Streamlined Filing vs. Voluntary Disclosure: Choosing the Right Path for Offshore Noncompliance

Overview

U.S. taxpayers with unreported offshore accounts or assets face serious risks, including steep penalties and potential criminal prosecution. The IRS offers two main paths to come into compliance: the Streamlined Filing Compliance Procedures (SFCP) and the IRS Voluntary Disclosure Practice (VDP). Choosing the right program depends on whether the noncompliance was willful or non-willful, the taxpayer’s risk profile, and the potential penalties involved.

Streamlined Filing Compliance Procedures (SFCP)

The SFCP is designed for taxpayers whose failure to report foreign financial assets and pay all tax due was non-willful—that is, due to negligence, inadvertence, mistake, or a good faith misunderstanding of the law. There are two versions: Streamlined Domestic Offshore Procedures (for U.S. residents) and Streamlined Foreign Offshore Procedures (for non-residents).

Key Features:

  • File three years of amended or delinquent tax returns (with all required information returns) and six years of FBARs (FinCEN Form 114).

  • Certify under penalty of perjury that the noncompliance was non-willful.

  • For U.S. residents, pay a 5% miscellaneous offshore penalty on the highest aggregate value of foreign financial assets during the covered period. For non-residents, all penalties are generally waived.

  • Pay all tax due and statutory interest.

  • Not available to taxpayers under IRS audit or criminal investigation, or those who have already been contacted by the IRS about the noncompliance.

  • No criminal protection is provided, but the IRS does not automatically audit streamlined submissions.

IRS Voluntary Disclosure Practice (VDP)

The VDP is intended for taxpayers whose noncompliance was willful and who face potential criminal exposure. This program is not an amnesty, but a timely, truthful, and complete disclosure may result in the IRS not recommending prosecution.

Key Features:

  • Submit a two-part application (Form 14457): preclearance request and detailed disclosure.

  • Cooperate fully with the IRS, provide all required returns and documentation, and make good faith arrangements to pay all tax, interest, and penalties.

  • Subject to higher penalties, including civil fraud penalties (typically 75% of the highest tax year’s underpayment), FBAR penalties, and other applicable penalties.

  • Not available to taxpayers already under IRS examination or whose noncompliance is already known to the IRS.

  • Only available for noncompliance involving legal source income.

  • Does not guarantee immunity from prosecution, but may result in prosecution not being recommended.

When to Use Each Program

  • Streamlined Filing is appropriate for taxpayers who can credibly certify that their noncompliance was non-willful and who are not under IRS investigation. It offers reduced or no penalties and a straightforward process for coming into compliance.

  • Voluntary Disclosure is appropriate for taxpayers with willful violations or criminal exposure who seek to avoid criminal prosecution and resolve their tax liabilities, even though penalties are higher.

Conclusion

Choosing the right path for offshore noncompliance is critical. Taxpayers must honestly assess whether their conduct was willful or non-willful, as using one program precludes the use of the other for the same noncompliance. The streamlined procedures offer a lower-penalty route for non-willful cases, while the voluntary disclosure practice is the only safe harbor for those with criminal exposure.

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.