Whether you have delinquent tax returns or you’re looking to declare unreported income, IRS amnesty programs offer a way to meet your tax obligations. For undeclared foreign income or missing Foreign Bank and Financial Accounts Reports (FBARs), you have two main options: the Streamlined Domestic Offshore Program (SDOP) or the Streamlined Foreign Offshore Program (SFOP). But what’s the difference between these two programs, and how do you choose the best amnesty program for your needs?
Well, while it’s best to consult the Gordon Law team for individualized tax advice, here’s an SDOP vs SFOP comparison and some tips for choosing the right amnesty program to remedy tax non-compliance.
What Is the Streamlined Domestic Offshore Program (SDOP)?
The Streamlined Domestic Offshore Program (SDOP) is an IRS offshore compliance program allowing U.S. residents to amend tax return non-compliance openly, and with less risk of significant financial penalties, than opting for a quiet disclosure.
- SDOP is open to S. residents, citizens, and Green Card holders
- Eligible individuals use it to disclose unreported foreign income e.g. trust or offshore account income
- SDOP is for non-willful reporting errors e.g. a genuine oversight or misunderstanding of the applicable laws
- Eligible taxpayers won’t pay certain penalties e.g. late payment or delinquent tax penalties
So, whether you’re filing delinquent FBARs or amending a tax return, the SDOP could support your needs.
What Is the Streamlined Foreign Offshore Program (SFOP)?
The Streamlined Foreign Offshore Program is an IRS amnesty procedure for openly disclosing tax non-compliance abroad. It’s therefore virtually the same as SDOP but with key differences.
- You can only use SFOP if you meet strict residency requirements
- It’s open to U.S. taxpayers (citizens and Green Card holders) who did not reside in the U.S. for a certain time period
- As with SDOP, it’s only for non-willful underreporting, not deliberate non-disclosure of foreign income
- Again, eligible taxpayers won’t pay certain penalties they might otherwise face for quiet disclosures
Both programs will require taxpayers to formally certify negligent rather than deliberate non-compliance.
So, if those are the overarching principles, what truly separates SDOP from SFOP, and which one should you choose if you’re potentially eligible for both? Let’s break down these considerations individually.
SDOP vs. SFOP Comparison: Eligibility Requirements
You can’t use SDOP or SFOP unless you meet the eligibility criteria. The requirements for each program do differ in a substantial way.
SDOP Eligibility
Aside from being a U.S. citizen, resident, or Green Card holder, to use SDOP, you must meet the following criteria:
- Meet the substantial presence test: physical presence in the U.S. on at least 31 days of the current calendar year, or at least 183 days in the most recent three calendar years (including this one) subject to the IRS’ weighted formula for the current calendar year and previous two years.
- Be prepared to certify you acted negligently rather than deliberately.
- There are no outstanding IRS civil or criminal investigations against you.
Typically, you should have also already filed the most recent three years’ worth of tax returns.
SFOP Eligibility
If you’re not eligible for SDOP—particularly on residence grounds—you may be eligible for SFOP. The criteria are:
- You’ve been outside of the U.S. for at least 330 days during a recent calendar year—both spouses must meet this requirement if it’s a joint return.
- Did not maintain a primary residence in the U.S. during your absence.
- Have a valid U.S. Social Security Number (SSN) or Taxpayer Identification Number (TIN).
- No active civil or criminal IRS investigations pending against you.
- Be prepared to certify non-willful rather than deliberate conduct.
As with the SDOP, you should typically have filed the last three years’ worth of tax returns.
Unsure which eligibility criteria you meet? That’s what the Gordon Law team is here for! Contact us to discuss your IRS amnesty program eligibility.
SDOP vs. SFOP: IRS Penalties
There are significant differences in how the IRS applies penalties for filing through the SDOP or SFOP.
SDOP Penalties
The IRS imposes a 5% one-off miscellaneous penalty on foreign assets that should have been disclosed.
- The penalty is 5% of the highest aggregate year-end value of assets the taxpayer should’ve disclosed.
- Most foreign assets—including mutual funds, bank accounts, and annuities—are included. Some assets, such as foreign real estate the taxpayer holds directly, may be excluded.
- The penalty is designed to simplify the process for calculating delinquent taxes owed—rather than imposing penalties per asset, it’s like a “catch all” figure.
Taxpayers will also be required to pay any interest on taxes owed; the penalty is a separate imposition.
SFOP Penalties
If you qualify for the SFOP amnesty program, there is no self-assessed miscellaneous penalty.
- Eligible taxpayers only owe the delinquent taxes plus interest (calculated based on the original due date).
- Again, the penalty position is designed to simplify the delinquent tax repayment process so it’s clearer for taxpayers to understand and comply with.
