SDOP Streamlined Domestic: 5% Penalty Base, Years, Form 14654

SDOP in short: years, penalty and package

The Streamlined Domestic Offshore Procedures (SDOP) let a US resident whose failures were non-willful amend the three most recent filed returns, file late FBARs for six years, and pay tax, interest and a 5% miscellaneous offshore penalty. For a complete, eligible submission that penalty replaces accuracy-related, information return and FBAR penalties, but not penalties already assessed, and not if an examination later finds fraud or a willful FBAR violation (IRS: domestic procedures). The first steps, the eligibility test and the basic penalty rule are in catching up on missed foreign reporting; this page covers the details that decide the numbers.

A case is not simple when a return in the window was never filed, a spouse lived abroad in one of the years, you own a foreign company, trust or fund, an asset is shared with someone outside your return, or any earlier filing could look willful. SDOP is closed to anyone under IRS civil examination for any year, whatever the subject, or under criminal investigation, and it needs a valid taxpayer identification number: someone eligible for a Social Security number who has none cannot use it (IRS: streamlined procedures; SDOP FAQ 17). You sign Form 14654 under penalties of perjury that your conduct was non-willful, meaning negligence, inadvertence, mistake or a good-faith misunderstanding; if that is in doubt, read what if my failure may have been willful before certifying.

Gather year-end and maximum statements for every foreign account and asset for six years, the three filed returns, any ownership papers, and a written history of where the money came from.

SDOP or SFOP: which applies if I moved here recently or my spouse lived abroad?

SDOP applies only if you fail the non-residency test of the foreign procedures; on a joint return, SDOP applies if one or both spouses fail it (IRS: domestic eligibility). The Streamlined Foreign Offshore Procedures (SFOP) require both spouses on a joint return to meet the test (IRS: foreign eligibility).

A US citizen or green card holder meets the test in a year with no US abode and at least 330 full days outside the US. Anyone else meets it in a year in which they did not meet the substantial presence test (the day count that makes a non-citizen a US tax resident). One such year among the three covered years is enough, so a person who arrived in the US recently may belong in SFOP, not SDOP (IRS: foreign eligibility). See the Streamlined Foreign Offshore guide if you or both spouses may qualify.

Which three years do I amend and which six FBAR years do I file?

SDOP covers the three most recent tax years whose return due date, or properly extended due date, has passed, and the six most recent years whose FBAR due date has passed (IRS: scope). The window depends on the day you submit, so recount the years if the package waits past a filing deadline. If the latest return year has passed its due date but its FBAR has not, the two windows do not line up and the penalty table on Form 14654 covers a seventh year (Form 14654). If you own a specified foreign corporation with a section 965(a) transition tax inclusion, the submission must also reach back to the inclusion year, generally 2017 or 2018, and every year after it, and each amended return and information return carries "Section 965" in red after "Streamlined Domestic Offshore" (IRS: section 965).

For each covered year you must already have filed a return, if one was required. SDOP cannot carry an original late Form 1040: the IRS says you may not file delinquent income tax returns through it (IRS: specific instructions). One required return missing from the window rules SDOP out. The IRS does not say whether filing that return late first, through regular channels, restores eligibility; get that reviewed before relying on it.

If the three most recent years, including Forms 8938, and their FBARs are already correct, SDOP still applies: the certification goes with a zero-change Form 1040-X for the latest year, and only the three older FBAR years feed the penalty (SDOP FAQ 7). The steps are in catching up on missed foreign reporting.

Which assets count toward the SDOP penalty base?

An asset is in the base for any of the six FBAR years in which it should have been, but was not, on an FBAR. For each of the three amended years it is also in the base if it was missing from Form 8938 or its income was left off the return (IRS: penalty definition). Only your personal financial interest counts (IRS: SDOP FAQ 1).

SDOP covers only your own liability: a co-owner who files nothing is not covered and can be examined (2014 OVDP FAQ 40). The same ownership rule applies to assets held through a foreign partnership or trust (SDOP FAQ 4). The IRS applies its older offshore program rules here: no amount of unreported income is too small, one dollar brings the asset in, and business accounts are not set apart (2014 OVDP FAQs 32 and 33, applied to SDOP by FAQ 1). Whether an account needs an FBAR at all is covered in which accounts go on an FBAR.

How do I value each asset for the SDOP penalty?

