Streamlined Foreign Offshore Procedures

The Streamlined Foreign Offshore Procedures provide favorable IRS compliance terms for qualifying U.S. taxpayers residing outside the United States whose failures to report foreign income, assets, FBARs, or international information returns resulted from non-willful conduct.

Qualifying taxpayers can generally correct the covered tax-return and FBAR years without the 5% miscellaneous offshore penalty that applies under the Streamlined Domestic Offshore Procedures.

Colorado Legal assists U.S. taxpayers abroad with Streamlined eligibility, residence analysis, delinquent and amended tax returns, FBARs, international information returns, and Form 14653 non-willfulness certifications.

What Are the Streamlined Foreign Offshore Procedures?

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

They apply to qualifying taxpayers who satisfy the applicable non-residency requirement and whose failures resulted from non-willful conduct.

The Non-Residency Requirement for U.S. Citizens and Green Card Holders

For a U.S. citizen or lawful permanent resident, the IRS non-residency test generally requires that, in at least one of the most recent three covered tax years, the individual:

• did not have a U.S. abode; and
• was physically outside the United States for at least 330 full days.

Temporary presence in the United States or maintaining a dwelling in the United States does not necessarily mean that an individual has a U.S. abode. The particular facts matter.

Non-Residency for Individuals Who Are Not U.S. Citizens or Green Card Holders

For an individual who is not a U.S. citizen or lawful permanent resident, the IRS applies a different rule.

Such an individual generally satisfies the applicable Streamlined Foreign non-residency requirement if, in at least one of the relevant three covered years, the individual did not meet the substantial presence test.

What About Married Couples Filing Jointly?

For a joint return, both spouses must satisfy the applicable Streamlined Foreign non-residency requirement.

This differs from the Domestic procedure, where one or both spouses failing the Foreign non-residency test can lead to Domestic treatment.

How Many Years Are Included?

A typical Streamlined Foreign submission generally includes:

• three tax-return years for which the applicable return due date or properly extended due date has passed; and
• six FBAR years for which the FBAR due date has passed.

Can Unfiled Original Tax Returns Be Submitted?

Yes, in appropriate Streamlined Foreign cases.

For each covered tax year:

• if no U.S. income tax return was previously filed, a complete and accurate delinquent return can generally be submitted; or
• if a return was previously filed, a complete and accurate amended return is generally submitted.

This is an important distinction from Streamlined Domestic, which generally requires that covered-year income tax returns already have been filed.

What Forms May Be Required?

Depending on the taxpayer’s foreign assets and activities, a Streamlined Foreign submission can involve:

• Form 1040 delinquent income tax returns;
• Form 1040-X amended returns;
• FinCEN Form 114 FBARs;
• Form 8938;
• Form 5471;
• Form 8621;
• Form 3520 or 3520-A;
• Form 8865;
• Form 8858;
• foreign tax credit calculations;
• foreign pension or retirement-plan issues; and
• other international information returns.

Form 14653 — Certification by U.S. Person Residing Outside the United States

A qualifying taxpayer uses Form 14653 to make the required Streamlined Foreign certification.

The taxpayer certifies eligibility, confirms that required FBARs have been filed, and certifies that failures to file returns, report income, pay tax, or submit required information returns resulted from non-willful conduct.

The taxpayer should provide a complete factual explanation supporting the certification.

For more on that distinction, see Willful vs. Non-Willful FBAR Violations.

Is There a 5% Offshore Penalty?

No Domestic-style 5% miscellaneous offshore penalty applies to a qualifying Streamlined Foreign submission.

This is one of the most important differences between Foreign and Domestic Streamlined treatment.

However, the taxpayer still must report the income correctly and generally must pay the underlying U.S. income tax and statutory interest due with the delinquent or amended returns.

What Penalty Relief Is Available?

A taxpayer who qualifies and fully complies with the Streamlined Foreign instructions generally is not subject to the specified:

• failure-to-file penalties;
• failure-to-pay penalties;
• accuracy-related penalties;
• international information-return penalties; or
• FBAR penalties

for the covered Streamlined submission, subject to the IRS rules and the accuracy of the taxpayer’s certification and filings.

Previously assessed penalties generally are not automatically abated.

Tax and Interest Still Apply

Streamlined Foreign does not eliminate the underlying U.S. income tax due on foreign income.

The full additional tax and applicable statutory interest generally must be paid in connection with the submission.

Foreign Pensions and Retirement Plans

U.S. taxpayers residing abroad frequently encounter reporting issues involving foreign pensions, retirement plans, savings arrangements, and investments that receive different treatment under U.S. law than under local law.

Depending on the country and applicable treaty, the Streamlined procedures can also intersect with requests for retroactive relief involving certain treaty-based tax-deferral elections.

PFICs and Foreign Mutual Funds

Foreign mutual funds frequently create U.S. Passive Foreign Investment Company issues even where the investment is ordinary and tax-favored in the taxpayer’s country of residence.

See our PFIC Tax and Form 8621 resource for additional information.

Can the IRS Audit a Streamlined Foreign Submission?

Yes.

Streamlined returns are not automatically selected for examination, but they may be selected through normal IRS audit procedures or checked against information received from banks, financial institutions, governments, or other sources.

Streamlined does not culminate in an automatic closing agreement.

Who Cannot Use Streamlined?

A taxpayer generally cannot use the Streamlined procedures after the IRS has initiated a civil examination of the taxpayer’s returns for any taxable year.

A taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible.

What If the Conduct May Have Been Willful?

The Streamlined Foreign Offshore Procedures require non-willful conduct.

Where the taxpayer is concerned that the conduct may have been willful, the IRS Criminal Investigation Voluntary Disclosure Practice should be evaluated before making a Streamlined certification.

Foreign vs. Domestic Streamlined

Issue	Streamlined Foreign	Streamlined Domestic
Residence requirement	Must meet IRS non-residency rules	Fails applicable Foreign non-residency requirement
Unfiled original returns	Can generally be included when applicable	Covered-year original returns generally must already have been filed
Tax-return period	Generally three years	Generally three years
FBAR period	Generally six years	Generally six years
Certification	Form 14653	Form 14654
5% miscellaneous offshore penalty	No	Generally yes

Frequently Asked Questions

Do I have to live overseas for all three covered years?

Not necessarily. The IRS non-residency rules generally require the applicable test to be satisfied in at least one of the relevant three years. The exact test differs depending on whether the taxpayer is a U.S. citizen or lawful permanent resident.

Can I file original delinquent returns through Streamlined Foreign?

Yes, qualifying Foreign Streamlined taxpayers can generally submit delinquent original returns for covered years when no return was previously filed.

Does Streamlined Foreign eliminate all U.S. tax?

No. The underlying income tax and applicable interest remain payable.

Is there a 5% penalty under Streamlined Foreign?

Qualifying Streamlined Foreign submissions are not subject to the Domestic procedure’s 5% miscellaneous offshore penalty.

Do both spouses have to qualify for foreign residence?

For joint return filers, both spouses must satisfy the applicable Streamlined Foreign non-residency requirement.

Official IRS Resources

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