Correcting Past International Tax Filing Mistakes: A Guide to the IRS Streamlined Procedures

For U.S. taxpayers with foreign bank accounts, businesses, investments or other financial interests, international tax reporting can become complicated very quickly. It is not unusual for someone to file U.S. tax returns for years without realizing that additional forms were required to report assets or activities outside the United States.

Often, the issue comes to light after changing accountants, selling a foreign business, receiving an inheritance, or simply having someone ask the right questions.

That discovery can be unsettling. The good news is that the IRS has established procedures that may allow certain taxpayers to correct past mistakes and come back into compliance.

What are the Streamlined Filing Compliance Procedures?

The IRS Streamlined Filing Compliance Procedures are available to qualifying individual taxpayers, including estates of individual taxpayers, whose failure to properly report foreign income, assets or accounts resulted from non-willful conduct. Businesses are not themselves eligible to use the Streamlined procedures, although business ownership can create international reporting obligations for an individual owner. Businesses with their own filing deficiencies may need to consider other correction procedures.

In simple terms, Streamlined can provide a path for taxpayers whose failure to comply resulted from negligence, inadvertence, mistake, or a good-faith misunderstanding of their U.S. tax obligations rather than an intentional decision to avoid those obligations.

There are separate Streamlined procedures for U.S. taxpayers residing inside and outside the United States, and the requirements and potential penalties differ between the two.

For taxpayers residing in the United States, the Streamlined Domestic Offshore Procedures generally involve submitting three years of corrected federal income tax returns and six years of required foreign bank account reports, commonly known as FBARs. The domestic procedures also generally require payment of a 5% miscellaneous offshore penalty based on certain foreign financial assets that fall within the penalty calculation. Additional tax and interest may also be due.

The exact filings required will depend on the taxpayer’s individual circumstances.

What kinds of issues can lead to a Streamlined filing?

Many of the taxpayers we encounter have been filing U.S. tax returns but did not realize that their foreign activities created additional reporting requirements.

For example, a taxpayer may inherit shares of a foreign corporation and not know that Form 5471 was required. Someone who owns an interest in a foreign partnership may have an obligation to file Form 8865. Other taxpayers discover that foreign investment accounts, pensions, trusts or bank accounts should have been reported on forms such as Form 8938, Form 8621 or the FBAR.

In some cases, the missing forms are only part of the problem. Income associated with the foreign assets or businesses may also have been omitted from the U.S. tax return.

This is why it is important to understand the entire fact pattern before deciding how to correct the filings.

The most important question: Was the failure non-willful?

One of the most important requirements of the Streamlined program is that the taxpayer certify that the prior noncompliance resulted from non-willful conduct.

This is more significant than simply saying, “I didn’t know.”

Not knowing about a filing requirement does not automatically establish non-willfulness. The taxpayer needs to explain the specific circumstances that resulted in the missing filings. That may include what the taxpayer understood about his or her U.S. obligations, what information was provided to prior tax professionals, what advice was received, and how and when the taxpayer ultimately discovered the problem.

Every situation is different.

A taxpayer who fully disclosed foreign businesses and accounts to a tax preparer but was never advised of the additional filing requirements may have a very different fact pattern from someone who deliberately chose not to tell a preparer about foreign assets.

The certification is signed under penalties of perjury, so this part of the process should be taken seriously.

What happens after a Streamlined submission is filed?

One misconception is that the IRS formally approves a taxpayer for the Streamlined program. Generally, that is not how the process works.

A taxpayer should not expect to receive a letter stating that the IRS has “accepted” the taxpayer into the Streamlined program or forgiven the previous noncompliance. In many successful cases, the submission is simply processed and there is no further correspondence from the IRS.

The IRS can, however, examine a Streamlined submission and challenge whether the taxpayer qualified for the procedures. Filing under Streamlined therefore does not guarantee a particular outcome.

Discovering a problem does not mean it cannot be fixed

Learning that several years of international tax forms may be missing can be intimidating, particularly because penalties for certain international information returns can be substantial.

But discovering the problem is also an opportunity to address it.

We have helped many taxpayers work through Streamlined filings involving foreign businesses, bank accounts and other international reporting issues. When the facts support non-willfulness and the submission is prepared carefully and transparently, we have seen many of these matters resolve without further issue.

The key is not to start filing forms simply because you have discovered they are missing. The first step should be understanding what should have been filed, whether income or tax was also omitted, which years are affected, and which IRS compliance procedure is appropriate for the particular circumstances.

At James Moore & Company, we regularly work with individuals navigating U.S. international tax requirements, including those whose ownership of foreign businesses creates additional U.S. reporting obligations. If you have discovered that foreign income, accounts, companies or other assets may not have been properly reported, we can help you understand the situation and determine an appropriate path toward compliance.