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SFOP Non-Residency | Streamlined Foreign Offshore Procedures Lawyer

Streamlined Foreign Offshore Procedures (“SFOP”) is currently the preferred offshore voluntary disclosure option for US taxpayers who reside overseas, recently came to the United States or recently left the United States. Hence, the issue of SFOP eligibility (i.e. the ability of a taxpayer to participate in this program) is very important for these taxpayers. Today, I would like to concentrate on the SFOP non-residency requirement (I will alternatively refer to it simply as “SFOP non-residency”).

SFOP Non-Residency: Two Main SFOP Legal Requirements

In addition to meeting the general procedural requirements, a taxpayer who wishes to do a SFOP voluntary disclosure must meet two specific legal requirements. First, he must satisfy the applicable non-residence requirement. Second, he must meet the non-willfulness requirement. As I pointed out above, the focus of today’s article is on the non-residency requirement.

SFOP Non-Residency: All Participants Must Meet This Requirement

From the outset, it is important to point out that all SFOP participants must meet the SFOP non-residency requirement. This means that, in case of joint filers, both spouses must satisfy this requirement. This is the case even if only one spouse has unreported foreign assets.

SFOP Non-Residency: Two Categories

There are two distinct SFOP non-residency requirements depending on the immigration status of SFOP participants. The first type of non-residency requirements applies only to US citizens, US Lawful Permanent Residents (a/k/a “green card holders”) and their estates. The second type applies to everyone else.

SFOP Non-Residency: US Citizens and US Permanent Residents

In order to meet the SFOP non-residency requirement, a US citizen or US Permanent Resident (or his estate) must satisfy the following test:

1. In any one or more of the most recent three years for which the US tax return due date (including proper due date extensions) has passed;

2. He did not have a US abode; and

3. He was physically outside of the United States for at least 330 full days.

SFOP instructions specifically cite IRC §911 and its regulations for interpreting the term “abode”, which the IRS defines as one’s home, habitation, residence, domicile, or place of dwelling; it is not equivalent to one’s principal place of business. The IRS confirmed that temporary presence in the United States or maintenance of a dwelling in the United States does not necessarily mean that one has an abode in the United States.

SFOP Non-Residency: IRS Examples for US Citizens and US Permanent Residents

The SFOP instructions offer two examples where a US citizen or US Permanent Resident meets the SFOP non-residency requirement. I have provided both examples here verbatim:

“Example 1: Mr. W was born in the United States but moved to Germany with his parents when he was five years old, lived there ever since, and does not have a U.S. abode. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.

Example 2: Assume the same facts as Example 1, except that Mr. W moved to the United States and acquired a U.S. abode in 2012. The most recent 3 years for which Mr. W’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.”

Please, note that example 2 emphasizes the fact that the non-residency requirement is satisfied even if an individual complies with it in only one of the past three years.

SFOP Non-Residency: Other Individuals

The second type of the SFOP non-residency requirement applies to all individuals who do not fit into the first category (i.e. they are not US citizens or US Permanent Residents). An individual from the second category meets the SFOP non-residency requirement if:

1. In any one or more of the most recent three years for which the US tax return due date (including proper due date extensions) has passed;

2. He did not meet the substantial presence test described in IRC §7701(b)(3).

SFOP Non-Residency: Substantial Presence Test

The Substantial Presence Test of IRC §7701(b)(3) is used to determine whether a person was a US tax resident in a given tax year. The Substantial Presence Test is satisfied if:

1. The individual was present in the United States for at least 31 days during the tax year in question; and

2. The sum of the number of days on which such individual was present in the United States during the current year and the two preceding calendar years equals or exceeds 183 days. The amount of days in the two preceding years should be multiplied by the applicable multiplier as follows: first preceding year – one-third; second preceding year – one-sixth.

I wish to emphasize that this is the general rule. There are numerous exceptions to the Substantial Present Test, including the “closer connection exception” and certain visa exemptions.

SFOP Non-Residency: IRS Example for Other Individuals

The IRS SFOP instructions again provide a useful example, which I copied here:

“Example 3: Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States. Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013. The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011. Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.”

Contact Sherayzen Law Office for Professional Help With Streamlined Foreign Offshore Procedures, Including SFOP Non-Residency and Non-Willfulness Requirements

If you are not in compliance with US tax laws concerning foreign assets and foreign income, please contact Sherayzen Law Office for professional help as soon as possible. We have successfully helped hundreds of US taxpayers around the globe with their offshore voluntary disclosures, including Streamlined Foreign Offshore Procedures. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Streamlined Foreign Offshore Procedure

One of the most dramatic changes to the voluntary disclosure process made by the IRS on June 18, 2014, was the complete revamping of the Streamlined Foreign Offshore Procedure. As long as the taxpayer can honestly certify that his prior violations of U.S. tax laws were non-willful, the Streamlined Foreign Offshore Procedure offers a unique opportunity for such a taxpayer to bring his tax affairs with respect to foreign accounts and other offshore assets into complete compliance with the U.S. tax rules with potentially no penalties. In this article, I am going to outline the Streamlined Foreign Offshore Procedure and discuss why it is important to take advantage of it as soon as possible.

Old Streamlined Foreign Offshore Procedure

The Streamlined Foreign Offshore Procedure already existed prior to June 18 changes. However, while it offered a no penalty solution to U.S. taxpayers residing overseas, it also imposed severe limitations preventing the great majority of these taxpayers from qualifying to participate in the Streamlined Foreign Offshore Procedure.

