Is there any penalty under the Streamlined Foreign Offshore Procedures?

No. Taxpayers who complete the foreign streamlined track correctly are not subject to failure-to-file, failure-to-pay, accuracy-related, information return or FBAR penalties for the covered years. The 5% miscellaneous offshore penalty applies only to the Streamlined Domestic Offshore Procedures for people living in the United States. You still pay any US tax due on the three years of returns plus statutory interest.

Do US business trips stop a London hedge fund manager qualifying for SFOP?

Not usually. A US citizen must have had no US abode and been physically outside the United States for at least 330 full days in any one of the last three years with a passed due date. Only one year needs to qualify, and the IRS says temporary US presence does not necessarily create a US abode. We count every travel day as a US day when testing the 330.

How is UK carried interest taxed from April 2026?

Under the revised UK regime effective on and after 6 April 2026, carried interest sits within Income Tax and is treated as trading profits subject to Income Tax and Class 4 National Insurance. For qualifying carried interest, 72.5% of the qualifying profits is treated as trading profits, depending on the fund's average holding period. US reporting follows separate US partnership and section 1061 rules.

Is my co-investment in an offshore feeder fund a PFIC?

Usually yes. A foreign corporation is a PFIC if 75% or more of its gross income is passive or at least half its assets produce passive income, which most fund vehicles meet. US holders generally file Form 8621 for each PFIC, including indirect holdings through a partnership such as a UK LLP. A fund's PFIC annual information statement can make the more favourable qualified electing fund election available.

Do I report LLP or fund accounts on my FBAR if I only have signature authority?

Potentially yes. The FBAR applies to US persons with a financial interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time in the year. A partner who can authorise payments from LLP or fund accounts may need to report them. The IRS notes the employer, not the individual, keeps the records for employer accounts.

Should a high-earning UK fund manager use the FEIE or foreign tax credits?

For most London fund managers the foreign tax credit is the better tool. The foreign earned income exclusion is capped and covers only earned income, while carry, gains and investment income fall outside it. Because UK Income Tax on a high earner's profit share is generally higher than US federal tax on the same income, properly sourced UK tax credits typically eliminate US tax on that income.

Streamlined Foreign Offshore for London Fund Managers

The Streamlined Foreign Offshore Procedures are the IRS route that lets a US citizen living abroad, including a portfolio manager or partner at a London hedge fund, catch up on missed US tax returns and FBARs without paying failure-to-file, accuracy-related, information return or FBAR penalties, provided the failure was non-willful. In short: you file three years of US returns, six years of FBARs and a signed non-willful certification on Form 14653, pay any tax and interest due, and the penalties fall away. For a fund manager the hard part is not the filing mechanics but the content of those returns: LLP profit allocations, carried interest, fund-linked deferred awards, co-investments that are often passive foreign investment companies, and accounts over which you hold signature authority.

What are the Streamlined Foreign Offshore Procedures?

The Streamlined Foreign Offshore Procedures (often shortened to SFOP) are one of two tracks inside the IRS Streamlined Filing Compliance Procedures. The foreign track is reserved for taxpayers who meet a non-residency requirement; the domestic track is for people living in the United States. The IRS sets out the foreign track at https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states, its page for US taxpayers residing outside the United States.

The key distinction for a London-based manager is the penalty outcome. A taxpayer who completes the foreign track correctly is not subject to failure-to-file, failure-to-pay, accuracy-related, information return or FBAR penalties for the covered years. There is no offshore penalty on the foreign track at all. The 5% miscellaneous offshore penalty that people often quote belongs only to the domestic track.

The IRS page also makes two points worth noting at the outset. Penalties can be reinstated on audit only if the examination finds that the original noncompliance was fraudulent or the FBAR violation was willful. And penalties already assessed for those years are not abated.

Who qualifies for Streamlined Foreign Offshore as a London fund manager?

Eligibility rests on three pillars, each of which needs to be tested against the facts of a fund career rather than assumed:

Non-residency: for a US citizen or green card holder, in any one of the most recent three years for which the US return due date has passed, you had no US abode and were physically outside the United States for at least 330 full days. Joint filers must both meet the requirement.
Non-willful conduct: the failure to file returns, report income and file FBARs resulted from negligence, inadvertence, mistake or a good-faith misunderstanding of the law, not a deliberate choice or reckless disregard.
A complete submission: three years of delinquent or amended returns with all required information returns, six years of FBARs, a signed Form 14653, and payment of all tax and statutory interest shown on the returns.

If you omit a required item, the IRS processes the returns under normal rules without the protections of the procedure, which is why we treat every fund manager submission as a full compliance build.

