To take advantage of an Internal Revenue Service (IRS) disclosure program, you will need to meet certain requirements. There are a number of requirements to use a streamlined domestic offshore procedure (SDOP) in Washington DC, which a detail-oriented SDOP attorney could help you meet.
The traditional voluntary disclosure program is for taxpayers who were willful in their failure to file and who are concerned that they are at risk for a criminal investigation and prosecution. A streamlined domestic offshore procedure is for taxpayers who were not willful. As a result, the IRS gives a better penalty of relief and lower penalties to the non-willful taxpayers who disclose with SDOP. Anyone who meets all of the eligibility requirements can use this program. This applies to individual taxpayers as well as estates.
There are several requirements for filing through the streamlined domestic offshore procedure in Washington DC. First, the individual will need to produce the three most recent years of tax returns to be amended and the six most recent years of FBARs. On the top of the return, they must write “Streamlined Domestic Offshore” in red ink to denote they are filing through this type of disclosure. (If the individual is filing through the SFOP, they should write “Streamlined Foreign Offshore” instead.)
They will have to complete Form 14654, which is a certification by a U.S. person residing in the U.S. or else they will not be processed through SDOP. Through Form 14654, they must submit payments for all the different tax years they missed, along with interest, and any relevant penalties. In the event that there is some type of election of deferral of income from certain retirement plans, they will need to provide a statement alongside that as well.
These documents all need to be sent to the IRS’s Austin, Texas campus for filing, while the last six years of FBARs need to be filed online.
To file an SDOP, the IRS requires income statements, bank statements, retirement accounts, life insurance information, travel logs, et cetera. From those documents, the tax adviser would prepare Form 1040 and other likely international forms such as Form 8938 which is a Statement of Specified Foreign Accounts, or a Form 2555 which is Foreign Earned Income Exclusion.
A preclearance letter is not required to file an SDOP in Washington DC, because the SDOP is for taxpayers who were non-willful and had no intent to deceive. They do not have any criminal exposure, and as a result, these returns are processed through normal procedures. The purpose of pre-clearance is to check and see that there is no criminal investigation that has already begun.
The taxpayer needs to provide specific reasons for their failure to report all of their income, pay all the tax, and submit all the required informational returns, including FBARs. The taxpayer should include their personal background information and financial situation, including facts that may be favorable or unfavorable to their story. This will be submitted with Form 14654.
They should explain how they came to acquire the funds in the account that is being disclosed. This could be due to an inheritance, business dealings from outside of the U.S., or because they opened that account while living in that country. They should include an overview of the withdrawals and deposits made in that account, how it has been managed or invested, as well as the name and information of any financial advisor they utilized, and the advice that person gave regarding how to handle that account.
If this account is in the name of a married couple, they would use one narrative for their disclosure unless they have different reasons for their non-willfulness, in which case they can provide separate narratives as part of the same disclosure.
Call us if you are a taxpayer living in the United States who was un-willful in failing to report offshore accounts to the government. The requirements to file an SDOP in Washington DC are not difficult to meet but they must be done carefully.