Which IRS Overseas Asset Penalty Relief Program is the Best

Unreported Foreign Asset Playbook (SFCP, DFSP, DIIRSP, VDP)

Unreported Foreign Asset Playbook 

For U.S. taxpayers who did not previously report all of their foreign accounts, assets, investments, and income on their tax returns and other international information reporting forms, the Internal Revenue Service offers many different offshore disclosure programs and procedures they can use to safely get into compliance. Unfortunately, the World Wide Web is littered with inaccurate and false information about what procedures taxpayers may qualify for and what options they should choose when getting into compliance. Not all taxpayers qualify for all the different programs. While most of the programs are similar and the procedures required to get into compliance, there are various eligibility requirements for each program and therefore while some taxpayers may prefer one program over another, technically they do not qualify. We have written hundreds of articles on offshore disclosure and specifically different programs taxpayers can use, but with tax season in full swing, we thought we would provide a summary to help taxpayers on their quest.

SFCP (Streamlined Filing Compliance Procedures)

The Streamlined Filing Compliance Procedures (SFCP) or ‘Streamlined Procedures’ is one of the most popular offshore disclosure options It is for taxpayers who are non-willful and not under audit. Depending on which program the taxpayer qualifies for they will be subjected to a 5% Title 26 miscellaneous offshore penalty (instead of other FBAR/FATCA penalties) or even possibly qualify for a penalty waiver.

SDOP (Streamlined Domestic Offshore Procedures)

The Streamlined Domestic Offshore Procedures (SDOP) are used for US residents. The program requires that taxpayers are non-willful, not currently under audit, and have previously filed their tax returns timely if they were required to file a tax return. Under this version of the program taxpayers may amend previously filed returns but not file original returns. Taxpayers are subject to a 5% penalty on the highest December 31st aggregate value of their unreported accounts and assets.

SFOP (Streamlined Foreign Offshore Procedures)

The Streamlined Foreign Offshore Procedures (SFOP) it’s for taxpayers who do not qualify as U.S. residents but are still required to file a Form 1040 or otherwise considered U.S. persons for tax purposes. Unlike the streamlined domestic version of the program, taxpayers may file original tax returns as well as avoid any penalties for undisclosed foreign accounts, assets, or investments.

DFSP (Delinquent FBAR Submission Procedures)

For non-willful taxpayers do not have to amend their tax returns for unreported income and the only form they have to file is the FBAR, they may qualify for the Delinquent FBAR Submission Procedures (DFSP). Under the current version of the program, there are no penalties assessed to the taxpayer.

DIIRSP (Delinquent International Information Return Submission Procedures)

The Delinquent International Information Return Submission Procedures (DIIRSP) is similar to the Delinquent FBAR Submission Procedures except that it allows taxpayers to file other forms such as Form 3520 or Form 8938. But, since November 2020, the IRS no longer grants Taxpayers an automatic penalty waiver under this version of the program.

VDP (Voluntary Disclosure Program)

Unlike all of the programs identified above, the IRS Voluntary Disclosure Program (VDP) is reserved for willful taxpayers. With VDP, Taxpayers pay significantly higher penalties for both the undisclosed assets along with the unreported income — but they do receive a closing letter and it will almost always avert any potential criminal repercussions for taxpayers.  There was a previous offshoot of the program referred to as OVDP come up with that program was terminated in 2018 and now domestic and offshore submissions are made directly through the traditional VDP program.

RC (Reasonable Cause)

Some taxpayers may be able to avoid having to go through the disclosure procedures if they can make a proactive or defensive Reasonable Cause (RC) submission. Technically, when the taxpayer can show reasonable cause then the IRS is not authorized to issue penalties, or if they were issued — the penalty should be abated.

Avoid Making a Quiet Disclosure (QD)

A Quiet Disclosure is when the taxpayer tries to circumvent the required disclosure procedures and submit amended or original forms hoping to not be detected by the IRS. The IRS has made it clear that if they catch taxpayers and acquire disclosure they will go after them for both civil and criminal penalties if applicable. Taxpayers should be very cautious before considering a quiet disclosure, especially because many taxpayers would qualify for streamlined or delinquency procedures and avoid or minimize penalties — without having to commit this type of fraudulent submission.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.