IRS Streamlined Filing Compliance Procedures: A Guide for Taxpayers with Unreported Foreign Assets

If you are a U.S. taxpayer who has not reported foreign financial assets or income, the IRS Streamlined Filing Compliance Procedures (SFCP) may offer a path to compliance with reduced penalties and minimized risk. This article explains the streamlined process, eligibility, required documentation, benefits, risks, and best practices for a successful submission.

What Are the IRS Streamlined Filing Compliance Procedures?

The SFCP is a special IRS program for taxpayers whose failure to report foreign assets and income was non-willful—meaning it was due to negligence, inadvertence, mistake, or a good faith misunderstanding of the law. The program is available to both U.S. residents and non-residents, with slightly different requirements and penalty structures for each group. The goal is to help taxpayers come into compliance while avoiding the harshest penalties and criminal prosecution for non-willful conduct.

Who Is Eligible?

To qualify for the streamlined procedures, you must:

  • Certify that your noncompliance was non-willful.

  • Not be under IRS audit or criminal investigation for any tax year.

  • Have a valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).

  • Not have previously used the IRS voluntary disclosure program for the same noncompliance.

What Is Required?

1. Amended or Delinquent Tax Returns:

File amended (Form 1040X) or delinquent (Form 1040) U.S. tax returns for the last three years, including all required international information returns (e.g., Forms 3520, 5471, 8938).

2. Delinquent FBARs:

File delinquent FBARs (FinCEN Form 114) for the last six years electronically, indicating the submission is part of the streamlined procedures.

3. Certification Statement:

Submit a signed certification form—Form 14654 (U.S. residents) or Form 14653 (non-residents)—attesting to eligibility and non-willfulness, with a detailed narrative explaining the circumstances of noncompliance.

4. Payment:

Pay all tax due, applicable interest, and, for U.S. residents, a 5% miscellaneous offshore penalty based on the highest aggregate value of foreign financial assets during the covered period.

5. Special Statements:

If seeking relief for certain foreign retirement plans, include additional statements and forms as required.

Step-by-Step Process

  1. Confirm eligibility and gather all necessary records.

  2. Prepare and file amended or delinquent tax returns and information returns for the last three years.

  3. File delinquent FBARs for the last six years electronically.

  4. Complete and sign the appropriate certification form with a detailed non-willfulness narrative.

  5. Calculate and pay all tax, interest, and (if applicable) the 5% penalty.

  6. Mail all documents and payments to the IRS address for streamlined submissions.

  7. Maintain compliance with all U.S. tax filing and reporting requirements going forward.

Benefits of the Streamlined Procedures

  • Reduced or Eliminated Penalties: Non-residents have all penalties waived; U.S. residents pay only a 5% penalty on foreign assets.

  • No Criminal Prosecution: Taxpayers who comply are generally protected from criminal prosecution for the disclosed issues.

  • No Automatic Audit: Submissions are not automatically audited, though they may be selected under normal IRS procedures.

Risks and Considerations

  • Strict Non-Willfulness Requirement: If the IRS later determines your conduct was willful, you may face severe penalties and possible criminal prosecution.

  • Potential for Audit: The IRS may audit your submission and verify information against third-party data.

  • No Abatement of Previously Assessed Penalties: Penalties already assessed for prior disclosures are not abated.

  • Ineligibility if Under Audit: Taxpayers under audit or criminal investigation are not eligible.

Common Mistakes and Best Practices

Common Mistakes:

  • Incomplete or inaccurate non-willfulness statements.

  • Omitting required forms or years.

  • Submitting while ineligible.

  • Miscalculating the 5% penalty.

  • Failing to pay all tax and interest due.

  • Missing or invalid taxpayer identification numbers.

Best Practices:

  • Prepare a detailed, honest non-willfulness statement with supporting documentation.

  • Double-check eligibility before submitting.

  • Include all required forms and years.

  • Accurately calculate and document the offshore penalty.

  • Remit full payment with your submission.

  • Keep copies and proof of all submissions.

  • Be prepared for possible IRS follow-up.

Summary:

The IRS Streamlined Filing Compliance Procedures offer a valuable opportunity for taxpayers with non-willful foreign asset noncompliance to come into compliance, avoid most penalties, and minimize risk. Careful preparation, honest disclosure, and strict adherence to the requirements are essential for a successful submission.

If you believe you may be eligible, consider gathering your records and reviewing your situation in detail to take advantage of this IRS program.

For more details on how to apply these mechanisms to your situation, check the IRS guidelines or click Contact to schedule a call with one our tax specialists.