The Streamlined Filing Compliance Procedures impact tax liabilities, interest, and penalties in a way that is generally more favorable to taxpayers than standard IRS procedures, especially for those whose failure to report foreign financial assets and pay all tax due was non-willful.
Taxpayers must pay the full amount of the tax liabilities for the most recent three years for which the U.S. tax return due date (or properly applied for an extension) has passed. This requirement is the same under both the Streamlined Foreign Offshore Procedures (for non-residents) and the Streamlined Domestic Offshore Procedures (for U.S. residents). The aim is to bring taxpayers into compliance by ensuring they pay what they owe in terms of income tax on unreported foreign income.
Interest on unpaid taxes is also due for the same three-year period and must be paid in full. Interest is calculated at the statutory rate set by the IRS and accrues from the original due date of the tax return until the date the tax is paid. Unlike penalties, interest charges cannot be waived or reduced under the Streamlined Procedures because they represent the time value of money that was owed to the government.
The Streamlined Procedures significantly reduce penalties, particularly for taxpayers using the Streamlined Foreign Offshore Procedures, who may not be subject to any failure-to-file, failure-to-pay, accuracy-related penalties, information return penalties, or FBAR penalties. This is a major benefit for eligible taxpayers, as penalties for failing to report foreign financial assets can be severe under normal circumstances.
For taxpayers eligible for the Streamlined Domestic Offshore Procedures, the main penalty is a miscellaneous offshore penalty equal to 5% of the highest aggregate balance/value of the taxpayer's foreign financial assets that were subject to non-compliance. This penalty is in lieu of all other penalties that might apply, including penalties for failing to file FBARs and information returns.
The Streamlined Filing Compliance Procedures offer a way for eligible taxpayers to resolve their past non-compliance issues related to foreign financial assets with reduced or eliminated penalties, though they are still responsible for paying the full amount of taxes and interest owed. This can result in a significant financial benefit and peace of mind for taxpayers who inadvertently failed to meet their reporting obligations. However, it's important for taxpayers to assess their eligibility carefully, particularly the requirement that their conduct was non-willful, before proceeding.