Why should I use the IRS Streamlined Tax Amnesty Program?

For US taxpayers, compliance with international tax obligations can be challenging, particularly for those living abroad or unaware of their responsibilities. 

 

The IRS Streamlined Tax Amnesty Program provides a lifeline for individuals who unintentionally failed to meet their obligations, offering a simplified path to compliance while avoiding severe penalties. 

Key Features of the Streamlined Tax Amnesty Program

Here are the program’s main highlights:

 

No or Reduced Penalties

The program offers leniency in penalties:

 

• No Penalties for SFOP Participants: Those living abroad pay only back taxes and interest owed.
• Reduced Penalty of 5% for SDOP Participants: US-based taxpayers pay a fraction of the penalties under standard compliance programs.

 

Simplified Filing Requirements

Participants are only required to submit:

 

• Three Years of Amended Tax Returns: Reporting all previously unreported income from foreign and domestic sources.
• Six Years of FBARs (Foreign Bank Account Reports): For foreign accounts exceeding US$10,000 at any point during the year. This limited look-back period simplifies the process compared to more extensive disclosure programs.

 

Certification of Non-Willfulness

Taxpayers must certify, under penalty of perjury, that their failure to comply was non-willful. This involves submitting:

 

• Form 14653 for SFOP or Form 14654 for SDOP.
• A detailed narrative explaining the circumstances that led to non-compliance, emphasizing that it was due to negligence, misunderstanding, or inadvertence—not intentional evasion.

 

Protection from Criminal Prosecution

By voluntarily disclosing their non-compliance and demonstrating non-willful conduct, taxpayers mitigate the risk of criminal charges, generally reserved for willful evasion cases.

Proving Non-Willfulness: How to Make Your Case

To qualify, taxpayers must provide a convincing case that their non-compliance was unintentional. Here’s how:

 

1. Gather Supporting Documentation – Compile evidence to support your claim, such as:

• Foreign Account Records: Statements showing the account’s origin or purpose, especially if tied to foreign residency or inheritance.
• Tax History: Past returns that reflect compliance, except for the oversight in question.
• Professional Advice Records: Correspondence with tax professionals showing reliance on incorrect advice.

 

1. Prepare a Non-Willfulness Statement – This narrative, submitted with Form 14653 or 14654, should include:

• Background Information: Personal and financial circumstances contributing to non-compliance.
• Explanation of Non-Compliance: A clear account of why the error occurred (e.g., lack of awareness, misunderstanding of FBAR requirements).
• Corrective Actions Taken: Steps like hiring a tax professional or amending returns demonstrate commitment to compliance.
• Evidence of Non-Intentional Conduct: Explicitly state that your actions were not willful, supported by the documentation.

Examples of Non-Willfulness

Lack of Knowledge

Jane, a US citizen living in Canada for several years, was unaware that she needed to file US tax returns and FBARs annually. She assumed that paying taxes in Canada covered all her obligations. Her non-compliance was not intentional but due to her lack of understanding of US tax laws requiring worldwide income reporting.

 

First-Time Filing as an Expat

Jacob recently moved abroad for the first time and opened a local bank account. He didn’t know that US citizens living overseas must report foreign financial accounts and income. His lack of compliance was the result of being unfamiliar with US tax rules for expats..

 

Failure to Realize the FBAR Filing Threshold

Sarah, a US expat, maintained several small foreign bank accounts, each with balances under US$10,000, but the combined total exceeded the FBAR threshold during the year. She didn’t file FBARs because she was unaware that the US$10,000 limit applied to aggregate balances, not individual accounts. Her mistake was non-willful.

 

Inherited Assets

Tom inherited a bank account in Switzerland from a relative. The account contained significant funds, but Tom didn’t realize he needed to report the account to the IRS on an FBAR or include any interest income on his tax returns. His oversight was non-willful, as he was unfamiliar with foreign reporting rules.

Alternatives for Taxpayers Who Don’t Qualify

If a taxpayer doesn’t meet the criteria for the Streamlined Program, other options are available:

 

• Voluntary Disclosure Program (VDP): For taxpayers with willful non-compliance, this program helps avoid criminal prosecution by resolving tax issues voluntarily.
• Delinquent FBAR Submission Procedures: Designed for taxpayers who failed to file FBARs but don’t owe additional taxes.
• Delinquent International Information Return Submission Procedures: For taxpayers who missed international forms like Form 5471 or Form 3520.
• Quiet Disclosure: This involves filing amended returns and FBARs without enrolling in a formal IRS program, though it carries risks of penalties.
• Filing Amended Returns: For isolated errors, filing amended returns with corrected information can resolve past discrepancies.

After Compliance: Staying on Track

Once compliant, taxpayers must maintain good standing with the IRS. Here’s how:

 

1. File Annual Tax Returns: Continue reporting worldwide income, even if living abroad.
2. Report Foreign Accounts (FBARs): File annually if foreign accounts exceed US$10,000.
3. Keep Detailed Records: Maintain records of all income, accounts, and tax filings.
4. Stay Informed: Tax laws evolve, so working with a knowledgeable tax professional ensures ongoing compliance.

 

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