Streamlined Filing Compliance Procedures

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Webinar Overview
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Who is a U.S. Taxpayer?

• U.S. Citizens
• Lawful permanent residents Green Card holder
• Those satisfying the substantial presence test of
  IRC section 7701(b)(3).

• To meet this test, a person must be physically
  present in the United States on at least
• 1. 31days during the current year, and2. 183
  days during the 3-year period that includes the
  current year and the 2 years immediately before
  that, considering
• All the days a person was present in the current
  year, and
• One -Third (1/3) of the days a person was present
  in the first year before the current year, and
  
• One - Sixth (1/6) of the days a person in the
  second year before the current year.

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Responsibility of US Citizen and Residents

• File income tax returns reporting worldwide
  income (Form 1040)
• File required US international informational tax
  returns
• File FBARs on FinCen Form 114

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Foreign Assets Disclosure and Reporting

• Form 3520 Annual Return to report transactions
  with foreign trust and receipt of certain foreign
  gift
• Form 926 Return by a U.S Transferor of property
  to a foreign corporation
• Form 5471 Information Return of U.S. persons with
  respect to certain foreign corporations
• Form 8865 Return of U.S. person with respect to
  certain foreign partnerships
• Form 8621 PFICs
• FBAR
• Form 8938 Foreign Financial Assets

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Form 3520
Annual Return to Report Transactions With Foreign
Trusts and Receipt of Certain Foreign Gifts

• Under IRC 6048, taxpayers must report various
  transactions involving foreign trusts, including
  the creation of a foreign trust by a United
  States person, transfers of property from a
  United States person to a foreign trust, and
  receipt of distributions from foreign trusts.
• This return also reports the receipt of gifts
  from foreign entities under IRC 6093F.
• The penalty for returns reporting gifts is five
  percent of the gift per month, up to a maximum
  penalty of 25 percent of the gift.

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Form 926
Return by a U.S. Transferor of Property to a
Foreign Corporation

• Under IRC 6038B, taxpayers must report transfers
  of property to foreign corporations and other
  information.
• The penalty for failing to file each one of these
  information returns is ten percent of the value
  of the property transferred, up to a maximum of
  100,000 per return, with no limit if the failure
  to report the transfer was intentional.

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Form 5471
Information Return of U.S. Persons with Respect
to Certain Foreign Corporations

• Under IRC 6035, 6038 and 6046, certain United
  States persons who are officers, directors or
  shareholders in certain foreign corporations
  (including International Business Corporations)
  must report information.
• The penalty for failing to file each one of these
  information returns is 10,000, with an
  additional 10,000 added for each month the
  failure continues beginning 90 days after the
  taxpayer is notified of the delinquency, up to a
  maximum of 50,000 per return.

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Form 8865
Return of U.S. Persons with Respect to Certain
Foreign Partnerships

• Under IRC 6038, 6038B, and 6046A, United States
  persons with certain interests in foreign
  partnerships must report interests in and
  transactions of these foreign partnerships,
  transfers of property to these foreign
  partnerships, and acquisitions, dispositions and
  changes in foreign partnership interests.
• Penalties include 10,000 for failure to file
  each return, with an additional 10,000 added for
  each month the failure continues beginning 90
  days after the taxpayer is notified of the
  delinquency.
• The penalty is capped at 50,000 per return, and
  ten percent of the value of any transferred
  property that is not reported, subject to a
  100,000 limit.

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FBAR
Who Must Report?

• Individuals Must Must File FBARs if they Have
• Financial Interest in, Signatory Authority or
  Other Authority Over One or More Accounts (Bank
  Accounts, Brokerage Accounts, Mutual Fund
  Accounts) in a Foreign Country

Penalty
A person who willfully fails to file an FBAR or
files an incomplete or incorrect FBAR, may be
subject to a civil monetary penalty of 100,000
or 50 of the balance in the account at the time
of the violation, whichever is greater. Willful
violations may also be subject to criminal
penalties.
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Form 8938
A specified foreign financial asset (SFFA) is

• Any financial account maintained by a foreign
  financial institution

Foreign bank accounts Foreign mutual funds
Foreign hedge funds Foreign private equity
funds Certain foreign insurance products
Penalty

• In general, Form 8938 penalties will be 10,000
  per year.

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Efforts by IRS

• IRSs latest efforts is to promote tax compliance
  and to crack down on offshore tax evasion
• These program will ease the financial and legal
  pain for expatriate Americans who live and work
  abroad
• They relax the penalties that a taxpayer with an
  overseas account might otherwise face for failing
  to disclose a foreign account

What Does the IRS Know?

