On June 18, 2014, the Internal Revenue Service announced SDOP (Streamlined Domestic Offshore Procedures), which will change offshore disclosure programs significantly. The SDOP changes the game for both non-resident and resident taxpayers. The IRS claims that the new changes will help ease the burden for taxpayers who have failed to report to the United States government certain foreign financial accounts and pay the taxes on the income that is associated with their non-compliance.
What Is The Difference Between The SDOP And The Current OVDP program?
The Streamlined Offshore Procedures loosens the restrictions of the old rules and rewards taxpayers that disclose their offshore assets with a lower penalty and a minimal tax. Taxpayers will only have to file 3 years of amended income tax returns instead of the current OVDP program’s requirement of 8 years of amended income tax returns. They will be assessed a penalty of only 5% of the account with the highest balance instead of the OVDP program’s 27.5% penalty.
In addition, the SDOP radically and significantly expands the previous Streamlined Program for Non-US residents which was only for non-tax filers with under $1,500 of income that was unreported.
SDOP Filing Risk Factors
It is extremely important that a taxpayer’s eligibility is carefully analyzed because once the SDOP is elected and the taxpayer claims the violations were non-willful, the taxpayer will not be eligible for the OVDP any longer. There are possible risk factors that need to be considered and analyzed such as the evidence of willfulness including the intent of laws, knowledge, and violations.
Although filing an SDOP does not automatically select the taxpayer for an IRS audit, the taxpayers are still subject to the possible normal audit selection. The taxpayer needs to be prepared to defend filing an SDOP and be able to demonstrate their non-willfulness and show there was no fraud.
What Should Be Included In A SDOP Filing Submission?
A Streamlined Offshore Procedure filing must include:
- 3 previous years of amended U.S. tax returns. “Streamline Domestic Offshore” needs to write in red, which will indicate the tax returns are being filed under the Streamline Domestic Offshore Procedures.
- The IRS form “Certification by US Person Residing in the US for Streamlined Domestic Offshore Procedures” must be fully executed. The Internal Revenue service asks you for specific reasons that you failed to report all of your income and pay the required taxes. They also require you submit the required tax returns including FBAR’s. This document should be drafted by a qualified and experienced lawyer or CPA based on your individual situation.
- Payment of the full amount of all Interest and tax due in connection with tax filings.
- The misc. the offshore penalty of 5%.
- You need to include a statement that your FBAR’s are being filed via the online FinCen web portal.
Both resident and non-resident U.S. taxpayers are eligible for the Streamlined Domestic Offshore Procedures. In the past, only taxpayers that lived outside of the United States were eligible. A taxpayer is not eligible for SDOP if the Internal Revenue Service has already initiated an examination of their tax returns for an eligible year.
The Streamlined Domestic Offshore Procedures should persuade more taxpayers to voluntarily come forward through one of the IRS’s programs if they are not in compliance. Only time will tell how the IRS will generally review the applications or how they will determine whether the taxpayer’s non-compliance was non-willful.