Streamlined Foreign Offshore Procedures (SFOP) program US back taxes and FBAR reporting The Streamlined Foreign Offshore Procedures (SFOP) program is designed for U.S. taxpayers who have been non-wilful in their failure to report foreign financial assets and pay all tax due in respect of those assets. Here’s a breakdown of the criteria, process, and ways to minimise tax and penalties. This is to ensure you catch up on back taxes with the Internal Revenue Service (IRS). Feel free to use our free online US tax estimator calculator tool. Criteria & eligibility for the SFOP program Residency Requirement: The taxpayer must meet the non-residency requirement (eligibility). If they are a U.S. citizen or a lawful permanent resident (Green Card holder), they must have been physically outside the U.S. for at least 330 full days in at least one of the last three years and not have had a U.S. abode. Non-wilfulness: The taxpayer’s conduct must be non-wilful. That means the failure to report all income, pay all taxes, and submit all required information returns, including FBARs, was due to negligence, inadvertence, or mistake. It was not a result of intentional wrongdoing. Delinquency: The taxpayer must not have filed a U.S. tax return for the most recent tax year for which the due date (including extensions) has already passed and must not have reported gross income from a U.S. source. What is Non-wilfulness for back taxes: non-tax filing Being “non-wilful” means that the taxpayer’s conduct was due to negligence, inadvertence, mistake, or conduct resulting from a good-faith misunderstanding of the requirements of the law. Here are five potential reasons or scenarios that may support a determination of non-wilfulness: Lack of Awareness: The taxpayer was unaware of the requirement to report and pay taxes on foreign income. This is especially plausible for those who have never filed a U.S. tax return despite being a U.S. citizen or resident, perhaps because they’ve lived abroad for an extended period. Reliance on Advisors: The taxpayer relied on a professional tax advisor who either did not inform them of the need to report foreign income and assets or provided incorrect advice. Complexity of Tax Laws: The U.S. tax laws, especially concerning international matters, are complex. A taxpayer might have misunderstood the rules, particularly if they come from a country with different tax reporting requirements. Mistaken Belief: The taxpayer believed they were in compliance because they were paying taxes in their country of residence, mistakenly thinking that this absolved them of any U.S. tax obligations. Language Barrier: English might not be the taxpayer’s first language, causing misunderstandings or misinterpretations of U.S. tax requirements. Taxpayers need to substantiate their claims of non-wilfulness with evidence. If they’re pursuing relief under programs like the Streamlined Foreign Offshore Procedures, they might be required to provide a narrative or certification explaining why they believe they were non-wilful. Process for SFOP for the last three 1040 tax years & six FBAR filings File Returns: Taxpayers must submit the last 3 years of federal tax returns for which the due date has passed. File FBARs: Taxpayers must submit 6 years of FBARs (Report of Foreign Bank and Financial Accounts, FinCEN Form 114) for which the due date has passed. Pay Tax & Interest: Any tax due must be fully paid, along with statutory interest. Complete a Certification: Taxpayers must complete and sign a statement on the Certification by a U.S. Person Residing Outside of the U.S. (Form 14653) certifying that they meet the eligibility criteria for the SFOP, and that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-wilful conduct. Minimise 1040 Taxes and Penalties for late filing with the IRS Utilise Foreign Tax Credits: If foreign taxes were paid, taxpayers can claim the Foreign Tax Credit on Form 1116 to avoid double taxation. Use Treaties: If a tax treaty exists between the U.S. and another country (e.g., U.S.