The IRS has intensified its enforcement of foreign asset disclosure and tax compliance, leading many U.S. taxpayers to realize they failed to report foreign accounts, income, or assets properly.
If you unintentionally failed to comply with FBAR (Foreign Bank Account Report) or FATCA (Foreign Account Tax Compliance Act) requirements, you may be eligible for the Streamlined Domestic Offshore Procedures (SDOP)—an IRS offshore amnesty program designed to help non-willful taxpayers correct their mistakes without facing severe penalties.
This guide will walk you through what SDOP is, who qualifies, how the streamlined domestic offshore procedures work, and the benefits of IRS offshore amnesty.
Today, you’ll learn:
✅ What SDOP is and how it helps U.S. taxpayers fix offshore reporting mistakes.
✅ Who qualifies for SDOP and how non-willful non-compliance is defined.
✅ The step-by-step process for submitting an SDOP application, including amended tax returns and FBAR filings.
✅ How much you’ll pay in penalties and why SDOP offers a better alternative to willful violation fines.
✅ The benefits of SDOP, including protection from criminal prosecution and a path to full compliance.
✅ What happens if you don’t correct offshore reporting mistakes, and how the IRS detects unreported foreign assets.
What Is SDOP?
SDOP (Streamlined Domestic Offshore Procedures) is an IRS program that allows U.S. taxpayers who reside in the United States to correct past offshore tax and reporting mistakes while avoiding severe penalties. It is specifically designed for individuals who failed to report foreign financial accounts, income, or assets but did so non-willfully(without intent to evade taxes).
SDOP provides a limited penalty structure and an opportunity for compliance without the fear of criminal prosecution. It is one of the most commonly used IRS voluntary disclosure programs for foreign asset reporting errors.
Who Qualifies for SDOP? (3 SDOP Eligibility Requirements)
To qualify, taxpayers must meet specific eligibility requirements set by the IRS.
1. You Must Be a U.S. Taxpayer Residing in the United States
SDOP is for U.S. residents who have failed to properly report offshore accounts or income. If you live outside the U.S., you may qualify for the Streamlined Foreign Offshore Procedures (SFOP) instead.
2. You Must Have Unreported Foreign Financial Accounts or Income
If you failed to file FBAR (FinCEN Form 114) or did not report foreign income on your tax return, you may qualify for SDOP. Common foreign assets requiring disclosure include:
- Foreign bank accounts (checking, savings, brokerage)
- Foreign retirement accounts
- Foreign mutual funds, stocks, and investments
- Foreign trusts and gifts
- Cryptocurrency held in foreign exchanges
3. You Must Be Non-Willful in Non-Compliance
To qualify for SDOP, your failure to report offshore assets must have been non-willful. This means that you did not intentionally evade taxes or hide assets. The IRS considers actions non-willful if they are due to:
- Negligence or misunderstanding of tax laws
- Reliance on incorrect advice from a tax professional
- Failure to realize that FBAR and FATCA rules applied to your accounts
If the IRS determines that your failure was willful, you may face criminal prosecution and should consider other options, such as the IRS Voluntary Disclosure Program (VDP).
How the Streamlined Domestic Offshore Procedures (SDOP) Work
The process involves filing corrected tax returns, paying any owed taxes, and submitting required foreign asset disclosure forms.
Here’s how it works step by step:
File Three Years of Amended Tax Returns (Form 1040X)
Taxpayers must amend their last three years of tax returns to include previously unreported foreign income (interest, dividends, capital gains, etc.).
This is done using IRS Form 1040X (Amended U.S. Individual Income Tax Return).
File Six Years of Late FBARs (FinCEN Form 114)
Taxpayers must also file six years of missing or corrected FBAR reports through the FinCEN BSA E-Filing System.
FBAR is required for:
- Foreign financial accounts exceeding $10,000 in aggregate at any point during the year.
- Accounts where the taxpayer has signatory authority (even if not the account owner).
Pay a 5% Offshore Penalty on Foreign Assets
One of the key benefits of SDOP is that it significantly reduces offshore penalties compared to willful violations.
- A 5% penalty is assessed on the highest aggregate foreign asset balance over the last six years.
- This is significantly lower than willful FBAR violations, which can result in penalties of 50% of account balances per year.
Certify Non-Willfulness (Form 14654)
Taxpayers must complete IRS Form 14654, a certification statement explaining that their failure to disclose foreign assets was not intentional.