• Never Underestimate What Information The IRS Can
  Find Out on its Own
• Tax Return Preparer Must Forewarn Clients About
  the Increasing Breadth of Information That Can Be
  Gathered by IRS, and Department of Justice (DOJ)
  on Noncompliant Taxpayers Through Social Media
• Foreign Bankers Are Often meticulous in Keeping
  Notes of Prior Phone Calls and Meetings with
  Clients or Advisors
• No Such Thing as a Secret Account
• Taxpayer Must be prepared to Credibly Explain to
  IRS Why They Failed to Disclose Foreign Accounts
  and Why They Did Not Make a Voluntary Disclosure?

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Streamlined Programs Remediation Eligibility

• Streamlined Programs Initiated in 2012
• Technically Two Programs
• Streamlined Domestic Offshore Procedures
• Streamlined Foreign Offshore Procedures
• Common Theme of Both Programs is Requirement That
  Taxpayer Certify Under Penalty of Perjury That
  His Conduct Was Not Willful Conduct was due to
  negligence, or mistake or conduct that is the
  result of good faith misunderstanding of the
  requirements of the law, accidental failure to
  report
• IRS does not explicitly define non-willful.
  They review each case on an individual basis
• Only available to Individual and Estate (Not
  entities)
• Always include a certification narrative
  (reasonable cause statement) and attach Form
  14654 or 14653
• Failed to report foreign financial assets and pay
  taxes

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Streamlined Domestic Offshore Procedures

• IRS extended streamline procedure to American
  Living in the U.S. with undisclosed foreign
  accounts who previously were ineligible from
  participating in the streamlined procedure
• Such person who come forward now will owe back
  taxes, interest, and a reduce miscellaneous
  offshore penalty equal to five percent of their
  undisclosed foreign financial assets.
• Taxpayers Residing In US Requires Taxpayer to
  Have Filed Prior US Tax Returns for Most Recent 3
  Years AND
• Limited to Filing Amended Returns (No Original
  Returns Permitted if None Originally Filed), AND
• Carries a Potential 5 Miscellaneous Penalty for
  Unreported Account/Assets

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Getting to Know Streamlined Domestic
What must I submit?

• For each of the most recent three years for which
  the U.S. tax return due date or extended due
  date - has passed (the "covered tax return
  period"), file amended tax returns, together with
  all required information returns (e.g., Forms
  3520, 3520-A, 5471, 5472, 8938, 926, and 8621)
• For each of the most recent six years for which
  the FBAR due date has passed (the "covered FBAR
  period"), file any delinquent FBARS and
• Pay a miscellaneous offshore penalty. The full
  amount of the tax, interest, and miscellaneous
  offshore penalty should be submitted with the
  amended tax returns.

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Miscellaneous Offshore Penalty for Streamlined
Domestic
1. How is the miscellaneous offshore penalty
calculated? It is equal to 5 percent of the
highest aggregate balance of the taxpayers
foreign financial assets that are subject to the
penalty during the years in the covered tax
return period and the covered FBAR period. 2.
How is the highest aggregate balance
determined? By tallying the year-end account
balances and year-end asset values of all the
foreign financial assets subject to the penalty
for each year in the covered tax return period
and the covered FBAR period and selecting the
highest aggregate balance from among those years.
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Streamlined Foreign Offshore Procedures

• U.S. taxpayers must satisfy the following
  requirements
• The applicable non-residency requirement (for
  joint return filers, both spouses must satisfy
  the non-residency requirement) and
• Have failed to file an FBAR with respect to a
  foreign financial account OR foreign investment
  related informational forms, and
• The failure to file an FBAR/Foreign investment
  related forms must have resulted from non willful
  conduct.
• U.S. Taxpayer living abroad who disclose their
  foreign accounts and settle their tax bills under
  Streamlined Foreign Offshore Procedure wont be
  charged any penalties. Instead, they will simply
  owe back taxes and interest.
• File 3 years of delinquent or amended tax or
  information return and pay tax and interest
• File 6 years of delinquent FBARs

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Getting to know Streamlined Foreign
The non-residency requirement has two strands

• First, the taxpayer must have a non-U.S. abode.
• Second, the taxpayer must have lived outside of
  the U.S. for 330 full days or more in at least
  one of the most recent three years for which the
  U.S. tax return due date (or properly applied for
  extended due date) has passed.

