What is the IRS Streamlined Foreign Offshore Procedure and who qualifies?

What the procedure is and what it removes

The Streamlined Filing Compliance Procedures were introduced in 2012 for US taxpayers living abroad and expanded in 2014 into two tracks: Streamlined Foreign Offshore for people who live outside the United States and Streamlined Domestic Offshore for people who live inside it. The foreign track is the one that applies to almost everyone filing from Canada, and it is the more generous of the two. The domestic track charges a 5% penalty on the highest year-end balance of the unreported foreign assets; the foreign track charges nothing.

A taxpayer accepted into the foreign procedure pays the tax and interest shown on the returns and is relieved of every penalty that would otherwise apply: the failure-to-file and failure-to-pay penalties on the returns, accuracy-related penalties, penalties for late information returns such as Forms 8938, 3520, 5471 and 8621, and FBAR penalties. For someone who has not filed in a decade, the difference between the penalties and zero can be larger than all the tax owing combined. Our streamlined filing guide walks through the package as it applies from Canada.

Who qualifies for the foreign offshore track

Three conditions have to be met at the same time:

1. The non-residency test. For a US citizen or green-card holder, in at least one of the three most recent years for which the return due date has passed, you must have had no US abode and have been physically outside the United States for at least 330 full days. Most people who have lived in Canada continuously meet this easily; frequent cross-border commuters and people who split the year between the countries need to count days. Someone who is neither a citizen nor a green-card holder qualifies instead by failing the substantial presence test in one of the three years.
2. Non-willful conduct. Your failure to report income, pay tax and file the information returns must have been due to negligence, inadvertence, mistake, or a good-faith misunderstanding of the law. Not knowing that the United States taxes its citizens abroad is the classic example. Deliberately hiding accounts is the opposite.
3. No open examination. If the IRS has already started a civil audit of any of your returns for any year, or a criminal investigation, the procedure is closed to you even if the audit concerns something unrelated.

You also need a valid Social Security number or ITIN, and you must not have previously submitted through the streamlined or offshore voluntary disclosure programs. People who did file returns but left the Canadian income or information forms off them qualify too; they submit amended returns rather than original ones. The procedure is available as at the time of writing, but the IRS has said it may end it at any point, which is one reason we do not recommend waiting.

What a complete submission contains

A streamlined package is a set of documents filed together on paper, with "Streamlined Foreign Offshore" written in red at the top of each return, to the IRS address given in the instructions. It contains:

• Three years of Form 1040 (or 1040-X where a return was previously filed), each complete with every required schedule and information return: Form 1116 or 2555, Form 8938, Form 8621 for each Canadian fund, Forms 3520 and 3520-A where applicable, Form 5471 for a Canadian corporation, Form 8833 for treaty positions.
• Six years of FBARs, filed electronically through the BSA E-Filing System, selecting "Streamlined Filing Compliance Procedures" as the reason for late filing. Our late-FBAR answer covers the records needed.
• Form 14653, the Certification by US Person Residing Outside of the United States, signed under penalties of perjury, with a written narrative explaining how the non-compliance arose and why it was non-willful.
• Payment of the tax and interest shown on the three returns.

For a typical long-term Canadian resident, the tax owing is small or nil because the foreign tax credit covers it. The exceptions are the same ones that bite on any US return from Canada: TFSA income, PFIC funds under the default rules, and gains on a home above the US exclusion. The certification narrative is the document the IRS actually reads, and it is where a submission succeeds or fails.

What non-willful means in practice and what happens next

Non-willfulness is judged on your whole story, and Form 14653 asks you to tell it: when you left the United States or how you came to be a citizen, what you understood about your obligations, how you learned of the requirement, whether any advisor was involved, and what the accounts were used for. A credible narrative is specific, consistent with the returns, and honest about anything awkward. A narrative that overstates ignorance while the facts show a US tax advisor, or a large unexplained account, invites scrutiny. Most Canadian cases are straightforward: ordinary accounts, ordinary income, and a genuine lack of awareness.

The IRS does not send an acceptance letter. Streamlined returns are processed like any other return; a refund or balance-due notice may follow, and the returns can be selected for audit in the usual way, at which point the certification would be tested. In practice, once the submission is in, you continue filing normally each year, which is why we set up the following year's engagement at the same time. The streamlined route is also the standard first step for someone who intends to renounce US citizenship, because renunciation requires five years of compliance and three streamlined years plus two current ones gets you there.

How we prepare streamlined submissions

We treat the three returns, six FBARs and the certification as one project with one fixed fee, quoted after a discovery call in which we confirm you meet the residency and non-willfulness tests before any work begins; market packages typically run $1,750-$2,500 or more, as set out on our fees page. We build the account inventory and maximum-balance schedule once and use it for the FBARs, Form 8938 and any T1135 catch-up on the Canadian side. We draft the Form 14653 narrative with you rather than for you, because it has to be your account of events, and we review it against the returns line by line so the two never disagree. Once the package is filed, the annual US return continues from a clean base.

Source: IRS - US Taxpayers Residing Outside the United States (Streamlined Foreign Offshore).