Do US business trips break the 330-day non-residency test?

Fund managers travel to the US constantly for investor meetings and conferences. The non-residency test requires at least 330 full days physically outside the United States in one of the three look-back years. A full day outside the US is a whole day; in the returns we prepare we treat any day on which you are in the United States for any part of the day, including arrival and departure days, as a day that does not count towards the 330.

Two features of the rule work in the manager's favour. First, you only need to meet the test in one of the three years, not all three. A heavy US roadshow year can be balanced by a quieter year. Second, the IRS states that temporary presence in the United States, or keeping a dwelling there, does not necessarily mean your abode is in the US. A London partner whose family home and work are in the UK is very unlikely to have a US abode merely because of business trips.

Our process is to rebuild travel from primary records rather than memory: passport stamps, airline itineraries, expense systems and calendar exports. We identify the cleanest qualifying year before the returns are drafted, because the non-residency statement on Form 14653 is signed under penalties of perjury.

How does the non-willful certification on Form 14653 work for finance professionals?

Form 14653 is the certification by a US person residing outside the United States. You certify that you are eligible, that all required FBARs have now been filed, and that your failures were non-willful. You must then give a specific narrative of the reasons for the failures. The original signed form goes with the submission, and the IRS asks for copies to be attached to each tax return and information return, but not to the FBARs.

A gap that generic SFOP guides rarely address is the sophistication problem. Hedge fund professionals understand markets, regulation and tax at a level well above the average expat, and an examiner reading the narrative will know that. The narrative therefore needs to explain, truthfully and specifically, why someone financially literate did not know about US citizenship-based filing. Common genuine explanations include having left the US as a child or young graduate, having all income taxed in the UK through PAYE and later Self Assessment, relying on a UK accountant who never asked about citizenship, and believing that paying more tax in the UK than would ever be due in the US meant no US filing was needed.

What does not work is a boilerplate narrative, or one that ignores red flags in your own history, such as a prior FBAR filing followed by years of silence, or an earlier conversation in which US filing was raised. If those facts exist, the narrative has to address them. Where the facts point towards willfulness, the streamlined route may not be appropriate at all, and that judgement must be made before anything is signed.

What exactly must be filed under the Streamlined Foreign Offshore Procedures?

The IRS checklist on its streamlined foreign page is precise, and the details matter:

Three years of Form 1040: for each of the most recent three years with a passed due date, a delinquent original return, or Form 1040-X if a return was filed but was wrong, together with every required information return such as Forms 5471, 8938, 8865 and 8621.
The red header: write Streamlined Foreign Offshore in red at the top of the first page of each return and each information return. The IRS describes this as critical to proper processing.
Six years of FBARs: for each of the most recent six years with a passed FBAR due date, file FinCEN Form 114 through the FinCEN BSA E-Filing System, choose Other as the late-filing reason and enter Streamlined Filing Compliance Procedures in the explanation box.
Form 14653: the original signed certification with your non-residency facts and non-willful narrative, with copies attached to each return and information return.
Payment: all tax shown as due plus statutory interest, with your taxpayer identification number on the payment.
Identification: if you have no Social Security number and are not eligible for one, an ITIN application goes in with the returns.

The IRS page gives a dedicated Austin address marked for Streamlined Foreign Offshore submissions and states that this address is only for returns filed under the procedure; future years go through normal filing channels. For ongoing years, the IRS FBAR page at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar confirms the FBAR is due on 15 April with an automatic extension to 15 October, filed electronically with FinCEN rather than with your tax return.

How is LLP profit share and carried interest reported on US returns?

Many London hedge fund managers are members of a UK limited liability partnership that acts as the investment manager. For UK purposes, members of an LLP are generally taxed as self-employed partners on their profit share through Self Assessment, subject to HMRC's anti-avoidance rules, including the salaried member provisions covered in the anti-avoidance section of the HMRC Partnership Manual at https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm259000.

For US purposes the starting point is different. A UK LLP is a foreign entity, and its US classification depends on the entity classification rules and on whether a classification election has been made. In the returns we prepare, many manager LLPs have elected to be treated as partnerships for US purposes, in which case a US member reports a distributive share of LLP income on the US return and may need to file Form 8865, the information return for certain interests in foreign partnerships. The IRS describes Form 8865 at https://www.irs.gov/forms-pubs/about-form-8865 as covering controlled foreign partnerships, transfers of property to foreign partnerships, and acquisitions, dispositions and changes in interests. Where no election exists and the LLP is classified as a corporation, the analysis shifts to Form 5471 and the controlled foreign corporation and PFIC rules, which is a materially different and more complex filing.

