for Streamlined treatment.

Domestic Streamlined vs. Foreign Streamlined

Issue	Domestic	Foreign
Residence	Taxpayer does not satisfy applicable Foreign non-residency requirement	Taxpayer satisfies applicable Foreign non-residency requirement
Three covered return years	Previously filed returns generally required; amended returns submitted	Delinquent original or amended returns may be submitted as applicable
FBAR period	Generally six covered FBAR years	Generally six covered FBAR years
Certification	Form 14654	Form 14653
Miscellaneous offshore penalty	Generally 5%	No Domestic-style 5% miscellaneous offshore penalty for qualifying submissions

What If the Conduct May Have Been Willful?

Streamlined Domestic requires non-willful conduct.

If the facts create a substantial concern that the reporting failures may have been willful, a taxpayer should evaluate the issue before signing Form 14654 or filing amended returns.

Potentially willful cases may require consideration of the IRS Criminal Investigation Voluntary Disclosure Practice.

Frequently Asked Questions

Is the Streamlined Domestic penalty always 5%?

The procedure generally imposes a 5% miscellaneous offshore penalty on the highest aggregate balance or value of assets included in the penalty base under the Streamlined rules. Determining which assets and years belong in that base requires a separate calculation.

Can I use Streamlined Domestic if I never filed my tax returns?

The Domestic procedure generally requires previously filed returns for each of the three covered years for which a return was required. It does not permit delinquent original income tax returns to be filed through the Domestic procedure.

Do I still owe income tax?

Yes. Additional income tax and applicable statutory interest remain payable.

Do I file six amended tax returns?

Generally no. The standard covered tax-return period is three years, while the standard covered FBAR period is six years.

Does Streamlined Domestic guarantee that I will not be audited?

No. Streamlined submissions are not automatically audited, but they remain subject to ordinary IRS examination and verification procedures.

Official IRS Resources

• IRS — U.S. Taxpayers Residing in the United States
• IRS — Streamlined Filing Compliance Procedures