Do you have delinquent FBAR filings? Did you recently learn of your filing requirement? Don’t panic—you’re not alone, and an amnesty program known as IRS Streamlined Domestic Offshore Procedures (SDOP) can offer a safe path forward.
Many taxpayers like you have ended up in this situation simply because they were unaware of FinCEN Form 114 (FBAR) and other offshore disclosure forms. Even taxpayers who hire a CPA to complete their tax returns often face this problem. In this article, we’ll share how you can avoid harsh IRS penalties and come back into compliance.
At Gordon Law, our attorneys have guided many clients through the Streamlined Domestic Offshore Procedures. Read on to see who qualifies, how to submit a successful application, and insider tips from our experienced international tax team.
What are Streamlined Domestic Offshore Procedures (SDOP)?
Streamlined Domestic Offshore Procedures (SDOP) are an amnesty program offered by the IRS. Many taxpayers may be required to file offshore disclosure forms alongside their tax returns each year. These forms disclose information about international financial accounts, interest in offshore entities, and more. They include, but are not limited to:
- FinCEN Form 114 (FBAR)
- Form 8938 (FATCA)
- Form 3520 for offshore gifts and trusts
- Form 5471 for foreign corporations
- Form 8858 for foreign disregarded entities
- Form 8865 for foreign partnerships
SDOP is a type of IRS streamlined procedure that allows non-willful taxpayers to correct past mistakes with these forms. Qualifying U.S. residents can submit delinquent forms and avoid the bulk of related penalties, which can be severe.
Benefits of Streamlined Domestic Offshore Procedures
The penalty for failure to file the FBAR is $10,000 per tax year for non-willful violations. For willful violations, the penalty is $100,000 or 50% of your highest account value—whichever is higher. Willful violations can also lead to criminal charges.
Other offshore disclosure forms, such as FATCA and Form 3520, carry similarly high penalties for non-filing or underreporting.
- Using IRS Streamlined Domestic Offshore Procedures, you’ll pay just one penalty amounting to 5% of the value of the offshore assets. This is charged in lieu of all other potential penalties.
- SDOP allows qualifying, non-willful taxpayers to come into compliance without fear of criminal charges.
Streamlined Domestic vs Streamlined Foreign Offshore Procedures
There are 2 types of streamlined filing compliance procedures: Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP).
SFOP is a more favorable program, offering a complete waiver of FBAR penalties rather than a 5% penalty. However, U.S. residents must use SDOP instead—hence the “domestic” part of the program’s name.
IRS Streamlined Procedures vs Voluntary Disclosure Program
You may have heard of the IRS Voluntary Disclosure Program (formerly known as Offshore Voluntary Disclosure Program, or OVDP). This is another option to come into compliance.
IRS streamlined procedures are much more favorable to taxpayers than voluntary disclosure, offering significantly reduced penalties. However, they are only available to taxpayers who failed to comply non-willfully (by accident). The IRS Voluntary Disclosure Program is reserved for those whose behavior was willful and who risk criminal charges.
| Program | Streamlined Domestic Offshore Procedures (SDOP) | Streamlined Foreign Offshore Procedures (SFOP) | IRS Voluntary Disclosure Program |
|---|---|---|---|
| Penalties | 5% Title 26 Miscellaneous Penalty | 0% penalties |
|
| Residency Requirements | Available to residents of the U.S. | Available to non-U.S. residents | Available to both U.S. residents and non-U.S. residents |
| Willful vs Non-Willful | Requires a non-willful certification; exclusive to taxpayers whose filing mistakes were accidental | Requires a non-willful certification; exclusive to taxpayers whose filing mistakes were accidental | Designed to correct willful noncompliance; offers the highest possible assurance that the IRS will not pursue a criminal investigation |
Who is eligible for Streamlined Domestic Offshore Procedures?
The first step of using the Streamlined Domestic Offshore Procedures is to learn whether you qualify. SDOP eligibility requirements include:
- Unreported Offshore Income: SDOP is only for taxpayers with unreported offshore income, such as income from bank accounts overseas. There are many information returns that taxpayers may be required to file, the most common being FinCEN Form 114 (FBAR), Form 8938 (FATCA), and Form 3520. You may use IRS streamlined filing if you didn’t file these forms at all, or if you filed incomplete forms.
- U.S. Residency: Taxpayers who reside in the United States are eligible for Streamlined Domestic Offshore Procedures. (Expats and non-residents can use the more favorable Streamlined Foreign Offshore Procedures.)
- Timely Tax Return Filing: The taxpayer must have timely filed all tax returns for the past 3 years, if required. (Not everyone is required to file an income tax return.)
- No Audits or Investigations: The taxpayer must not already be subject to a tax audit or investigation, even if the issue is not related to foreign accounts. Taxpayers whose information was provided to the IRS in a “John Doe” summons are also ineligible for SDOP.
- Non-Willfulness: Non-willfulness is a key requirement of any streamlined filing application. To use the SDOP, you must submit a Non-Willful Certification under penalty of perjury. Submitting a false statement carries severe legal consequences. If you have any concerns about willful noncompliance, consider using the Voluntary Disclosure Program (OVDP) instead.
Many of our clients were unaware of their FBAR filing requirement for years (even though they hired a CPA). Once they learned about the requirement, they sought an FBAR lawyer right away to fix the situation. This is an example of non-willful behavior.