Use the December 31 value of your own interest in each asset, in US dollars, for each year it is in the base. Add the values by year across the six FBAR years (seven if the windows do not line up), pick the highest yearly total, and multiply by 5% (SDOP FAQ 6). Value each asset separately and convert at the year-end exchange rate, even if the peak came earlier in the year (2014 OVDP FAQ 31).

• Your share: a co-owned asset counts at your percentage of its value; a joint account between spouses on one joint submission counts once.
• Company stock: any reasonable method, such as the balance sheet on Form 5471, with no discount for a minority stake or lack of marketability (SDOP FAQ 5).
• FBARs are different: each FBAR reports the maximum value during the year, converted at the Treasury year-end rate, so the FBAR figure and the penalty figure often differ (FinCEN line-item instructions).

Form 14654 lists each asset with its institution, city, country, account number, year opened and year-end value for each year; enter "N/A" for a year with nothing in the base. A continuation sheet must be signed, with names and taxpayer identification numbers printed. By signing, you agree to keep account statements for the penalty assets for six years from the certification and income and asset records for the amended years for three years (Form 14654).

Do assets on a late Form 3520 or 5471 still count toward the penalty?

Yes. The Form 8938 instructions let you skip an asset that is reported on a Form 3520, 5471, 8621 or 8865 filed on time, but that exception covers only timely forms, and the IRS confirms that an asset reported only on a late Form 3520 or 5471 stays in the SDOP base (SDOP FAQ 3; Form 8938 instructions). For a foreign company, that means the stock is in the base; for a foreign trust, your interest in it.

Do foreign funds or a foreign pension change what goes in an SDOP package?

Yes. A foreign fund adds Form 8621 to each amended return where it is required, even though information returns normally travel with an original return, and the fund shares fall in the penalty base under the same test as other assets (IRS: specific instructions). The Form 8621 computations are in the foreign fund (PFIC) guide.

A foreign pension may be reportable on the FBAR and Form 8938, which can put it in the base. Where a treaty allows deferral on a retirement or savings plan you never elected, the package can request late-election relief with two statements (IRS: treaty deferral relief). Which pension forms apply is in the foreign pension guide. A Canadian RRSP or RRIF held by an eligible individual under Rev. Proc. 2014-55 is outside the base, but only if your Form 14654 statement says you are one; the plan may still belong on the FBARs and Forms 8938 (SDOP FAQ 8); see the Canadian accounts catch-up guide.

How do I pay the SDOP penalty, tax and interest?

Send the full tax, interest and penalty with the amended returns, with your taxpayer identification number on the check (IRS: specific instructions). Form 14654 says the payment should equal the tax and interest for all three years plus the penalty; a wrong figure can bring a balance-due notice or a refund (Form 14654). Interest runs on each year's late payment amount.

The IRS requires the documents and payment on paper and will not accept an electronic submission; only the late FBARs go electronically, through FinCEN. Send them to Internal Revenue Service, 3651 South I-H 35, Stop 6063 AUSC, Attn: Streamlined Domestic Offshore, Austin, TX 78741. That address is only for this submission (IRS: mailing). By signing Form 14654 you consent to immediate assessment and collection of the penalty for the latest of the three years, waive all defenses to it, including the time limit on assessment, and waive the right to seek its refund or abatement. You also accept that the amended returns may report income from years past the usual three-year assessment period, and that claiming back tax paid on that income forfeits the streamlined terms (Form 14654). The IRS sends no acknowledgment and signs no closing agreement (IRS: general treatment).

How long should the Form 14654 statement be, and what if it is incomplete?

The IRS sets no length limit; it sets a content standard. The statement must give specific reasons for each failure, the whole story with favorable and unfavorable facts, your personal and financial background, the source of the money in every foreign asset, and your dealings with it: deposits, withdrawals and investment decisions (SDOP FAQ 13).

Also cover a "no" answer on Schedule B, any missed company or trust reporting, and any advisor you relied on, with the advisor's name, address, phone number, a summary of the advice, how you came to the advisor and how often you were in contact. Spouses with different reasons state each one separately. The form's field expands, or you can use a signed attachment (Form 14654). A missing, incomplete or deficient statement means the returns are processed in the normal course without the SDOP penalty terms (IRS: certification). If a spouse or former spouse will not sign, you can file the joint amended returns and Form 14654 with your signature alone only if each joint amended return shows a net increase in tax. Explain why in the statement, write "SDO FAQ 14" in red in the spouse's signature area on each return and on Form 14654, and when the IRS asks for the missing signature, answer by citing that FAQ (SDOP FAQ 14).

