The Streamlined Foreign Offshore Procedures (SFOP) disclosure program was created to help provide U.S. persons (citizens, residents, and Green Card holders) who have spent more than 330 days outside of the United States for at least one out of the last three years and who have been non-willful, with an avenue to come into U.S. tax compliance without the application of the enormous penalties that would typically be imposed for their non-compliance.
The SFOP program is the best available program for qualifying individuals as this program does not have any associated penalties. To utilize this program you need to complete amended or original tax returns for the most recent three tax years, amended or original FBARs for the most recent six FBAR years, and a non-willful certification on Form 14653.
When considering how to move forward and address your tax non-compliance, your first question needs to be - which programs am I eligible for? If you are eligible for the SFOP program, that will almost certainly be the best path forward for you.
General Eligibility Requirements for the Streamlined Foreign Offshore Procedures:
You are “non-willful” with regard to the failure to correctly report your foreign income and your foreign accounts.
You have spent 330 or more days outside of the United States in at least one of the last three tax years (note this is based on the tax years for which your deadline to file a Form 1040 has passed).
Your tax returns must not currently be under audit and you must not currently be under criminal investigation regarding your tax filings.
You failed to report income items and pay the associated tax for income generated from foreign assets.
You have paid all taxes and penalties that have already been assessed on the relevant years.
One important distinction between the SFOP and the Streamlined Domestic Offshore Procedures (SDOP) programs is the fact that you can go through the streamlined foreign offshore procedures even if you have unfiled returns during the last three years, whereas, technically you are not supposed to use the SDOP program if you have any unfiled returns. This means that it is of the utmost importance that if you came to the U.S. within the last three years, that you act quickly to begin the disclosure process as the biggest difference between the SFOP and the SDOP program is the 5% penalty on all of the noncompliant foreign assets that must be paid to utilize the SDOP program.
When it comes to streamlined disclosures, the most important question is always - was I non-willful? The answer to this question isn’t always clean cut and we will help you to make this determination by gathering information on the purpose of the foreign activity, the reason that activity wasn’t timely reported, and how you learned that there might be filing obligations that you missed. It is generally easier to establish non-willfulness with SFOP disclosures than with SDOP disclosures as many many people are under the good faith belief that they don’t need to continue to file or pay tax in the United States while they are living and working in a foreign country. Alternatively, most individuals that immigrate to the U.S. are surprised to learn that they have to report their foreign income and accounts in the U.S., this is especially surprising because at no point in the immigration process are they ever advised on the tax implications of their immigration.
Once we have determined that you weren’t willful in your omissions, we can move forward and begin to prepare your FBARs and your tax returns. Hopefully by this time you’ve already shaken every tree, looked under every rock, and called every family member that could potentially have opened an account in your name at any point in your life. Our document gathering processes very often result in clients considering things that they had absolutely no idea would need to be included, things like foreign life life insurance, foreign retirement accounts, foreign pensions, foreign LLCs or other foreign businesses (even when they are entirely dormant). A lot of the information you’re going to need is going to take a significant amount of time to gather (especially while this pandemic is still impacting business practices around the world) and in some cases will even prove impossible to acquire. We convert this mountain of statements and information into FBARs and tax returns.
Once we have the FBARs and returns prepared, we move on to the last step, the Form 14653 and the Non-willful certification that accompanies it. These certifications are quite a bit more involved than most clients assume they will be. In addition to covering topics like how you learned you weren’t in compliance, how you’ve handled your previous filings, your work and education history, we will also include a review of all of your foreign activity and foreign accounts and provide details on each item separately. For some of our clients, this results in over a hundred different items that need to be addressed in the foreign activity section of their non-willful certification.
After the non-willful is finalized, we compile the required forms, signatures, and tax liability checks. The FBARs are e-filed and the remainder of the disclosure is mailed to the IRS. Then we wait. After several months you will receive processing notices informing you that your amended (or delinquent) returns have been processed. This is very likely the last correspondence you will ever receive from the IRS in relation to your SFOP disclosure. They never reach out to you to let you know they have accepted your non-willful argument, and this is, without doubt, one of the most frustrating aspects of this process. You will only hear from the IRS again if your submission is selected for exam, an outcome that is incredibly unlikely on a disclosure that is thoroughly prepared.