Missed U.S. filings while abroad? A guide to the IRS Streamlined Foreign Offshore Procedures (SFOP)

Moving abroad does not end U.S. tax and foreign-account reporting. U.S. citizens, green card holders and some other taxpayers can still have filing requirements after years of living in China, Canada, Europe or elsewhere.

Many people learn this late. When the missed filings were non-willful, the Streamlined Foreign Offshore Procedures, or SFOP, may provide a way to catch up.

SFOP has no 5% offshore penalty, which is the main difference from the domestic procedure. The tax on the omitted income, and the interest on it, still have to be paid.

What is SFOP?

SFOP is the part of the IRS Streamlined Filing Compliance Procedures for taxpayers who live outside the United States. A submission generally includes:

• Three years of late or amended income tax returns
• The international information returns that belong with those returns
• Six years of FBARs
• Form 14653, a certification that the conduct was non-willful and
• Payment of the tax and interest.

The program is for negligence, inadvertence, mistake or a good-faith misunderstanding of the law. It is not for someone who intentionally hid income or assets.

Who commonly considers SFOP?

Typical situations include:

• A U.S. citizen who moved abroad and stopped filing
• A dual citizen who was born or raised abroad and learned of the U.S. obligation later
• A green card holder who has lived and worked abroad for years
• A person who reported income where they live, but not to the United States
• A person who filed U.S. returns but left out foreign interest, dividends, gains, pension, rent or business income
• A person who never filed an FBAR, or missed Form 3520, 5471 or 8938 and
• A person who believed that paying foreign tax, or having small balances, ended the U.S. requirement.

Fitting one of these descriptions does not establish eligibility. The non-residency test and the non-willful standard both still have to be met.

Who qualifies for SFOP?

A taxpayer generally has to meet all five conditions.

1. The non-residency test is met. The test is described in the next section.
2. The conduct was non-willful. The taxpayer certifies this on Form 14653 under penalties of perjury.
3. There is an offshore tax problem to correct. The taxpayer failed to report income from a foreign financial asset and pay the tax on it, and may also have missed FBARs or information returns. A taxpayer who never filed a U.S. return can use SFOP.
4. No examination or investigation is open. A civil examination of any tax year blocks eligibility, even one unrelated to foreign assets. So does an IRS criminal investigation.
5. The taxpayer has a valid taxpayer ID. A person who is eligible for a Social Security number needs one. A person who is not eligible for an SSN and has no ITIN can include a complete Form W-7 with the submission.

How does the non-residency test work?

The test depends on the taxpayer's status. It has to be met in at least one of the three most recent covered years. It does not have to be met in all three.

On a joint return, both spouses must meet the test that applies to each of them.

What is a U.S. abode?

"Abode" means more than owning a home in the United States. The IRS says that being temporarily present in the United States, or keeping a dwelling there, does not necessarily mean a person's abode is in the United States.

The question is where the person's life is centered. Relevant facts include where the family lives, where the person keeps a home, personal and economic ties, and how often and why the person returns. Abode has a domestic meaning, so the location of a job does not settle it by itself.

How are the 330 days counted?

Only full days count. The IRS streamlined pages do not define a full day. The foreign earned income exclusion regulations define it as a continuous 24 hours from midnight to midnight and say the days need not be consecutive, which is the safe way to count. Passports, airline records, tickets and a travel calendar are the usual evidence. I-94 travel history can help a person who entered as a nonimmigrant.

Is this the same as the Form 2555 test?

No. SFOP borrows the meaning of "abode" from the foreign earned income exclusion rules, but it has its own test. Qualifying for Form 2555 does not by itself establish SFOP eligibility.

Example 1: A citizen who has always lived abroad

A U.S. citizen was born in the United States, moved to Shanghai as a child and has lived there since, with no home in the United States.

She has no U.S. abode and spends more than 330 full days abroad each year. She meets the test.

Example 2: A citizen who recently moved back

A U.S. citizen lived abroad for many years and returned to the United States during the most recent covered year.

He may not meet the test for the year he returned. He met it in the two earlier covered years, and one qualifying year is enough.

Example 3: A foreign national who transferred to the United States

A foreign national, with no green card, was transferred to a U.S. office partway through the covered period. She met the substantial presence test in the two most recent years but not in the earliest one.

She meets the test because she was not a U.S. resident under the substantial presence test in one of the three years.

What does "non-willful" really mean?

Non-willful conduct is conduct due to negligence, inadvertence or mistake, or conduct that results from a good-faith misunderstanding of the law.

This is the most important and most fact-specific part of an SFOP case. A sentence saying "I did not know about the FBAR and I am sorry" is not enough. The IRS asks for the whole story, including the facts that do not help the taxpayer.