-UK tax treaty), certain provisions can help reduce or eliminate U.S. taxes. Penalty Exemption: One of the main advantages of the SFOP is that there are no late penalties or FBAR penalties for eligible taxpayers. Consider Timing: If possible, consider the timing of disclosures to optimize tax positions, especially if you can carry back losses or credits. Unreported Foreign Income Example: Linda, a U.S. citizen, has been living and working in Germany for the past 6 years. She didn’t realize she had to file U.S. tax returns on her German income. Through SFOP, she files the last 3 years of federal tax returns and 6 years of FBAR (Foreign Bank and Financial Accounts Report) without penalties, reporting her German income and paying any due taxes. Unreported Foreign Accounts: Example: Raj moved to India in 2010 and has savings accounts there. He’s been filing U.S. taxes but didn’t know about the FBAR requirement. Using SFOP, Raj filed the past 6 years of FBARs to disclose his Indian bank accounts, avoiding potential penalties. Incomplete Previous Filings: Example: Marie, living in France, filed her U.S. tax returns but missed reporting her French pension. Discovering the oversight, she uses SFOP to amend the last 3 years of U.S. tax returns to include the pension income and also submits 6 years of FBARs to report her French bank accounts. Business Ownership Overseas: Example: Sam owns a small business in Australia. He filed his U.S. taxes but wasn’t aware he needed to file Form 5471 for his foreign corporation. Through SFOP, Sam back-files the necessary Form 5471 for the last 3 years, reporting the corporation’s activities and ensuring he’s compliant. Investments and Capital Gains Overseas: Example: Jessica, living in Singapore, sold a property she inherited and made a significant gain. Unaware of the U.S. tax implications, she didn’t report this on her U.S. return. She learns about SFOP and uses it to amend the past 3 years of tax returns to report the capital gain from the property sale. FAQ What is the purpose of the IRS Streamlined Foreign Offshore Procedures? The IRS Streamlined Foreign Offshore Procedures aim to provide U.S. taxpayers residing abroad with a straightforward way to report their offshore assets and ensure they're compliant with U.S. tax laws, particularly if they've unintentionally failed to declare foreign income or file required forms. Who is eligible for the Streamlined Foreign Offshore Procedures? U.S. taxpayers living outside the country who haven't willfully evaded tax responsibilities and have failed to report their foreign financial assets or file U.S. tax returns can avail of these procedures. They must also meet a non-residency requirement. Are there penalties associated with the Streamlined Foreign Offshore Procedures? One of the major advantages of this program is the reduced penalties. Eligible taxpayers using the Streamlined Foreign Offshore Procedures aren't subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties. What forms do I need to file under the Streamlined Foreign Offshore Procedures? Taxpayers must submit three years of amended or delinquent tax returns and six years of FBAR (Foreign Bank Account Reports). Along with this, a certification form (Form 14653) must be filed, attesting that the failures to comply were non-willful. Can I participate in the Streamlined Procedures if I've already been contacted by the IRS about my delinquent returns or FBARs? No, if the IRS has initiated a civil examination or a criminal investigation regarding your returns, you aren't eligible for the Streamlined Procedures. It's crucial to apply before the IRS contacts you to benefit from the program's reduced penalties.
Streamlined Foreign Offshore Procedures (SFOP) program US back taxes and FBAR reporting The Streamlined Foreign Offshore Procedures (SFOP) program is designed for U.S. taxpayers who have been non-wilful in their failure to report foreign financial assets and pay all tax due in respect of those assets. Here’s a breakdown of the criteria, process, and ways to minimise tax and penalties. This is to ensure you catch up on back taxes with the Internal Revenue Service (IRS). Feel free to use our free online US tax estimator calculator tool. Criteria & eligibility for the SFOP program Residency Requirement: The taxpayer must meet the non-residency requirement (eligibility). If they are a U.S. citizen or a lawful permanent resident (Green Card holder), they must have been physically outside the U.S. for at least 330 full days in at least one of the last three years and not have had a U.S. abode. Non-wilfulness: The taxpayer’s conduct must be non-wilful. That means the failure to report all income, pay all taxes, and submit all required information returns, including FBARs, was due to negligence, inadvertence, or mistake. It was not a result of intentional wrongdoing. Delinquency: The taxpayer must not have filed a U.S. tax return for the most recent tax year for which the due date (including extensions) has already passed and must not have reported gross income from a U.S. source. What is Non-wilfulness for back taxes: non-tax filing Being “non-wilful” means that the taxpayer’s conduct was due to negligence, inadvertence, mistake, or conduct resulting from a good-faith misunderstanding of the requirements of the law. Here are five potential reasons or scenarios that may support a determination of non-wilfulness: Lack of Awareness: The taxpayer was unaware of the requirement to report and pay taxes on foreign income. This is especially plausible for those who have never filed a U.S. tax return despite being a U.S. citizen or resident, perhaps because they’ve lived abroad for an extended period. Reliance on Advisors: The taxpayer relied on a professional tax advisor who either did not inform them of the need to report foreign income and assets or provided incorrect advice. Complexity of Tax Laws: The U.S. tax laws, especially concerning international matters, are complex. A taxpayer might have misunderstood the rules, particularly if they come from a country with different tax reporting requirements. Mistaken Belief: The taxpayer believed they were in compliance because they were paying taxes in their country of residence, mistakenly thinking that this absolved them of any U.S. tax obligations. Language Barrier: English might not be the taxpayer’s first language, causing misunderstandings or misinterpretations of U.S. tax requirements. Taxpayers need to substantiate their claims of non-wilfulness with evidence. If they’re pursuing relief under programs like the Streamlined Foreign Offshore Procedures, they might be required to provide a narrative or certification explaining why they believe they were non-wilful. Process for SFOP for the last three 1040 tax years & six FBAR filings File Returns: Taxpayers must submit the last 3 years of federal tax returns for which the due date has passed. File FBARs: Taxpayers must submit 6 years of FBARs (Report of Foreign Bank and Financial Accounts, FinCEN Form 114) for which the due date has passed. Pay Tax & Interest: Any tax due must be fully paid, along with statutory interest. Complete a Certification: Taxpayers must complete and sign a statement on the Certification by a U.S. Person Residing Outside of the U.S. (Form 14653) certifying that they meet the eligibility criteria for the SFOP, and that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-wilful conduct. Minimise 1040 Taxes and Penalties for late filing with the IRS Utilise Foreign Tax Credits: If foreign taxes were paid, taxpayers can claim the Foreign Tax Credit on Form 1116 to avoid double taxation. Use Treaties: If a tax treaty exists between the U.S. and another country (e.g., U.S.-UK tax treaty), certain provisions can help reduce or eliminate U.S. taxes. Penalty Exemption: One of the main advantages of the SFOP is that there are no late penalties or FBAR penalties for eligible taxpayers. Consider Timing: If possible, consider the timing of disclosures to optimize tax positions, especially if you can carry back losses or credits. Unreported Foreign Income Example: Linda, a U.S. citizen, has been living and working in Germany for the past 6 years. She didn’t realize she had to file U.S. tax returns on her German income. Through SFOP, she files the last 3 years of federal tax returns and 6 years of FBAR (Foreign Bank and Financial Accounts Report) without penalties, reporting her German income and paying any due taxes. Unreported Foreign Accounts: Example: Raj moved to India in 2010 and has savings accounts there. He’s been filing U.S. taxes but didn’t know about the FBAR requirement. Using SFOP, Raj filed the past 6 years of FBARs to disclose his Indian bank accounts, avoiding potential penalties. Incomplete Previous Filings: Example: Marie, living in France, filed her U.S. tax returns but missed reporting her French pension. Discovering the oversight, she uses SFOP to amend the last 3 years of U.S. tax returns to include the pension income and also submits 6 years of FBARs to report her French bank accounts. Business Ownership Overseas: Example: Sam owns a small business in Australia. He filed his U.S. taxes but wasn’t aware he needed to file Form 5471 for his foreign corporation. Through SFOP, Sam back-files the necessary Form 5471 for the last 3 years, reporting the corporation’s activities and ensuring he’s compliant. Investments and Capital Gains Overseas: Example: Jessica, living in Singapore, sold a property she inherited and made a significant gain. Unaware of the U.S. tax implications, she didn’t report this on her U.S. return. She learns about SFOP and uses it to amend the past 3 years of tax returns to report the capital gain from the property sale.