The most difficult conditions were the $1,500 additional tax liability threshold and the risk assessment process (to comply with the “simple return” rule). Further complications would arise from the failure to timely file original tax returns.

2014 Changes to Streamlined Foreign Offshore Procedure

It is precisely these difficult requirements that were removed by the IRS in June of 2014, thereby opening up a tremendous opportunity to U.S. taxpayers residing overseas: the $1,500 tax limit was gone, the risk assessment process was gone, and the importance of timely filed U.S. tax returns was also downgraded. Instead, the IRS created a new advantageous (to U.S. taxpayers) Streamlined Foreign Offshore Procedure with simplified eligibility requirements.

If these requirements are met, a U.S. taxpayer residing overseas can now avoid the imposition of all FBAR penalties if he follows the Streamlined Foreign Offshore Procedure for filing amended tax returns and delinquent FBARs.  Moreover, as an additional bonus, the IRS is stating that it will waive all failure-to-file and failure-to-pay penalties, accuracy-related penalties, and information return penalties.

There are some limitations on this generous gift. Any previously assessed penalties with respect to those years, however, will not be abated. Furthermore, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

Since Streamlined Foreign Offshore Procedure offers such tremendous benefits to U.S. taxpayers who reside outside of the United States, it is important to make sure that all of the eligibility and filing requirements are met.

Streamlined Foreign Offshore Procedure: Eligibility requirements

There are three main eligibility requirements for participation in the Streamlined Foreign Offshore Procedure. First, the taxpayer must meet the applicable non-residency requirement. Here is the first caveat, for joint return filers, both spouses must meet the applicable non-residency requirement. Different rules apply to taxpayers who are U.S. citizens and U.S. permanent residents than to those taxpayers who do not fall into these categories.

The second requirement of the Streamlined Foreign Offshore Procedure is that the taxpayer violated the applicable U.S. tax requirements non-willfully – i.e. the taxpayer failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct.

The third requirement of the Streamlined Foreign Offshore Procedure is that the participating taxpayer is not subject to an IRS civil examination or an IRS criminal investigation.  Two important points here – it does not matter whether the examination relates to undisclosed foreign financial assets and it does not matter whether the examination involves any of the years subject to the voluntary disclosure.  In either case,  the taxpayer will not be eligible to use the Streamlined Foreign Offshore Procedure.

In reality, there is a more obscure fourth requirement that there is a valid Taxpayer Identification Number (TIN), but this issue can be solved by enclosing a completed ITIN application with the disclosure package under the Streamlined Foreign Offshore Procedure.

Filing Requirements Under the Streamlined Foreign Offshore Procedure

There are five main filing requirements that must be met in order to comply with the Streamlined Foreign Offshore Procedure.

The first filing requirement under the Streamlined Foreign Offshore Procedure is that, for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the taxpayer must file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938). Specific procedures must be followed in the preparation of these returns.

The second filing requirement under the Streamlined Foreign Offshore Procedure is that, for each of the most recent 6 years for which the FBAR due date has passed, the taxpayer must file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. The taxpayer is required to file these delinquent FBARs electronically at FinCen. Detailed instructions must be followed to file these FBARs properly.

The third filing requirement under the Streamlined Foreign Offshore Procedure is the submission of the payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. The taxpayer’s TIN must be included on the check.

The fourth filing requirement under the Streamlined Foreign Offshore Procedure is the submission of any requests for relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty.  Specific additional requirements apply to this request (especially, in the Canadian RRSP context).

Finally, the fifth filing requirement under the Streamlined Foreign Offshore Procedure is the most important part of this application – completed and signed “Certification by U.S. Person Residing Outside of the U.S.” (as of July 4, 2014, this is still in draft format but the final version should appear soon).

This is the most important legal document in the Streamlined Foreign Offshore Procedure. This is the statement that certifies that the taxpayer: (1) is eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been properly filed; and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct. I cannot emphasize enough the importance of contacting your international tax attorney prior to submitting this document to the IRS.

The taxpayer must submit the original signed statement as well as attach copies of the statement to each tax return and information return being submitted through these procedures.

Streamlined Foreign Offshore Procedure: Some Considerations

While participation in the Streamlined Foreign Offshore Procedure may offer tremendous benefits to U.S. taxpayers who reside outside of the United States, it is important to understand that this may not be a simple process and all considerations should be taken into account. From the legal determination of whether the residency requirements are met to the very complicated legal decision on whether the “non-willful” determination applies, Streamlined Foreign Offshore Procedure involves significant legal analysis.

Based on my extensive experience, I believe that the great majority of the U.S. taxpayers who are currently not in compliance with the FBAR requirements are non-willful at heart. However, it is important to make sure that the legal case supports this finding – i.e. the facts of the case should support the determination of legal non-wilfulness.

I strongly advise against making such determination without the help of an international tax lawyer. You need an attorney who can look at your case objectively and with a “cool head”, and make such determination based on his experience and knowledge of law.

Finally, it is essential to understand that there is no guarantee that Streamlined Foreign Offshore Procedure will be available even in half a year in the same format.  The IRS reserved the power to change the rules regarding  Streamlined Foreign Offshore Procedure at any point.  This is why it is so important to act fast to make sure that you are able to take advantage of this unique opportunity.

Contact Sherayzen Law Office for Professional Help with Your Participation in the Streamlined Foreign Offshore Procedure

If you have undisclosed foreign accounts, contact Sherayzen Law Office for a professional analysis of your voluntary disclosure options. Our international tax law firm has helped hundreds of U.S. taxpayers worldwide and we can help you.

Contact Us to Schedule Your Confidential Consultation!