IRS Streamlined Procedures - U.S. Tax Amnesty with No Penalties

The Challenge

A non-U.S. citizen client became a U.S. tax resident in 2020 after qualifying as a nonresident under the closer-connection exception in 2018 and 2019. Although she filed Form 1040 for 2020, the return omitted international filings tied to a Jersey trust and its foreign company.

The client was a discretionary beneficiary of the irrevocable trust, established by her late spouse. The trust owned a foreign company holding a U.K. residence, which she occupied rent-free for six days in 2020. A conservative analysis treated that use as a deemed distribution and rent payment, potentially requiring Forms 3520 and 5471 and Subpart F reporting.

Our Approach

ETP analyzed whether the client was an owner of the trust for U.S. tax purposes, concluding that the facts supported non-grantor treatment, but the occupancy and CFC attribution issues made conservative reporting prudent.

We then tested eligibility for the Streamlined Foreign Offshore Procedures. The client was neither a U.S. citizen nor a green-card holder and, through the closer-connection exception, had not met the substantial presence test in at least one relevant year. The foreign procedures were therefore available. We recommended an amended 2020 return with Forms 3520 and 5471, a detailed non-willfulness certification, any required FBARs, and payment of the tax and interest properly due.

Creating Additional Value

For qualifying non-willful taxpayers abroad, the Foreign Streamlined procedures offer an exceptionally valuable route back into compliance. The taxpayer pays the underlying tax and interest, but the corrective submission avoids the usual late-filing, international information-return and FBAR penalties - especially important when foreign trusts, companies and accounts are involved.

The difference from the domestic program is measurable: domestic procedures impose a 5% penalty on the highest aggregate value of covered foreign assets, while foreign procedures impose no such penalty. The analysis did not provide the valuation needed for an exact client-specific amount, but eliminating that charge saves $50,000 for every $1 million in the penalty base, in addition to the other penalties avoided.

The Result

ETP turned a complicated trust and CFC reporting problem into an orderly, penalty-free compliance plan. Connecting the prior closer-connection years to the foreign-residency test positioned the client to:

• Amend the 2020 return to include Forms 3520 and 5471 and report any associated income;

• Use the Streamlined Foreign Offshore Procedures with a non-willfulness certification and no offshore penalty;

• Avoid the 5% domestic miscellaneous offshore penalty - a savings of $50,000 for every $1 million in covered asset value; and

• Resolve historical international reporting before IRS contact while paying only the tax and interest properly due.