If we think about an SDOP vs. SFOP comparison, if you’re an eligible taxpayer, the lack of a financial penalty is a significant benefit to filing under SFOP.
SDOP vs. SFOP: Filing Requirements
The filing requirements for SDOP and SFOP are virtually identical but be mindful of nuances.
Streamlined Domestic Offshore Program Filing Requirements
- Submit all amended individual tax returns for the last three years. Include “Streamlined Domestic Offshore” in red at the top of the first page of every return (including information returns).
- Submit any required information returns such as Form 8938 or Form 3520.
- Complete IRS Form 14653 to certify you acted non-willfully.
- Submit any amended or delinquent FBARs for the last six years and do so electronically.
- Be prepared to calculate and pay the 5% penalty on the year/end aggregate value of undisclosed financial assets during the period.
If you don’t include “Streamlined Domestic Offshore” at the top of each return, your returns are treated as normal amended or delinquent returns and will not receive the protections offered by the amnesty programs.
Streamlined Foreign Offshore Program Filing Requirements
There are one or two key filing differences to be mindful of if you’re filing under SFOP.
- Submit your amended individual tax returns for the last three years. Include “Streamlined Foreign Offshore” in red at the top of the first page of any return, including your information returns.
- As with SDOP, submit any required information returns alongside your tax returns.
- Complete IRS Form 14654, not IRS 14653, to certify you acted negligently rather than willfully.
- Submit any amended or delinquent FBARs for the last six years. Submit these electronically.
The major differences are that you should include a different heading in red at the top of your returns, and complete a different IRS certification. You should also bear in mind that a failure to include “Streamlined Foreign Offshore” at the top of any return means you won’t benefit from the program’s protections.
IRS SDOP vs. SFOP Comparison: Which Is Best?
Ultimately, the answer depends on your eligibility. If you meet the SFOP’s strict residency requirements, there are no penalties for filing under the scheme unless the IRS determines it willful rather than negligent non-compliance. And the filing obligations are the same as those under the SDOP, so it’ll help you mitigate the tax you owe without additional filing paperwork. But on the other hand, you’ll be required to answer further IRS questions to prove you meet the criteria, so this could be a burden depending on your situation.
Even if you’re not eligible for the SFOP, it’s still preferable to file under the SDOP and pay the 5% penalties than to make a quiet disclosure and risk far steeper fines.
Can I Change Between IRS SDOP and SFOP?
Unfortunately, no. Once you file under IRS SDOP or SFOP, you can’t switch to a different amnesty program. If you make a mistake and you don’t qualify for SFOP despite filing for it, the IRS can simply treat your return like a delinquent return so you won’t necessarily benefit from an amnesty program’s unique protections. This is why it’s so critical to choose carefully and fully consider your options before committing to an IRS program—our tax attorneys can help you choose the right procedure for your circumstances if you need support.
What if I Forgot to Choose SDOP or SFOP?
The IRS will treat your return as a standard amended or delinquent tax return. You could face penalties for quiet disclosures—meaning a failure to declare unreported income through an amnesty program—which can result in significant fines, IRS audits, and even criminal prosecution in the most serious circumstances. Always double-check your return before filing or have our experienced tax lawyers evaluate your return before you hit “send”!
Can a Tax Lawyer Help Me Choose an IRS Amnesty Program?
If you’re unsure whether the Streamlined Domestic Offshore Program or Streamlined Foreign Offshore Program is right for you, then here’s how the Gordon Law team can steer you in the right direction.
- Eligibility assessment: Not only can we explain the intricacies of each program as they relate to you, but we’ll help you choose the right program based on your eligibility e.g. your residency status. We can also advise if the Voluntary Disclosure Program may be more suitable rather than the SDOP or SFOP.
- Application guidance: Whether you’re filing amended tax returns or FBARs, we’ll walk you through the application process so there’s less risk of errors, omissions, and potentially costly oversights.
- IRS negotiations and appeals: If you need support handling IRS negotiations, or you plan on appealing penalties, our experienced IRS negotiation lawyers will assist you through the entire process so you can make informed and confident decisions regarding how best to proceed.
- Future tax planning: We understand the value of effective tax planning to prevent delinquent tax returns, so we’ll help you with your tax strategy to reduce the risk of future non-compliance.
No matter how complex your issue, our tax compliance team can help you move forward.
Looking to File Under IRS SDOP or SFOP? Contact Gordon Law!
Ready to take control of delinquent tax returns? Whether you opt for SDOP or SFOP, it’s always worth getting legal advice before you file—which is where Gordon Law comes in. From tax advice to tax debt negotiations, we can assist with the IRS tax issues that matter to you. Call now or reach out online to discuss how we can help.