This is a crucial part of SDOP eligibility, as the IRS scrutinizes non-willfulness claims carefully.
3 Benefits of Using SDOP
Using Streamlined Domestic Offshore Procedures provides significant advantages over other IRS compliance programs.
1. Avoids Severe FBAR and FATCA Penalties
Without SDOP, taxpayers who fail to file FBARs or FATCA reports may face:
- FBAR penalties of $10,000 per violation (or 50% of account balances for willful violations).
- FATCA penalties starting at $10,000 for non-disclosure of foreign assets.
- Additional tax penalties and interest charges on unreported income.
By using SDOP, taxpayers avoid these harsh fines and reduce penalties to 5% of foreign asset balances.
2. Provides Protection from Criminal Prosecution
Taxpayers who voluntarily correct offshore reporting errors under SDOP reduce the risk of IRS criminal investigations for tax evasion. Without disclosure, the IRS may:
- Investigate taxpayers with unreported foreign income.
- Refer cases to the IRS Criminal Investigation Division.
- Impose criminal fines and potential jail time for willful offshore tax fraud.
3. Allows for a Fresh Start with Full IRS Compliance
Once an SDOP submission is accepted, the taxpayer is fully compliant with IRS offshore reporting rules and no longer needs to worry about past mistakes.
What Happens If You Don’t Correct Offshore Reporting Mistakes?
Failing to report offshore accounts or income can lead to serious IRS penalties, audits, and criminal charges. The IRS aggressively enforces foreign asset disclosure rules through:
- FATCA Agreements with Foreign Banks – Banks report U.S. account holders automatically.
- Whistleblower Programs – The IRS rewards individuals who report offshore tax evasion.
- Artificial Intelligence (AI) Audits – The IRS detects mismatches between tax returns and foreign asset reports.
If the IRS discovers unreported foreign assets before you voluntarily disclose, you may be subject to:
- 50% FBAR penalties per violation
- IRS audits going back six years
- Criminal tax fraud investigations
Is SDOP the Right Option for You?
SDOP is the best IRS offshore amnesty program for taxpayers who:
✅ Live in the U.S. and failed to disclose foreign accounts non-willfully.
✅ Want to fix past FBAR and FATCA reporting mistakes.
✅ Are willing to pay a 5% penalty instead of higher FBAR fines.
✅ Seek IRS protection from criminal tax charges.
If you intentionally hid offshore assets, you should consider the IRS Voluntary Disclosure Program (VDP) instead.
How SDOP Compares to Other IRS Offshore Amnesty Programs
If you have undisclosed foreign accounts or assets, SDOP is not the only IRS compliance program available. Depending on the circumstances, you may qualify for a different IRS offshore amnesty program that offers alternative benefits and penalties.
Below is a comparison of SDOP vs. other IRS disclosure programs.
SDOP vs. SFOP (Streamlined Foreign Offshore Procedures)
SDOP is for U.S. residents who need to fix past offshore tax mistakes, while SFOP (Streamlined Foreign Offshore Procedures) is for U.S. taxpayers living abroad who have unreported foreign accounts.
| Feature | SDOP (U.S. Residents) | SFOP (U.S. Expats) |
|---|---|---|
| Who Qualifies? | U.S. residents with unreported foreign accounts | U.S. expats with unreported foreign accounts |
| FBAR Filing Required? | Yes (6 years of FBARs) | Yes (6 years of FBARs) |
| Penalty Rate | 5% of highest foreign asset balance | No penalty |
| Tax Return Amendments? | 3 years of Form 1040X | 3 years of Form 1040X |
| Best For | U.S. residents with foreign income/assets | U.S. citizens living abroad who were unaware of reporting rules |
SFOP offers a more lenient penalty structure (0%) but only applies to U.S. expats who meet the IRS non-residency requirements. If you live in the U.S., SDOP is your best option.
SDOP vs. IRS Voluntary Disclosure Program (VDP)
If you intentionally hid foreign accounts (willful non-compliance), SDOP is not an option. Instead, taxpayers must apply to the IRS Voluntary Disclosure Program (VDP), which:
If you are unsure whether your non-compliance was willful or non-willful, consult a tax attorney before choosing a disclosure program.
How to Prepare for an SDOP Submission in 4 Steps
- Requires disclosure of six years of past tax returns.
- Does not guarantee immunity from criminal prosecution but reduces penalties.
- Imposes higher financial penalties than SDOP, often ranging from 25% to 50% of account balances.