The narrative on Form 14653 should generally cover:

• Personal, educational and professional background
• When and why the taxpayer moved abroad
• How each account or asset was acquired, and where the money came from
• How each account was used and managed
• What the taxpayer understood about U.S. filing obligations, including why any foreign company or trust was not reported
• Whether the income was reported in the country of residence
• Who prepared any earlier U.S. returns and what that person was told
• For any adviser relied on: name, contact details, a summary of the advice, how the relationship began and how often they were in touch
• Why the foreign account question on Schedule B was answered "no," if it was
• How the problem was discovered and what was done afterward.

Spouses with different reasons each explain their own. The narrative has to match the returns, the FBARs, bank and brokerage statements, travel records and correspondence.

What if the conduct may have been willful?

SFOP should not be used for willful conduct. Facts that call for a careful review first include:

• Keeping foreign accounts from a tax preparer
• False statements on a return or on bank documents
• Moving money to avoid detection
• Using nominees, shell companies or other structures to hide ownership
• Continuing not to file after a professional explained the obligation
• Filing incomplete returns after learning of the requirement and
• Giving inconsistent information to the IRS, banks or advisers.

These facts do not automatically prove willfulness. They do mean the case should be analyzed by a qualified tax or legal professional before anything is filed. For taxpayers concerned about willfulness, the IRS says to consider its Criminal Investigation Voluntary Disclosure Practice.

Which years have to be filed?

SFOP has two separate look-back periods.

The three years are not simply the last three calendar years. They depend on the date of the submission and on whether a valid extension was requested for the most recent year, so they should be pinned down before any return is prepared.

For each late FBAR, select "Other" as the reason for filing late and enter "Streamlined Filing Compliance Procedures" as the explanation. FBARs are never mailed with the paper package.

Which forms may be needed?

The forms depend on the taxpayer's income, accounts and entities. They may include:

• Form 1040 or Form 1040-X
• Schedule B, for interest, dividends and the foreign account questions
• Form 1116, for the foreign tax credit
• Form 2555, for the foreign earned income exclusion
• Form 8938, Form 3520, Form 5471 and other international information returns and
• The FBAR (FinCEN Form 114).

Each form has its own threshold. For a taxpayer living abroad, the two most common are:

These Form 8938 thresholds apply to a year in which the taxpayer lived abroad under the Form 8938 rules. For a covered year spent living in the United States, the thresholds are $50,000 at year-end or $75,000 at any time, or $100,000 and $150,000 on a joint return. Reporting an account on the FBAR does not remove a Form 8938 requirement.

Does SFOP eliminate the tax?

No. SFOP removes penalties. It does not remove the income tax.

The taxpayer pays the additional U.S. tax shown on the returns, plus statutory interest. Several rules can reduce that tax, and each has its own conditions:

• Foreign tax credit. A credit for foreign income tax can generally be claimed within 10 years of the due date of the return for the year the foreign tax was paid or accrued.
• Foreign earned income exclusion. The exclusion is an election with timing rules. On a return filed more than one year after its original due date, it is generally available only when no tax is owed after the exclusion, or when the return is filed before the IRS discovers that the election was not made. A return that relies on this rule carries the notation "Filed Pursuant to Section 1.911-7(a)(2)(i)(D)" at the top of the first page of Form 1040.
• Tax treaties. A treaty may change how certain income is taxed.
• Foreign retirement plans. A late treaty election to defer income in certain foreign retirement or savings plans can be requested inside the SFOP submission. The request names the treaty provision and includes a dated statement, signed under penalties of perjury, explaining why the election was missed and how the failure was discovered.

What penalties are waived?

A taxpayer who qualifies and follows the procedures is not subject to:

• Failure-to-file and failure-to-pay penalties
• Accuracy-related penalties
• Penalties for the international information returns in the submission or
• FBAR penalties.

There is also no 5% offshore penalty, which applies under the domestic procedure.

The protection has limits:

• A penalty that was already assessed before the submission is not removed.
• When an examination finds additional tax that the submission did not report, that additional amount can carry the usual penalties.
• When an examination finds that the original noncompliance was fraudulent, or that the FBAR violation was willful, the protection no longer applies.

How does SFOP compare with SDOP?

The absence of the 5% penalty is not a reason to choose SFOP. The residence analysis comes first, and it decides which procedure is available.

What goes into an SFOP submission?

A typical submission follows seven steps.

1. Confirm eligibility and the covered years

Document citizenship or immigration status, addresses in and outside the United States, travel dates, full days inside and outside the United States for each year, where the abode was, and whether both spouses qualify. Then fix the three return years and the six FBAR years.

2. Gather the financial records

These may include foreign bank and brokerage statements, interest and dividend records, records of securities purchases and sales, pension and retirement records, ownership documents for foreign companies, trust documents, gift and inheritance records, foreign tax returns and proof of foreign tax paid, and any earlier U.S. returns.

3. Prepare three years of returns

Prepare a complete Form 1040 or Form 1040-X for each covered year, with all schedules and international information returns.

