SDOP vs SFOP: Which Streamlined Track Do I Qualify For? The Residency Test, the 5% Penalty, and the Filed-Return Requirement

The streamlined program is one procedure with two doors. The Streamlined Foreign Offshore Procedures (SFOP) are for US persons who live outside the US under the IRS's non-residency test; they file three years of returns and six years of FBARs and pay no penalty. The Streamlined Domestic Offshore Procedures (SDOP) are for US persons who live in the US; they must have filed returns for each of the three years (they amend rather than file late), and they pay a miscellaneous offshore penalty of 5% of the highest aggregate value of the foreign assets that should have been reported. Which door you use is decided by where you were, not where you are now, and the residency test is specific enough that a Canadian's answer is usually clear once the days are counted.

Key takeaways

• SFOP (foreign): for taxpayers who meet the non-residency test (a US citizen or green card holder with no US abode and 330 full days outside the US in at least one of the three years; a non-citizen who failed the substantial presence test in at least one of the three years). Delinquent or amended returns accepted. No penalty.
• SDOP (domestic): for taxpayers who do not meet the non-residency test. Returns must have been filed for each of the three years (amended returns only; a non-filer is ineligible). A 5% miscellaneous offshore penalty on the highest aggregate year-end value of the foreign financial assets subject to the penalty across the six FBAR years and three return years. Otherwise no penalties.
• The test looks back: the non-residency test is applied to the three most recent years for which the due date has passed, not to the current year. A Canadian who moved to the US two years ago and was in Canada three years ago qualifies for SFOP on the earlier year.
• The filed-return requirement is the trap in SDOP: a US resident who never filed at all cannot use it (or SFOP, if resident); the remaining routes are delinquent filing with reasonable cause or, for willful cases, the Voluntary Disclosure Practice.
• Both spouses on a joint submission must meet the same track's requirements.

Which track: the non-residency test

The SFOP non-residency test for a US citizen or lawful permanent resident: in any one of the three most recent tax years for which the return due date has passed, no US abode and at least 330 full days physically outside the US. For others: failure of the substantial presence test in at least one of those years. One qualifying year is enough.

Applied to Canadians:

• A US citizen living in Canada who visits the US fewer than 35 days a year: SFOP.
• A US citizen living in Canada who winters in Florida for four months: fails the 330-day test every year; SDOP (if returns were filed) or neither.
• A Canadian who moved to the US and became a resident under the substantial presence test: SFOP if the earliest of the three years was a Canadian year in which the test was not met; SDOP if all three years were US-resident years.
• A green card holder living in Canada who visits the US briefly: SFOP.
• A green card holder who has lived in the US for years and has Canadian accounts from before the move: SDOP.

The abode requirement matters for people who keep a US home. A US citizen with a house in Buffalo and an apartment in Toronto who spends 330 days outside the US may still have a US abode; the IRS looks at the facts, and a person who maintains a US residence available year-round is at risk of failing the test.

SDOP's requirements

Beyond residency, SDOP requires that the taxpayer filed a return (an original 1040) for each of the three years in the covered period; the streamlined submission consists of amended returns (Form 1040-X) adding the omitted foreign income and information returns. A person who filed for two of the three years and not the third cannot use SDOP. The logic is that the domestic procedure is for filers who omitted foreign items, not for non-filers.

The 5% penalty is computed on the highest aggregate year-end value (for accounts) or fair market value (for other assets) of the foreign financial assets subject to the penalty, taken across the years in the covered tax return period (three years) and the covered FBAR period (six years). Assets subject to the penalty are those that should have been reported on an FBAR or Form 8938 and were not, and those whose income was not reported. An account that was properly reported and whose income was properly reported is excluded from the base. RRSPs that were reported on the FBAR and whose income was properly deferred under the treaty are typically excluded; a TFSA never reported is included at its highest year-end balance.

SFOP's requirements

Residency as above; non-willfulness; no examination; three years of returns (delinquent or amended); six FBARs; Form 14653. No penalty of any kind for the covered years.

The cases between

Never filed, living in the US. Ineligible for both tracks (SDOP requires filed returns; SFOP requires non-residency). Options: file the delinquent returns and FBARs outside the streamlined program with reasonable-cause statements (the delinquent FBAR and international information return procedures, if all income was reported, which it was not), accepting the risk of penalties; or, if the conduct was willful, the Voluntary Disclosure Practice. In practice, non-willful US-resident non-filers with modest exposure file delinquent returns with a reasonable-cause narrative and often see penalties abated.

Filed some years, not others. SDOP requires all three; a person who filed two of three is ineligible and files the missing year delinquently with reasonable cause alongside amended returns for the others.

Resident now, abroad before. The lookback makes SFOP available if one of the three years was a qualifying foreign year; the returns for the US-resident years are included in the same submission.

Married, mixed. A joint submission requires both spouses to qualify for the same track; where one qualifies for SFOP and the other only for SDOP, the couple files separately or uses SDOP for both.

Worked example

Three Canadians with unreported TFSAs and Canadian mutual funds:

• A is a US citizen in Vancouver, 20 US days a year, never filed. SFOP: three delinquent returns, six FBARs, Form 14653, no penalty.
• B is a US citizen in Vancouver who winters in Palm Springs for 120 days, filed returns each year but omitted the Canadian accounts. Fails 330 days; SDOP: three amended returns, six FBARs, Form 14654, and a 5% penalty on the highest year-end value of the TFSA and the mutual funds (say $180,000): $9,000.
• C moved from Toronto to Austin three years ago, was a Canadian resident in the earliest of the three years, and has never filed a US return (was a non-resident that year; has filed 1040s since but omitted the RRSP and TFSA). SFOP on the earliest year: delinquent 1040 for the arrival year and amended returns for the two US years, six FBARs, no penalty.

Official sources

The IRS states that a US citizen or lawful permanent resident meets the non-residency requirement where, "in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed," the individual "did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days." Eligible taxpayers "will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties." — Internal Revenue Service, U.S. Taxpayers Residing Outside the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states

The IRS states that eligible taxpayers must "have previously filed a U.S. tax return (if required) for each of the most recent 3 years" and pay a Title 26 miscellaneous offshore penalty equal to "5 percent of the highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period." — Internal Revenue Service, U.S. Taxpayers Residing in the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-in-the-united-states

Practitioner note

The track is decided by the days, and the SDOP filed-return requirement is the wall that non-filers in the US hit. We count the three years, check whether a return exists for each, and only then say which door. For the snowbird who is a US citizen in Canada, the answer is usually SDOP with a 5% penalty, and the penalty base is the assets that were never reported, not the ones that were.

See also: If you are a US citizen or green card holder in Canada catching up, start with what you still owe the IRS, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the track determination, the penalty base computation for SDOP, and the full submission on either track. See cross-border pricing or book a call.