Many American taxpayers are still not sure if they should be concerned about the IRS changes to Offshore Bank and Foreign Asset Disclosure Programs.
Here are some frequently asked questions we have received.
Question 1:
Will a taxpayer qualify for either of the Streamline Program or the Offshore Voluntary Disclosure Program that permits Taxpayers to voluntarily disclose their offshore bank accounts with reduced penalties if they are under examination?
Answer. Taxpayers who are already under a civil examination of a taxpayer’s returns for any taxable year, (regardless of whether the examination related to undisclosed foreign financial assets), will not be eligible to use the streamlined procedures or the Offshore Voluntary Program. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Question 2:
What are the requirements that a U.S. Taxpayer who is living in the U.S. must meet for the Streamlined Disclosure Program?
Answer.
The taxpayer must be a U.S. tax resident in the U.S. (for joint return filers, one or both of the spouses must be tax residents.
The taxpayer must have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed.
The taxpayer must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns, such as forms reporting gifts from foreign persons, forms for U.S. taxpayers that have ownership in foreign corporations and forms disclosing all of the taxpayers foreign income producing assets.
Such failures must have resulted from non willful conduct. Non willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirement of the law.
Question 3:
If a Taxpayer is concerned that his or her failure to report income, pay tax and submit required information returns was due to willful conduct and who wants more assurances that they will not be subject to criminal inability and/or substantial monetary penalties, should the taxpayer consider participating in the Offshore Voluntary Disclosure Program (OVDP) and not the Streamline Program?
Answer. Yes. The Offshore Voluntary Compliance Program is a separate IRS Program that waives certain serious penalties but asserts a much higher overall penalty than the Streamlined Procedure and it assures taxpayers that they will have a perfectly clean slate.
Questions 4:
What is the standard of “willfulness” that prevents a taxpayer from entering the Streamlined Program?
Answer. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. A finding of willfulness must be supported by evidence of willfulness. The burden of establishing willfulness is on the Internal Revenue Service and if is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted.
By Richard S. Lehman Esq., United States Tax Attorney
The Internal Revenue Service announced major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and those residing in the United States. These changes will provide thousands of people a new avenue to come into compliance with their U.S. tax obligations. The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets are non willful.
This is an extremely important and valuable I.R.S. Program. It allows almost every American who has been afraid to step forward and disclose their foreign assets to the U.S. taxing authorities to do so with minimized penalties on unpaid taxes and unfiled information returns.
Purpose of the streamlined procedures: The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations:
a streamlined procedure for filing amended or delinquent returns and
terms for resolving their tax and penalty obligations. These procedures will be available for an indefinite period until otherwise announced. This means that just as the Internal Revenue Service has suddenly announced this highly beneficial “settlement tool”, the Internal Revenue Service can withdraw the program. Eligible taxpayers need to act quickly.
General eligibility for the streamlined procedures: The streamlined filing compliance procedures, (the “Streamlined Procedures”), are designed for only individual taxpayers, including estates of individual taxpayers. The Streamlined Procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States.
Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs, was due to non willful conduct.
Audit of Returns
Taxpayers who choose the “Streamlined Procedures” to report offshore income will not be able to enter the existing I.R.S. Offshore Voluntary Disclosure Program (OVDP).
Most important, taxpayers who choose this Streamlined Procedure must be sure their disclosures are complete and in good faith. This is because returns submitted under the Streamlined Procedures will not be subject to IRS audit automatically. However, they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.
Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties and even criminal liability, if appropriate.
Not Eligible
Not all taxpayers will be eligible for the streamlined procedures.
Taxpayers who are already under a civil examination of a taxpayer’s returns for any taxable year, (regardless of whether the examination relates to undisclosed foreign financial assets), will not be eligible to use the streamlined procedures. Taxpayers under examination may consult with their agent. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Quiet Disclosures
Taxpayers eligible to use the Streamlined Procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so called “Quiet disclosures”) may still use the streamlined procedures. However, any penalty assessments previously made with respect to those filings will not be abated.
Receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS. However, the check will be cashed. No formal confirmation of acceptance will be provided by the I.R.S.
The Offshore Voluntary Disclosure Program
If a Taxpayer is concerned that his or her failure to report income, pay tax and submit required information returns was due to willful conduct and who wants more assurances that they will not be subject to criminal inability and/or substantial monetary penalties, that taxpayer should consider participating in the Offshore Voluntary Disclosure Program (OVDP) and should consult with their professional tax or legal advisers.