In practice we ask the LLP finance team for each look-back year's profit allocation statement, the UK partnership return figures, and confirmation of the LLP's US classification and any US reporting it already produces for other American members.

How does the UK carried interest regime interact with US reporting?

Carried interest, or performance allocations, is where UK and US rules diverge most sharply. On the UK side, HM Treasury and HMRC have published a revised regime that takes effect on and after 6 April 2026. According to the policy paper at https://www.gov.uk/government/publications/reform-of-the-tax-treatment-of-carried-interest/revised-tax-regime-for-carried-interest, carried interest is brought wholly within the Income Tax framework and treated as trading profits subject to Income Tax and Class 4 National Insurance contributions. For qualifying carried interest, the amount treated as trading profits is 72.5% of the qualifying profits, and whether carry is qualifying depends on the average holding period of the fund. The regime applies where the individual is UK tax resident, or where the carry relates to investment management services performed in the UK.

For earlier years in a three-year SFOP look-back, carried interest was generally taxed in the UK under the previous capital gains-based framework, so a submission filed now may straddle two different UK regimes. That matters because the foreign tax credit you can claim in the US depends on how much UK tax was actually paid on each item, and in which period.

On the US side, a performance allocation from a fund structured as a partnership typically retains the character of the underlying fund-level income and gains, and the US has its own holding-period rule for carried interest under section 1061 of the Internal Revenue Code. The result is that the same allocation can be capital gain in one country and income in the other, recognised in different years. Aligning the UK and US figures, and sourcing the income correctly so the foreign tax credit can absorb it, is the technical core of most fund manager submissions we prepare.

What about deferred and fund-linked bonus awards?

Regulated managers commonly defer part of variable remuneration, often into awards that track the value of the manager's own funds. This is a gap angle few catch-up guides cover. These awards create timing problems in both directions: the UK may tax on vesting or payment, while the US analysis depends on whether the arrangement is a compensation promise, a funded interest, or an actual allocation of fund units, and on when it becomes substantially vested.

Where the deferred award is settled in units of a non-US fund, the US holder can end up owning PFIC shares the moment the units are delivered, with a basis equal to the amount taxed as compensation. If those units are then held or rolled, they need their own Form 8621 tracking from that date.

Is a co-investment in your own fund a PFIC requiring Form 8621?

Very often, yes. Managers usually co-invest alongside clients, and the investor-facing vehicles for a London-run strategy are frequently offshore feeder funds or Irish or Luxembourg collective investment vehicles organised as companies. A foreign corporation is a passive foreign investment company if 75% or more of its gross income is passive, or if at least half of its assets, measured on average, produce or are held to produce passive income. A fund vehicle whose business is investing will almost always meet one or both tests. The instructions at https://www.irs.gov/instructions/i8621 set out these tests and the Form 8621 rules.

Without an election, a PFIC is taxed under the default section 1291 regime: gains on sale and excess distributions, broadly distributions above 125% of the average of the previous three years, are spread back over your holding period, taxed at the highest ordinary rate for each year and charged an interest amount. The alternatives are a qualified electing fund election, which requires the fund to supply an annual information statement, or a mark-to-market election where the shares are marketable. Elections are generally made on a timely filed return, so for a catch-up filer the IRS instructions on late and protective elections become relevant.

Three practical points we see repeatedly:

Indirect ownership counts: where you hold the feeder through the LLP or another partnership, the instructions treat you as an indirect shareholder, and a filing duty can sit with you personally.
The small-holding exception is narrow: Part I of Form 8621 need not be completed for a section 1291 fund where aggregate PFIC holdings were $25,000 or less ($50,000 or less on a joint return) at year end and there was no excess distribution or gain, but most manager co-investments far exceed those figures.
Ask the fund for the PFIC annual information statement: many manager-run funds already produce one for US investors, which can make the qualified electing fund route available and dramatically simplify the computation.

Should a high-earning fund manager use the FEIE or the foreign tax credit?

The foreign earned income exclusion, claimed on Form 2555, lets qualifying taxpayers exclude a capped amount of foreign earned income. The IRS page at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion explains that you need a foreign tax home and must meet the bona fide residence or physical presence test, and that the maximum exclusion is adjusted annually for inflation. For a manager earning seven figures, however, the cap covers only a small slice of income, and investment income, gains and most carry are not earned income at all.