A helpful formula that illustrates the extreme
scenario
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Getting to Know Streamlined Foreign
Example 2

• A taxpayer who spends 36 days in the U.S. in
  year one, 36 days in the U.S. in year two, and 36
  days in the U.S. in year three fails the
  nonresidency requirement.
• Why? Because there are 365 days in a year and in
  no year could he have spent at least 330 days
  outside of the United States. Instead, the
  maximum number of days that he spent outside of
  the U.S. in each year was 329 days, one day shy
  of the 330-day threshold.
• As you can see, the rigid requirements of the
  nonresidency requirement can play the role of
  spoiler to well intentioned taxpayers wanting
  to "get right with the IRS.

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Getting to Know Streamlined Foreign
Interesting question to ponder

• Is the taxpayer in example 2 who is deemed
  ineligible for streamlined foreign, eligible for
  streamlined domestic?
• Only if he has filed his U.S. tax returns for
  each of the most recent three years for which the
  U.S. tax return due date - or extended due date -
  has passed (a key requirement for streamlined
  domestic)
• If the taxpayer in example 2 filed U.S. tax
  returns in two of the most recent three years for
  which the U.S. tax return due date has passed,
  but neglected to do so in just one year, not only
  would he be ineligible for streamlined foreign
  but he would also be ineligible for streamlined
  domestic!

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Getting to Know Streamlined Foreign
Remaining Requirements

• U.S. taxpayer must file delinquent or amended tax
  returns, together with all required information
  returns (e.g, Forms 3520, 5471, and 8938) for
  each of the most recent three years for which the
  U.S. tax return due date or extended due date
  has passed and
• File any delinquent FBARs for each of the most
  recent six years for which the FBAR due date has
  passed.

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Polling Question
How Many years of delinquent FBAR needs to be
filed in Streamline Compliance Procedure?
A. 3 Years B. 6 Years
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Streamlined Assets

• Streamlined Assets refers to the assets which are
  reportable either on FBAR or Form 8938.
• Some assets like personal real estate investment
  in foreign country are not included
• Other assets such as Canadian RRSP (Registered
  Retirement Saving Plan) is included on the FBAR
  and Form 8938 but NOT computed as part of the
  penalty. (Elect income deferral on retirement
  plans permitted by Treaty)

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IRS Audit and Verification

• Returns submitted under either the foreign or
  domestic offshore procedures are not
  automatically selected for audit. Instead, they
  are subject to verification.
• Through verification, the examining agent can
  request account statements and other relevant
  documents to verify the information reported.
• However, this does not mean that an examination
  is impossible. On the contrary, such returns may
  be selected for audit under the existing audit
  selection processes applicable to any U.S. tax
  return
• Taxpayers who are eligible to use the streamlined
  procedures and who follow all of the instructions
  are not subject to failure-to-file and
  failure-to-pay penalties, accuracy-related
  penalties, information return penalties, or FBAR
  penalties, even if their returns are subsequently
  selected for audit.
• First, any previously assessed penalties relating
  to the years that are selected for audit will not
  be abated.
• Second, to the extent that the IRS determines an
  additional tax deficiency for a return submitted
  under these procedures, it can assert additional
  tax and penalties relating to that additional
  deficiency.
• Finally, the IRS will unleash the full arsenal of
  penalties if it determines that the original tax
  noncompliance was due to fraud and/or that the
  FBAR violation was willful.

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IRS Audit and Verification

• Tax returns will be processed no different than
  any other returns submitted to the IRS. Reading
  between the lines, what the IRS seems to suggest
  is not to expect confirmation for receipt of the
  returns.
• Assuming a taxpayer's streamlined submission is
  rejected, the only remaining option for coming
  into compliance with one's U.S. tax obligations
  is to file amended 1040s and delinquent
  international returns in what is known as a
  quiet disclosure.
• With respect to the Streamlined Domestic Offshore
  Procedures, the five-percent miscellaneous
  penalty is imposed on a broader base of foreign
  assets - not just those relating to FBAR
  reporting.

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Who Is Ineligible?

• Those taxpayers who cannot certify that their
  failure to report all income, pay all tax, and
  submit all required information returns was due
  to nonwillful conduct.
• Those taxpayers who are under criminal
  investigation by IRS Criminal Investigation.
• Those taxpayers who are undergoing a civil
  examination, regardless of whether that
  examination relates to unreported foreign assets.

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Polling Question
Is late filing and late payment penalties
applicable for tax returns filed under
Streamlined Filing Procedures?
A. Yes B. No
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Do You Have Any Questions?
An Informative Session On STREAMLINED FILING
PROCEDURES
DO LET US KNOW YOUR QUERIES )
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