This Offshore Voluntary Compliance Program is a separate I.R.S. Program that waives certain serious penalties but asserts a much higher overall penalty than the Streamlined Procedure and it assures taxpayers that they will have a perfectly clean slate.
Coordination with treatment under OVDP
Once a taxpayer makes a submission under either the Streamlined Foreign Offshore Procedures of the Streamlined Domestic Offshore Procedures, the taxpayer may not participate in OVDP.
Similarly, a taxpayer who submits an OVDP voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined procedures.
A taxpayer eligible for treatment under the Streamlined Procedures who submits, or has submitted, a voluntary disclosure letter under the OVDP (or any predecessor offshore voluntary disclosure program) prior to July 1, 2014, but who does not yet have a fully executed OVDP voluntary disclosure letter on or after July 1, 2014, is eligible to participate in the streamlined procedures.
The Streamlined Procedures will apply to all United States taxpayers that are residing both within and without the United States. The rules are slightly different for U.S. taxpayers who reside without the United States.
Eligibility Procedures and requirements are for these taxpayers.
U.S. TAXPAYERS RESIDING IN THE UNITED STATES
U.S. Residents
The taxpayer must be a U.S. tax resident in the U.S. (for joint return filers, one or both of the spouses must be tax residents.
The taxpayer must have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;
The taxpayer must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and or one or more international information returns, such as forms reporting gifts from foreign persons, forms for U.S. taxpayers that have ownership in foreign corporations and forms disclosing all of the taxpayers foreign income producing assets.
Such failures must have resulted from non willful conduct. Non willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. A finding of willfulness must be supported by evidence of willfulness. The burden of establishing willfulness is on the Internal Revenue Service and if it is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted.
The Benefits Of The Streamlined Procedure
A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions will not be subject to failure to file and failure to pay penalties, accuracy related penalties, information return penalties, or FBAR penalties.
Specific Instructions for the Streamlined Foreign Offshore Procedures
Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed: If a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471 and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.
Include at the top of the first page of each delinquent or amended tax return and at the top of each information return “Streamlined Foreign Offshore” written in red to indicate that the returns are being submitted under these procedures.
Filing of Returns
Taxpayers must file Form 1040X, Amended U.S. Tax Return, together with any required information returns and musty Include at the top of the first page of each amended tax return the words “Streamlined Domestic Offshore Procedures” written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.
The Certification
Taxpayers must complete and sign a statement on the Certification by U.S. Person Residing in the U.S. certifying:
that you are eligible for the Streamlined Domestic Offshore Procedures;
that all required FBARs have now been filed (see instruction 9 below);
that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non willful conduct; and that the miscellaneous offshore penalty amounts is accurate.
Together with the required accurate returns, the taxpayer must submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. The taxpayer’s identification number must be included on the check and the taxpayers may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
Submit payment of miscellaneous offshore penalty as defined above.
For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.
The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate year-end balance / value of the taxpayer’s foreign financial assets that are subject to the miscellaneous penalty.
A taxpayer who is eligible to use these Streamlined Domestic Offshore Procedures and who complies with all of the instructions below will be subject only to the Title 26 miscellaneous offshore penalty and will not be subject to accuracy related penalties, information return penalties or FBAR penalties.
Complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (1) that you are eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed; and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non willful conduct.
Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. Your taxpayer identification number must be included in your check.
U.S. Taxpayers Residing Outside The United States
Eligibility for the Streamlined Foreign Offshore Procedures
For the most part Taxpayer’s residing outside of the U.S. will have the same requirement as those residents in the U.S. However, there are certain differences.
Taxpayers must meet the applicable non-residency requirements; and
have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR with respect to a foreign financial account, and such failures resulted from non willful conduct.
Individual U.S. citizens or lawful permanent residents, or estate of U.S. citizens or lawful permanent residents will meet the applicable non residency requirement if, 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 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.
THE CONCEPT OF WILLFULNESS
In tax law “willfulness” has its own definition and it is an important definition for every taxpayer That is because a taxpayer who “willfully” filed or did not file accurate tax information can be subjected to numerous very expensive penalties and even criminal liability.
As mentioned, a taxpayer who wishes to be in the Streamlined Program must not have “willfully failed to report income from any foreign asset and/or failed to file an FBAR Information form.
The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. A finding of willfulness must be supported by evidence of willfulness. The burden of establishing willfulness is on the Internal Revenue Service and if it is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted.