Our attorneys at Gordon Law have helped scores of clients navigate these tricky legal waters. We’ll explain each of your options, help you understand the best path forward, and handle every last detail of the paperwork. Reach out today to put your IRS problems behind you!
What happens when you complete SDOP?
Wondering what kind of tax treatment you’ll get under the IRS Streamlined Domestic Offshore Procedures? This program does come with a small penalty, but it’s much more lenient than the typical civil penalties. Here’s what to expect.
5% penalty (Title 26 Miscellaneous Offshore Penalty)
Under the IRS Streamlined Domestic Offshore Procedures, a taxpayer must pay a single FBAR streamlined penalty. It’s called the Title 26 Miscellaneous Offshore Penalty, or simply the 5% streamlined penalty. This penalty amounts to 5% of the highest aggregate balance of all qualifying offshore accounts.
Penalty calculation – Qualifying accounts can include, but are not limited to:
- Bank accounts
- Brokerage or investment accounts
- Retirement accounts
- Life insurance policies
However, some types of foreign assets aren’t included in the streamlined penalty calculation. It’s important to get the number right—otherwise, the IRS may reject your SDOP application or you could end up paying too much.
Without the domestic streamlined procedures, many more penalties could apply. The standard FBAR penalty is up to $10,000 per tax year for non-willful offenses. Other information returns each carry their own non-filing penalties which can be well in excess of $10,000 per form, per tax year. If you successfully complete the Streamlined Domestic Offshore Procedures, all of these penalties are replaced by the 5% Title 26 Miscellaneous Offshore Penalty.
Unpaid tax and interest
In addition to the 5% penalty, under the SDOP you must pay any overdue tax and interest resulting from the foreign income disclosed through the program. However, the FBAR and other offshore disclosure forms are information returns. They typically don’t affect how much tax you owe.
How to apply for Streamlined Domestic Offshore Procedures
The application for Streamlined Domestic Offshore Procedures includes:
- Up to 6 years of amended FBAR forms
- 3 years of amended tax returns
- Calculation of the Title 26 Miscellaneous Offshore Penalty (5% streamlined penalty)
- Non-willfulness statement
- IRS Form 14654
Let’s break down each of these items.
Up to 6 years of amended FBARs
The FBAR, or FinCEN Form 114, reports certain foreign financial assets and accounts held by U.S. taxpayers. If those assets totaled $10,000 or more at any time in the year, then an FBAR must be filed for that tax year. The Streamlined Domestic Offshore Procedures application includes 6 years of amended FBARs.
Clients often run into problems trying to track down 6 years’ worth of records from their offshore banks and other accounts. Our attorneys can help you in this process.
3 years of tax returns
The taxpayer must submit tax returns for the past 3 years (original or amended) that include all offshore income. They must also submit any information returns that should have been filed in the past 3 years, such as:
Calculation of the Title 26 Miscellaneous Offshore Penalty (5% streamlined penalty)
As we mentioned above, you must calculate the 5% streamlined penalty before applying for SDOP. These calculations can be complex, so we recommend working with an experienced international tax attorney to ensure your information is correct.
Non-willfulness statement
The SDOP application includes a non-willfulness statement, which explains the taxpayer’s situation and why the required forms were not previously filed. The statement should demonstrate a good faith misunderstanding of the requirement.
This is an essential piece of the SDOP application and must be entirely truthful. It’s important to be clear and concise, without overexplaining yourself.
Need help with your statement? Our attorneys have processed more than 100 streamlined applications, so we know exactly what the IRS is looking for and what you should avoid. Get in touch to learn about professional streamlined filing services.
IRS Form 14654, Certification by U.S. Person Residing in the U.S.
Form 14654, “Certification by U.S. Person Residing in the U.S.,” certifies (under penalty of perjury) that:
- A taxpayer qualifies for the Streamlined Domestic Offshore Procedures.
- All required FBAR forms, tax returns, and information returns have now been filed.
- The taxpayer was non-willful.
- The calculation of the Title 26 Miscellaneous Offshore Penalty is accurate.
If the 14654 form is missing or incomplete, the delinquent FBARs and tax returns will be processed without the lenient terms offered by SDOP.
Should you hire an SDOP attorney?
It is possible to apply for Streamlined Domestic Offshore Procedures on your own; however, you can save yourself a lot of time, uncertainty, and worry by hiring a professional. SDOP has strict requirements and complex calculations, and any mistakes could cause the IRS to reject your application.
If you do decide to use professional help, it’s important to remember that not all tax professionals are experienced with offshore taxes, FBARs, or streamlined filing.
The tax attorneys at Gordon Law have years of experience in this area and have completed hundreds of successful streamlined applications. We charge a flat fee for Streamlined Domestic Offshore Procedures. This includes preparation of all of the required forms, as well as a thorough review of your eligibility.
We will never try to sell you a service you don’t need or convince you to apply for a program that you don’t qualify for. We’ll lay out the facts, walk through your options, and guide you through the process from start to finish.
Want to make sure your SDOP application is done right? Call Gordon Law
IRS streamlined procedures, including SDOP, can be confusing and overwhelming. If you’d like experienced guidance from an attorney, call Gordon Law today at (847) 580-1279. We’ve helped more than 100 people like you navigate streamlined filing since the program started in 2012. Our experienced FBAR attorneys can help you understand your options, complete all the paperwork, and answer your questions every step of the way.