My late FBARs show the wrong late-filing reason or a typo: do I amend them?

Each SDOP FBAR should give "Other" as the late reason with "Streamlined Filing Compliance Procedures" in the explanation box (IRS: FBAR instruction; FinCEN: filing late). The IRS says a mistake in FBARs filed for a streamlined submission is fixed by e-filing amended FBARs (SDOP FAQ 16).

To amend, file a new, complete FBAR for that year, select Amend, and enter the prior report's BSA identifier from the filing confirmation; if you cannot find it, enter fourteen zeros (FinCEN line-item instructions). The IRS and FinCEN pages cited here name no separate consequence for a wrong late reason.

I found a mistake after mailing, or the penalty looks wrong: how do I correct an SDOP submission?

If the returns are not under examination, send corrected amended returns, an amended Form 14654, or both, with the facts of the error and any added tax, interest and penalty (SDOP FAQ 16). Write "amended" in red at the top of Form 14654 and "Amended Streamlined Domestic Offshore" in red at the top of each corrected return. Mail it to IRS, 3651 S. IH 35, MS 6063 AUSC, Attn: Streamlined Procedures, Austin, TX 78741; this is the address the IRS gives for corrections, while the original package goes to the address above.

• An asset was left out: amend Form 14654 and pay the added penalty; if its income was also missing, amend the three returns too.
• A Canadian RRSP or RRIF was wrongly in the base: an eligible individual can ask for the excess back on Form 14708, mailed to the Stop 4305 AUSC address printed on the form; both spouses sign if the certification was joint, and the IRS's decision cannot be appealed (SDOP FAQ 12; Form 14708).
• The penalty was overstated for another reason: the IRS publishes no other reconsideration route, and the signed certification waives refund and abatement of the penalty. Whether an amended Form 14654 can lower it is unsettled; get it reviewed before filing.

Example

All figures are in US dollars and illustrative.

A deposit abroad, an employer account and a flat

A US resident's fixed deposit and savings account abroad were never on FBARs, and their interest was left off his returns. His December 31 totals for the six FBAR years are $50,000, $60,000, $70,000, $90,000, $80,000 and $85,000. He also signs on his employer's foreign account ($400,000, no personal financial interest) and owns a flat abroad. On these facts neither counts. The highest year is $90,000, so the penalty is 5% of $90,000, or $4,500, plus tax and interest on the three amended returns. His FBARs still report maximum values, and the employer account may still need reporting as a signature-authority account.

A foreign company reported on late Forms 5471

A sole owner of a foreign company that is not a disregarded entity files late Forms 5471 with her amended returns. The penalty base holds her stock, valued by a reasonable method such as the Form 5471 balance sheet, with no discount. The company's own $150,000 bank balance is not added on top. Because the stock is not an FBAR account, it counts only in the three amended years. If the balance sheet shows net assets of $200,000 at the highest of those three year-ends and she has no other assets in the base, the penalty is 5% of $200,000, or $10,000.

A couple where one spouse lived abroad

A married couple files jointly. He lived in the US all three covered years; she lived abroad and met the non-residency test in the earliest one. Because one spouse fails the non-residency test, their joint submission is Streamlined Domestic, not Foreign, and both spouses' accounts go on one Form 14654.

Different for you?

• You have not decided whether to use a streamlined procedure at all: compare the routes in streamlined or late forms.
• You or both spouses lived abroad in a covered year: see the Streamlined Foreign Offshore Procedures.
• A return in the window was never filed, or you are new to the rules: start with catching up on missed foreign reporting.
• The income you left off is not from a foreign financial asset: see amending for income left off past returns.
• You hold foreign funds: work through the foreign fund (PFIC) guide.
• You have a foreign pension, or a Canadian RRSP or RRIF: see the foreign pension guide or the Canadian accounts catch-up guide.
• You own a foreign company or trust, share assets with someone outside your return, or spouses have different facts: the valuation and certification need FBAR and foreign reporting help.
• You want someone to prepare the submission: see choosing a preparer.