For that reason, in the returns we prepare for London fund managers, the foreign tax credit on Form 1116 is usually the primary tool. UK Income Tax rates on a high earner's profit share are generally higher than the corresponding US federal rates, so properly sourced UK tax can eliminate the US tax on that income, with excess credits available for carryover under US rules. Claiming the exclusion on part of the income reduces the credit available for that same income and can complicate future years, so the choice should be modelled across all three look-back years rather than made by default.

Which accounts go on the FBAR and Form 8938 for a fund manager?

The FBAR is required where a US person has a financial interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time in the calendar year. For a portfolio manager or LLP partner, the list is longer than personal bank and brokerage accounts. It can include the LLP capital account where it is held in a reportable financial account in your name or for your benefit, personal holdings in offshore funds, UK pension or savings accounts that count as foreign financial accounts, and, importantly, firm accounts over which you have signature authority.

Signature authority is a gap angle most consumer guides miss entirely. A partner or senior manager who can authorise payments from the LLP's or fund's foreign bank or brokerage accounts may have an FBAR filing duty for those accounts even with no financial interest in them. The IRS FBAR page notes that where an officer or employee reports signature authority over an employer's foreign account, the employer, not the individual, must keep the account records. We obtain the list of mandates from the operations team.

Form 8938 is a separate obligation filed with the tax return. The IRS explains at https://www.irs.gov/businesses/corporations/basic-questions-and-answers-on-form-8938 that filing Form 8938 does not relieve you of the FBAR requirement, and that a partnership interest in a foreign partnership is a specified foreign financial asset when held outside a financial account. Thresholds are higher for taxpayers living abroad and depend on filing status; at hedge fund wealth levels, they are almost always exceeded, so we prepare Form 8938 alongside the FBARs and reconcile the two so that the same assets are described consistently.

Worked scenario: a London portfolio manager catching up through SFOP

The following is an illustration only. All figures are hypothetical, and an exchange rate of $1.30 to £1 is assumed for every year purely for simplicity.

Daniel is a US citizen who moved to London after university and is now a partner in a UK LLP that manages a long-short equity strategy. He has never filed a US return or FBAR. His UK Self Assessment returns show an LLP profit share of around £1.4 million a year. He holds about £600,000 in the strategy's Cayman feeder fund through a co-investment, has deferred awards settled in fund units, a UK current account and investment account, and signature authority over two LLP operating accounts.

Non-residency: in one look-back year he spent 41 days in the US across investor trips; in another he spent 24. Counting each travel day as a US day, the second year gives well over 330 full days outside the United States, so he meets the test.
Earned income: his UK Income Tax and Class 4 contributions on the profit share exceed the US federal tax on the same income, so foreign tax credits reduce US tax on that income to nil in each year, with excess credits carried forward.
PFIC: the feeder fund is a PFIC. The fund issues a PFIC annual information statement, so the computation for the years before a valid election follows the default rules while later years can use the qualified electing fund regime where the election is available.
Balance due: in this illustration nearly all of the US tax and interest arises from the PFIC computations and short-term trading gains allocated through the co-investment, not from his salary-like profit share.
FBARs: six years of FBARs list his personal accounts, the feeder holding where reportable, and the two LLP accounts under signature authority. No FBAR penalty applies because the submission is made under the foreign streamlined procedures and his conduct was non-willful.

The fear is usually of a huge penalty on a large UK income. The reality is that UK tax covers most of the earned income, there is no offshore penalty on the foreign track, and the genuine US cost sits in the investment layer, which is exactly where most do-it-yourself attempts go wrong.

What are the most common mistakes hedge fund managers make with SFOP?

Omitting deferred awards and co-investments from the asset list because they never touch a personal bank account.
Ignoring signature authority over LLP or fund accounts on the FBAR.
Treating the LLP as transparent for US purposes without confirming its US classification, which can change the required information returns entirely.
Filing a generic non-willful narrative that does not deal with a finance professional's knowledge or with prior partial filings.

How we prepare Streamlined Foreign Offshore submissions for fund managers

Our compliance process for London fund professionals follows the same sequence every time. We first confirm eligibility, mapping US days and the non-willful facts, before any numbers are prepared. We prepare the three years of Form 1040 with Forms 1116, 8865 or 5471, 8621 and 8938 as needed, reconcile them to the six years of FBARs, draft the Form 14653 narrative from your own account of events. Once the catch-up is filed, we prepare the ongoing annual US returns and FBARs so the position does not drift again.

Getting the investment-layer reporting right the first time matters, because an examination that finds an additional deficiency can bring penalties on that amount. Done properly, the Streamlined Foreign Offshore route is usually the most efficient way for a London-based US citizen to close the gap.