The SDOP filing process requires detailed financial records, accurate tax amendments, and legal certification of non-willfulness. To maximize your chances of IRS approval, follow these key preparation steps:
1. Gather All Foreign Financial Records
To submit an SDOP application, you must have detailed documentation of your foreign assets, including:
- Bank statements for the past six years
- Investment account statements (stocks, bonds, mutual funds)
- Foreign pension or retirement account records
- Real estate holdings or rental income documents
Organizing accurate financial data ensures that your FBAR filings and tax amendments are correct and complete.
2. Work with a Tax Attorney to Draft a Non-Willfulness Statement
The IRS requires all SDOP applicants to certify their non-willfulness by submitting Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures).
This form explains why you failed to report foreign assets and proves that you did not intentionally evade taxes.
Common reasons for non-willful tax violations include:
✅ Lack of awareness of FBAR and FATCA reporting requirements.
✅ Reliance on incorrect advice from an accountant or tax preparer.
✅ Incorrect belief that foreign banks automatically reported taxes to the U.S. government.
Since non-willfulness certification is critical, working with a tax attorney ensures that your explanation is accurate, credible, and legally sound.
3. Ensure Tax Returns Are Corrected Properly
To be eligible for SDOP, taxpayers must file three years of amended tax returns (Form 1040X) that accurately:
- Report previously undisclosed foreign income (interest, dividends, capital gains).
- Claim foreign tax credits or deductions (if applicable).
- Adjust FATCA and FBAR disclosures on tax filings.
Making errors on these amended returns can lead to IRS rejection or additional penalties, so professional tax assistance is recommended.
4. Prepare to Pay the 5% Offshore Penalty
Unlike SFOP, which has no penalty, SDOP requires taxpayers to pay a 5% penalty on the highest foreign account balance over the past six years. This penalty:
- Applies to all foreign financial accounts, real estate, and investments.
- Is based on the highest year-end balance, not the current balance.
- Must be paid in full at the time of submission.
While this penalty may seem steep, it is far lower than the alternative penalties for unreported foreign assets, which can reach 50% of account balances per violation under FBAR rules.
What happens if the IRS rejects my non-willfulness claim under SDOP?
If the IRS rejects your claim that your mistakes weren’t on purpose, they might kick you out of the SDOP program and start a regular audit or investigation instead.
This could mean much bigger penalties. You could be fined up to $10,000 per mistake for accidental violations, or up to 50% of your account balance for intentional violations. You’d also face extra tax penalties and interest. What’s worse, the information you submitted for SDOP could be used against you. That’s why working with our tax attorneys is helpful. We provide attorney-client privilege when preparing your statement, and can help decide if SDOP is right for your case.
Can I apply for SDOP if I've already received FATCA notifications from my foreign bank?
How does cryptocurrency held on foreign exchanges factor into SDOP applications?
The IRS treats cryptocurrency like property for taxes. If you have crypto on foreign exchanges worth over $10,000 at any time during the year, you should report it on an FBAR and in your SDOP application. When applying for SDOP, include all your crypto transaction records and estimated values based on historical prices. The 5% SDOP penalty will usually apply to the highest total value of your crypto plus other foreign financial assets.
What if I discover additional foreign accounts after completing my SDOP application?
If you find foreign accounts you didn’t know about after sending your SDOP application, tell the IRS right away. If your SDOP application is still being processed, send additional information updating your FBAR forms and tax returns to include these new accounts. If your SDOP has already been accepted, file a new FBAR this year that includes all accounts, and report everything correctly going forward. You might want to talk to a tax attorney about whether you need to fix anything else.
Final Thoughts on SDOP and Offshore Reporting Compliance
If you’ve failed to report foreign bank accounts, offshore investments, or international income, the Streamlined Domestic Offshore Procedures (SDOP) provide an opportunity to fix past mistakes while avoiding massive penalties and IRS prosecution.
Key Takeaways:
✅ SDOP allows non-willful taxpayers to correct offshore tax reporting mistakes.
✅ Taxpayers must file 3 years of amended tax returns and 6 years of FBARs.
✅ A reduced 5% penalty applies instead of severe FBAR fines.
✅ The IRS is aggressively enforcing offshore tax compliance—waiting could be costly.
If you need expert assistance with SDOP eligibility, IRS offshore amnesty, or foreign asset reporting, contact Silver Tax Group today. Our experienced tax attorneys can help you navigate SDOP, minimize penalties, and ensure full IRS compliance.
