You can use streamlined filing compliance procedures to:
- File up to three (3) years of back taxes in the US
- File up to six (6) years of delinquent FBARS (Reports of Foreign Bank and Financial Accounts), if you have foreign bank accounts that cross reporting thresholds
- Potentially reduce or avoid IRS penalties altogether
What are the Streamlined Filing Compliance Procedures?
Streamlined filing compliance procedures (often called streamlined procedures) are a group of IRS procedures you can use to amend your American tax returns if you failed to report foreign assets and/or income. They help you get back into compliance with IRS rules, and can help minimize the penalty you have to pay, or eliminate it altogether.
8938 vs FBAR: Which One Do You Need to File?
Form 8938 is the Statement of Specified Foreign Financial Assets you need to include in your US tax return if the total value of your foreign financial assets meets the IRS reporting threshold.
This threshold applies to US citizens, resident aliens, and even certain nonresident aliens. It’s based on where you live and your tax filing status. If you’re required to file an 8938 form and don’t, you could be assessed a substantial penalty, starting at $10,000 USD. That penalty can go up every 30 days.
If you move from Canada to the US, you may also need to file an FBAR (Report of Foreign Bank and Financial Accounts) if you have any of the following types of accounts:
- Canadian bank accounts
- Canadian brokerage accounts
- Canadian mutual fund accounts
- Tax-free savings accounts (TFSA reporting problems are common in the US, which does not recognize their tax-free status)
- RRSPs (Registered Retirement Savings Plans)
The FBAR and Form 8938 are completely different IRS tax requirements, and you may need to complete both.
Include Form 8938 as an attachment to your annual US tax return. If you’re required to file an FBAR, you can file it electronically on FinCEN Form 114.
Do you need to file Form 8938 and/or an FBAR? Contact us to find out for FREE.
What You Need for the Streamlined Filing Compliance Procedures
To use the IRS streamlined filing compliance procedures, you need:
- A federal tax identification number (apply for a federal taxpayer id number if you don’t already have one).
- To pay any penalties you owe for previous tax years
- Individual filing status, or filing on behalf of the estate of an individual
- To certify that your failure to report all income, pay any taxes due and submit all required information, including delinquent FBARs, was NOT willful, that you did it by mistake or didn’t know/understand the requirements when you moved from Canada to the US
- To not be under audit, civil examination or criminal investigation by the IRS
When you use the streamlined procedures to disclose previously unreported foreign income, you can often purchase a package from a cross-border tax accountant that includes amending your old tax returns for up to three (3) tax years and FBARs (FinCEN Form 114) for up to six (6) tax years.
Streamlined Domestic Offshore Procedures (SDOP) vs. Streamlined Foreign Offshore Procedures (SFOP)
The IRS offers two (2) types of streamlined procedures you can use to catch up on US taxes if you failed to report foreign income and/or assets.
You can use the domestic procedures if you reside in the United States
AND
- You’re a US citizen OR
- You’re a lawful permanent resident (green card holder) OR
- You meet the Substantial Presence Test
If you are not a US citizen or lawful permanent resident, and don’t meet the requirements of the Substantial Presence Test, but still need to report foreign assets and income from previous tax years, you may be eligible to use the streamlined foreign offshore procedures.
The IRS may waive your penalty completely if you are a US taxpayer living outside of the United States and use the streamlined foreign procedures to catch up on your US taxes.
If you live in the US, and didn’t report your foreign assets and/or income, you may be subject to a 5% penalty calculated on the highest aggregate year-end balance of the assets you failed to report.
Even if you have to pay the 5% penalty, this is often still less than the penalty you might have to pay if you don’t catch up on your reporting, which starts at $10,000 for failure to submit a required 8938 form.
Streamlined Filing Compliance Procedures:Frequently Asked Questions
Who qualifies for the Streamlined Filing Compliance Procedures?
You may qualify for the streamlined filing compliance procedures if you failed to report foreign accounts as an individual, or on behalf of the estate of an individual. You would need to apply for a federal tax id number in the US if you don’t have one, and pay any old tax penalties from previous tax years. If you are under audit or criminal investigation by the IRS, you can’t use the streamlined filing compliance procedures to catch up on US taxes.
What is the difference between FBAR and Form 8938?
An FBAR is a report of foreign bank and financial accounts. You can file an FBAR electronically on FinCEN Form 114. It is not part of your annual US tax return.
Form 8938 is a statement of specified foreign financial assets. You may be required to file it as an attachment to your annual tax return if the total value of your foreign financial assets meets the IRS reporting threshold.
If you move to the US and keep foreign accounts, you may need to complete both an FBAR and an 8938 form.
Will I owe penalties if I use the streamlined program?
If you live in the US, and didn’t report your foreign assets and/or income, you may have to pay a 5% penalty calculated on the highest aggregate year-end balance of the accounts you didn’t report.
If you don’t live in the US, the IRS may waive your penalty if you catch up your US filings. Either way, if you failed to report foreign accounts, the penalty due when you participate in the streamlined filing compliance procedures is often still less than the penalty for nonreporting on Form 8938, which starts at $10,000 and can increase every 30 days.
How many years do I have to file?
You need to file for every tax year where you were required to report foreign accounts. You can use the streamlined procedures to file up to three (3) years of back taxes and up to six (6) years of delinquent FBARs (Report of Foreign Bank and Financial Accounts.)
Need to Catch Up on Your US Tax Returns?
Request a FREE consultation with cross-border tax accountant and Sr. Tax Manager Kelly Sheng to determine if you are eligible to use the Streamlined Filing Compliance Procedures to catch up on your US taxes and potentially reduce or eliminate your penalty for nonreporting.