Write "Streamlined Foreign Offshore" in red at the top of the first page of each return and each information return. The IRS treats this notation as essential for routing the submission correctly.

4. Complete Form 14653

The certification confirms that the taxpayer is eligible, that all required FBARs have been filed, and that the conduct was non-willful.

The signed original goes in the package, and a copy is attached to each return and each information return. It is not attached to the FBARs. When the certification is missing, incomplete or otherwise deficient, the IRS processes the returns in the normal way, without the streamlined penalty terms.

5. Calculate and pay the tax and interest

Full payment of the tax and statutory interest goes with the submission. There is no 5% penalty to calculate.

6. File six years of FBARs electronically

File each FBAR separately through FinCEN's system and keep the confirmations.

7. Mail the paper package

The returns, information returns, Form 14653 and payment are mailed together. The IRS does not accept this package electronically. The current address is:

Internal Revenue Service
3651 South I-H 35, Stop 6063 AUSC
Attn: Streamlined Foreign Offshore
Austin, TX 78741

Confirm the address on the IRS SFOP page before mailing.

Does the IRS issue an approval letter?

No. The IRS processes the returns like any other return. It does not acknowledge receipt, and the process does not end with a closing agreement.

A streamlined submission is not automatically audited. The IRS can still select it for examination, compare it with information from financial institutions, review the certification, ask for account statements or travel records, and assess additional tax and penalties on anything the submission left out.

Keep a full copy of the package, the signed Form 14653, proof of mailing, FBAR confirmations, financial and travel records, exchange rate calculations, foreign tax records and correspondence with advisers.

Common SFOP mistakes

Common problems include:

• Assuming that living abroad is enough to qualify
• Not counting the 330 full days accurately, or overlooking the separate abode requirement
• Assuming that qualifying for Form 2555 means qualifying for SFOP
• Not confirming that both spouses meet the non-residency test
• Filing FBARs without correcting the income tax returns
• Filing three years of FBARs when six are required, or six years of returns when three are
• Omitting Form 3520, 5471, 8938 or another information return
• Assuming that foreign tax paid removes the U.S. reporting requirement
• Claiming the foreign earned income exclusion on a late return without checking the late-election rules
• Using a generic non-willful narrative, or leaving out unfavorable facts
• Not explaining the source of the funds and how the accounts were used
• Mailing FBARs with the paper package
• Not paying the tax and interest with the submission and
• Using SFOP when the facts point to intentional noncompliance.

Is SFOP the right route when only an FBAR was missed?

Not necessarily. SFOP is built for a taxpayer with unreported income. Other routes exist for narrower problems:

• Only FBARs were missed. When all foreign income was reported and all tax was paid, the IRS says a taxpayer it has not contacted about the late FBARs, and who is not under civil or criminal investigation, should file them electronically as soon as possible and explain why they are late. The current IRS FBAR guidance says penalties depend on the facts and circumstances.
• Only an information return was missed. The Delinquent International Information Return Submission Procedures may apply. A reasonable cause statement can be attached, and relief is not automatic.
• The taxpayer gave up U.S. citizenship. The IRS has separate relief procedures for certain former citizens who relinquished citizenship after March 18, 2010, never filed U.S. returns as a citizen or resident, were non-willful, and meet limits on net worth and tax owed.

Can a submission be corrected after it is filed?

Yes, when the returns are not already under examination. The corrected documents are mailed to the same Austin street address, to the attention of Streamlined Procedures, with:

• "Amended Streamlined Foreign Offshore" written in red at the top of the first page of each corrected return
• A corrected Form 14653 marked "amended" in red and
• An explanation of the original error.

An error on an FBAR is corrected by filing an amended FBAR electronically.

A correction can delay processing and invite questions. It is not a reason to send an incomplete first submission.

Final thoughts

For a taxpayer who qualifies, SFOP offers substantial relief: returns that were never filed can be filed, the income tax period is three years, the FBAR period is six, and there is no 5% offshore penalty.

Those benefits depend on meeting the non-residency test, giving a credible and complete non-willful certification, reporting all foreign income and assets, paying the tax and interest, and following the IRS instructions exactly.

The choice of procedure comes before any filing. A submission made under the wrong procedure is hard to reverse and can lead to penalties that were avoidable.

IRS and regulatory references

• Streamlined Filing Compliance Procedures
• U.S. taxpayers residing outside the United States (SFOP)
• SFOP frequently asked questions
• Options available for U.S. taxpayers with undisclosed foreign financial assets
• IRS: Report of Foreign Bank and Financial Accounts (FBAR)
• Substantial presence test
• Treasury Regulations section 1.911-7, election procedures
• Treasury Regulations section 1.911-2, abode and full days
• Instructions for Form 8938 (Rev. November 2021)
• Delinquent International Information Return Submission Procedures
• Relief procedures for certain former citizens

• Internal Revenue Code section 6511, time limit for foreign tax credit claims