TAX AMNESTY PROGRAMS FAQS

The Internal Revenue Service (IRS) created tax amnesty programs for expats to come forward voluntarily if they failed to file tax returns, report all foreign income and assets, and pay taxes. Tax amnesty programs enable you to become tax compliant without criminal repercussions in exchange for a reduced penalty.

Taxes are essential revenue that enables the US government to function and provide vital services to the public. The tax system works best when taxpayers file tax returns on time and pay all taxes owing, so the US tax system is founded on voluntary compliance.

US taxpayers should always be diligent about meeting their tax obligations. But in 2022, tax compliance is even more important.

The Inflation Reduction Act was passed in 2022, providing 80 billion dollars in funding for the IRS. This means the IRS will significantly increase its number of audits, increasing the risk of penalties for non-compliant taxpayers.

So if you owe taxes or haven’t filed tax returns, understanding how to get back into tax compliance—and how tax amnesty programs can help you—is essential.

As a US citizen working in a foreign country, you must report worldwide income and assets on your US tax return and pay taxes owing. If you haven’t filed US tax returns, including FBARs, or filed them incorrectly, you could be penalized. Tax amnesty programs for expats can help bring you back into US tax compliance.

Learn more about your US taxpayer obligations here.

If you’re a US Citizen working abroad, or a foreigner working in the US, you must comply with specific expat tax laws. You’re required to:

• Report all foreign financial assets,
• Pay applicable taxes on your worldwide income, and
• File tax returns on time, including international information returns such as FBARs.

If you’ve failed to meet these requirements, expat tax amnesty programs help you get back into compliance.

There are four main tax amnesty programs for expats.

• Streamlined Domestic Offshore Procedures (SDOP),
• Streamlined Foreign Offshore Procedures (SFOP),
• Delinquent International Information Return Submission Procedures (DIIRSP),
• Voluntary Disclosure Program (VDP).

Each tax amnesty program has specific eligibility criteria, requirements, and penalties. It’s important to understand which program is best suited to your situation.

Need help? Speak to one of our tax experts today.

Notes:
1. To use SDOP you MUST have timely filed original tax returns for the last 3 years. You CAN’T use SDOP to file delinquent tax returns.
2. You can only use DIIRSP if you DON’T need to make any substantive changes to your tax return, that would impact your tax liability.
3. You can only use SFOP if you lived outside the US for at least 330 days in one or more of the last 3 years.

You’re eligible to use Streamlined Domestic Offshore Procedures if:

• Your failure to report and/or pay tax on foreign financial assets is due to non-wilful conduct,
• You timely filed original tax returns for the last 3 years,
• You live in the US,
• You’re an individual taxpayer.

You’re not eligible to use Streamlined Domestic Offshore Procedures if any of the following apply:

• You’re unable or unwilling to certify your failure to report and/or pay tax on foreign financial assets is due to non-wilful conduct,
• You didn’t timely file original returns for the last 3 years,
• You live outside the US,
• You’re filing taxes for a business,
• You’re under audit or criminal investigation,
• Your failure to report income and/or pay tax is for domestic (US-based) financial assets only.

There’s a capped 5% penalty to use Streamlined Domestic Offshore Procedures. Some taxpayers are concerned about paying this penalty. But it’s essential to understand that using SDOP enables you to avoid additional, more severe penalties, including FBAR penalties, failure to file penalties, and accuracy-related penalties.

You’re eligible to use SFOP if:

• Your failure to report and/or pay tax on foreign financial assets is due to non-wilful conduct,
• You’ve lived outside the US for at least 330 days in one or more of the last 3 years,
• You’re an individual taxpayer.

You’re not eligible to use Streamlined Foreign Offshore Procedures if any of the following apply:

• You’re unable or unwilling to certify your failure to report and/or pay tax on foreign financial assets is due to non-wilful conduct,
• You live in the US
• You’re filing taxes for a business,
• You’re under audit or criminal investigation,
• Your failure to report income and/or pay tax is for domestic (US-based) financial assets only.

There are currently no penalties for using Streamlined Foreign Offshore Procedures. Plus, using SFOP means you avoid additional, more severe penalties.

The SFOP and SDOP amnesty tax programs are similar and are both streamlined filing compliance procedures. The main difference is that Streamlined Foreign Offshore Procedures apply to taxpayers who were physically outside the US for at least 330 days in one or more of the last 3 years.

You’re eligible to use DIIRSP if:

• You failed to file 1 or more international information returns,
• You have reasonable cause to explain your failure to file international information returns,
• You filed your original tax returns on time,
• Unreported income does not make a substantive change to your tax return.

