If you have previously filed all of your US tax returns only to later realize that you accidentally omitted reporting your foreign income or assets, the Streamlined Offshore Domestic Procedures (“SDOP”) may be a good option for you to come into IRS compliance.
In order to qualify for SDOP, your omissions must be non-willful (i.e. you were not omitting them on purpose). You must have timely filed your US tax returns, and you cannot qualify as a foreign resident. If you meet these requirements, you can pay a reduced penalty of 5% of your foreign asset base rather than the much higher penalties (up to 50% per year!) permitted under law for non-compliance.
The process for filing under SDOP involves preparing amended tax returns for the previous 3 years and FBARs (Fincen 114) for the previous 6 years. You calculate any increase in tax that was owed on the unreported foreign income, as well as determine the balances in your foreign accounts as of 12/31 of each year and translate to US dollars at appropriate exchange rates for each year. Additionally, you must file any omitted forms related to foreign assets and income such as 5471, 8858, 8865, 8621, 3520, 3520-A, etc.
The 5% civil penalty is levied based on the year in the lookback period with the highest asset balances as of 12/31. For example, if you are filing for the 6-year lookback period from 2012-2017, and the highest year-end aggregate balances in your account are as of 12/31/2015, you will multiple that amount by 5% to determine your penalty. You must pay the 5% penalty along with any unpaid tax shown on the amended returns, plus interest.
SDOP provides a good option for taxpayers who, again, were not willful in their non-compliance. However, the burden really is on the taxpayer to demonstrate non-willfullness. Furthermore, the penalties under this program, while reduced, are still substantial and can seem punitive for individuals that unknowingly made a mistake. Our experienced Offshore Disclosure specialists can help you determine whether SDOP is the best option for you given your circumstances. Additionally, through our close association with Lanphier LLP, a full service CPA firm of which Dennis Lanphier is also a partner, we are also able to assist you with preparing the applicable tax returns necessary to complete this disclosure process.
Contact our firm today to discuss your Offshore Disclosure issues and how we can assist you.