According to the IRS Manual, the innocent failure of an unsophisticated Taxpayer to know the filing requirements for international transactions, coupled with other factors, such as the lack of any efforts taken to conceal the existence of the accounts could not lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.
Willfulness can rarely be proved by direct evidence, since it is a state of mind. It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness in the failure to file the FBAR on inference from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interest in entities transferring cash to foreign banks
The Service has given its agents great discretion when the evidence shows that there is not a certain degree of culpability necessary for willfulness and has suggested certain mitigating factors that may determine that a penalty is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum). These factors to consider can include the fact that a taxpayer was cooperating with the I.R.S.
Internal Revenue Service Document
The Service issued a legal memorandum in connection with its international enforcement programs. One of the issues addressed was the proper interpretation of the “willfulness” standard in the context of civil FBAR penalties. The Service’s directness on this point was remarkable. “The first question was whether the phrase willful violation (or willfully causes any violation) has the same definition for both the civil penalty and the criminal penalty. The answer by the I.R.S. was “yes”.
The IRS’s own internal guidance in the Internal Revenue Manual (IRM) on the willful FBAR penalty states that “[t]he test for willfulness is whether there was a voluntary, intentional violation of a known legal duty”. . . it acknowledges that “[t}he mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.” Rather, to establish willful blindness the IRS directs its agents that they must show that the taxpayer “has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements”.
The regulations further state that “[w]hether a person knowingly or willfully fails to file timely or fails to include correct information is determined on the basis of all the facts and circumstances in the particular case.” Factors to consider in determining intentional disregard include, but are not limited to:
(i) Whether the failure to file timely or the failure to include correct information is part of a pattern of conduct by the person who filed the return of repeatedly failing to file timely or repeatedly failing to include correct information;
(ii) Whether correction was promptly made on discovery of the failure;
(iii) Whether the filer corrects a failure to file or a failure to include correct information within 30 days after the date of any written request from the Internal Revenue Service to file or correct; and
(iv) Whether the amount of the information reporting penalties is less than the cost of complying with the requirement to file timely or to include correct information on an information return.
GLOSSARY OF STATEMENTS FROM DECIDED CASES RE WILLFULNESS
CASE LAW
Since willfulness can be somewhat elusive to define, the following is a Glossary of statements from various authorities that will shed more light on the meaning of willfulness.
In the course of one of the first cases involving willfulness, the court advised the jury that, to prove “willfulness,” the Government must prove the voluntary and intentional violation of a known legal duty, a burden that could not be proved by showing mistake, ignorance, or negligence. The court further advised the jury that an objectively reasonable good-faith misunderstanding of the law would negate willfulness.
A second court not only repeated this standard for willfulness; it went even further to distinguish tax offenses from the general rule of law that “ignorance of the law is no defense”. Since the tax laws are so complex, ignorance of the law is a factor in the determination of willfulness.
The Supreme Court has long held that, in tax cases, “willfulness” requires proof of an intentional violation of a known legal duty, meaning that there must be some evidence beyond recklessness that a taxpayer was aware of the relevant reporting requirements. A showing that the defendant acted with “careless disregard” is not adequate. Willfulness is an entirely subjective determination.
Another court in (affirming criminal conviction for willful tax fraud where tax preparer “closed his eyes to” large accounting discrepancies, willful was said to be proven through reference from conduct meant to conceal or mislead sources of income or other financial information” and it “can be inferred from a conscious effort to avoid learning about reporting requirements. Similarly, willful blindness may be inferred where “a defendant was subjectively aware of a highly probability of the existence of a tax liability and purposefully avoided learning the facts point to such liability.
The word willful “retains its traditional meaning that violation of the Act must be deliberate, voluntary and intentional.” [Other cases] urge upon us still another meaning: that “willful” requires bad purpose as an element of the violations.
Under some statutes, an act is “willful” only if done malevolently, wickedly and criminally. Under other types of statutes, it suffices that the act was performed consciously and voluntarily, rather than inadvertently or accidentally. Betwixt these two formulations, “willful” has been given various other meanings, although shades of difference ofttimes diminish when the probe extends beneath the surface. Because of its inherent instability, only the most careful consideration of the term “willful” in its legislative context can provide satisfactory assurance that eventually it will take on its proper cast.
Richard S. Lehman Esq., contact him today with additional questions about this latest IRS Streamlined program.