You’re not eligible to use Delinquent International Information Return Submission Procedures if any of the following apply:

• You’re unable to provide a reasonable cause statement for each delinquent international information return,
• The IRS has already contacted you about delinquent returns,
• You’re under audit or criminal investigation.

There are no penalties for using Delinquent International Information Return Submission Procedures, provided there’s no impact on your tax liability by filing the missing international information return. You’re subject to penalties if your reasonable cause statement is not accepted.

Voluntary Disclosure Practice is suitable if any of the following apply:

• You owe back taxes because you failed to disclose worldwide income,
• You’re unable or unwilling to certify non-wilful conduct, i.e., your conduct was willful,
• The IRS could prove willful conduct,
• The facts of your case give rise to criminal prosecution,
• You’ve submitted a pre-clearance letter to the IRS to verify you haven’t already been selected for audit or criminal prosecution.

Before using VDP, it’s important to assess if a less severe tax amnesty program is a more suitable option. If there’s a case for non-wilful conduct, there are alternate amnesty programs which could be a more suitable option to get you back into tax compliance.

Are you considering the voluntary disclosure practice? First, speak to a specialist to review your case. Schedule a confidential consultation with our tax experts today.

The penalties for using Voluntary Disclosure Practice aren’t fixed. They vary and are determined by several factors including the taxpayer’s compliance and cooperation with the program and the IRS findings of the case. Maximum penalties include 50% for FBAR violations or 75% for fraud, with the percentage being in the highest year of income for the lookback period.

When you file amended or delinquent tax returns, it may impact your tax liability. So if you owe taxes as a result, you still need to pay them, along with any interest accrued.

If you file amended or delinquent tax returns using SDOP, SFOP, or DIIRSP, the IRS processes these returns like a standard tax return. So you’re still subject to being audited—and the consequences of non-compliant returns. Therefore, it’s essential to understand the rules and requirements of tax amnesty programs properly so you know how to file accurately and ultimately satisfy your tax obligations.

When you seek specialist tax advice for help with tax amnesty, there’s also a fee for the service. Schedule a free consult with Streamlined Advisory today to learn more.

However, each amnesty tax program has specific eligibility rules and filing requirements. So it’s essential to understand which program fits your circumstances best and how to file correctly. If you get it wrong, you could find yourself (still) out of tax compliance or face unnecessary penalties. Plus you only have one opportunity to use a tax amnesty program, so it’s critical to get it right the first time.

Once you’ve filed amended or delinquent tax returns using an IRS tax amnesty procedure, the IRS expects you to remain tax compliant moving forward.

This means you must report all foreign financial assets, pay applicable taxes on worldwide income, and file tax returns on time, including international information returns such as FBARs.

Our tax specialists are experts in US tax amnesty programs.

We take the guesswork and stress out of becoming tax compliant. We apply our knowledge and expertise in expat tax to review your case and determine which tax amnesty program is the proper fit. We’ll prepare and file the amended or missing returns, leaving you up-to-date with all your tax obligations.

Get in touch with Streamlined Advisory today for help getting started.

Streamlined Advisory works closely with an experienced network of trusted professionals including tax attorneys. Once we review your case, we can refer you if the circumstances warrant legal advice.

Set up a confidential consult with Streamlined Advisory today to review your case.

Delinquent means tax returns, including international information returns such as FBARs, are missing and have not been submitted to the IRS.

Amended refers to previously filed tax returns that need to be fixed and resubmitted due to errors relating to disclosing foreign financial assets. This includes incorrect or incomplete tax returns.

Non-willful conduct occurs due to negligence, inadvertence, a mistake, or a good faith misunderstanding of the requirements of the law.

Reasonable cause means you exercised reasonable care to meet your tax obligations but were nevertheless unable to do so due to a reasonable excuse. The IRS will consider the facts and circumstances of your situation. Sound excuses for failing to comply could include death, illness, incapacitation, natural disasters.

Foreign financial assets refer to assets held outside the US, including bank and investment accounts maintained by a foreign financial institution, stocks and securities issued outside the US, an interest in a foreign retirement or deferred compensation plan.

Certain assets are not considered foreign financial assets by the IRS, including real estate outside the US.

International information returns are used to summarize and disclose information to the IRS. An example is using the Foreign Bank Account Report (FBAR) to report foreign financial accounts.

Streamlined Filing Compliance Procedures encourage expat taxpayers to disclose and pay tax on worldwide income and include two IRS tax amnesty programs, Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Expat taxpayers traditionally used the IRS Offshore Voluntary Disclosure Program (OVDP) to get back into tax compliance. However, in 2018 Streamlined Filing Compliance Procedures (including SDOP and SFOP) replaced OVDP.