The IRS has updated its Streamlined Filing Compliance Procedures and Delinquent International Information Return pages (October 9, 2014) and issued Frequently Asked Questions with regard to each.

The FAQs for U.S. Taxpayers residing in the U.S. clarify that:

  1. The 5% penalty for non-willful submissions does not apply to accounts over which the taxpayer had only signature authority but no financial interest.
  2. The penalty base includes only unreported assets that would have been reported on an FBAR or Form 8938. Thus, real estate, even with unreported income, is not included.
  3. Assets not reported on Form 8938 because they were reported on a delinquent Form 3520 or Form 5471 for the same year are included in the penalty base whereas assets reported in a timely filed Form 3520 or Form 5471 are not included in the base.
  4. Stock in a foreign corporation is included in the penalty base unless it is a disregarded entity in which case its reportable underlying foreign financial assets are included.
  5. Stock in a foreign corporation may be valued using any reasonable method including using the balance sheet on its Form 5471. No valuation discounts are permitted.
  6. The 5% penalty should be calculated as explained in FAQ #6, as follows
    1. Begin the computation by identifying the assets included in the penalty base for each of the last six years.  These assets include:
      1. For each of the six years in the covered FBAR period, all foreign financial accounts (as defined in the instructions for FinCEN Form 114) in which the taxpayer has a personal financial interest that should have been, but were not reported, on an FBAR;
      2. For each of the three years in the covered tax return period, all foreign financial assets (as defined in the instructions for Form 8938) in which the taxpayer has a personal financial interest that should have been, but were not, reported on Form 8938.
      3. For each of the three years in the covered tax return period, all foreign financial accounts/assets (as defined in the instructions for FinCEN Form 114 or IRS Form 8938) for which gross income was not reported for that year.
    2. Once the assets in the penalty base have been identified for each year, enter the value of the taxpayer’s personal financial interest in each asset as of December 31 of the applicable year on the Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures (Form 14654).
    3.  For any year in which a foreign financial account was FBAR compliant and (for the most recent three years) in which a foreign financial asset was both Form 8938 and Form 1040 compliant, the amount entered on the form will be zero.
    4. Once the asset values have been entered on the form, add up the totals for each year and select the highest aggregate amount as the base for the 5-percent penalty.
  7. A taxpayer who has been properly filed returns and reported all foreign financial assets for the past three years but who had unreported foreign financial assets in years 4 through 6 may make a Streamlined submission.   The penalty will be calculated as under FAQ 6 above.

Only one FAQ has been posted for U.S. Taxpayers Residing Outside the United States

  • FAQ 1 clarifies that non-residency for purposes of qualifying for the Streamlined process is not governed by IRC Sec. 911(b) (3) and Treas. Reg. Sec. 1.911-2(b) but is solely determined by the rules described on the Streamlined IRS page.

With respect to Delinquent International Information Returns, the IRS clarified that unlike the 2012 OVDP FAQ 18, eliminated from the 2014 FAQs, there is no automatic penalty relief for taxpayers who were fully compliant. Rather:

  • Taxpayers should use these procedures when they believe they have reasonable cause for the delinquency.
  • Taxpayers with unreported income, or unpaid tax may use these procedures, subject to the reasonable cause requirement mentioned above.
  • Penalties may be imposed if the IRS rejects the taxpayer’s reasonable cause explanation; and,
  • The taxpayer must follow the IRS procedures for establishing reasonable cause, including the requirement that the taxpayer provide a statement of facts made under penalties of perjury. (Referring to Treas Regs. Sections 1.6038-2(k) (3), 1.6038A-(4) (b), and 301.6679-1(a) (3).

What the IRS did not clarify is how aggressive it will go about determining if a taxpayer’s failure to report was non-willful as the taxpayer is required to certify (see Tax Wars Blog posts Bloomberg BNA Samples Attorney Views on Streamlined Process (9/20/14 and Will-O-The Wisp Willfulness in the Streamlined Process (9/1/14)). On this important aspect of the Streamlined process the IRS continues to be coy, telling taxpayers to ask their lawyers. As recently as October 16, an IRS senior attorney speaking at the American Law Institute program was quoted in BNA Bloomberg report to have said as to why the IRS has been vague about what it means by non-willful, “It’s intentional, and I really think it’s to the collective benefit…, because these are human stories and human circumstances.”  At the University of San Diego School of Law-Procopio International Tax law Institute, the IRS supervisory trial attorney for the IRS Office of Chief Counsel also stated that there is no need to further define non-willfulness (as reported in Tax Analysts Tax Notes Today on 11/3/14)

The IRS acting director of International Business Compliance also emphasized at the ALI program that under the delinquent foreign form submission procedures reasonable cause explanations will be viewed very positively where all foreign income has been reported.

While the new FAQs are welcome and helpful some guidance on the most important question of whether certain factors rule out non-willfulness in the eyes of the IRS and how the agency will apply the willful blindness standard would be appreciated by the tax bar.

© 2014 by Robert S. Steinberg, Esquire All rights reserved



Posted in 214 OVDP, COMPLIANCE, FBARS, OFFSHORE BANK ACCOUNTS, TAX | Tagged , , , , , , , , | 1 Comment


I receive many calls from taxpayers considering how to bring their unreported offshore accounts into compliance. Sometimes and often with respect to expatriates, these individuals will have prepared their own returns and even attempted to represent themselves through some of the tangled web of rules concerning the OVDP, Streamlined Filing Compliance Procedures, Transitional Rules or opting out of the OVDP. Likewise, many calls originate from people who’ve divorced and have represented themselves in innocent spouse disputes with IRS. Usually, they call when something very bad and unforeseen to them happens in their case.

I always tell them that their self-representation likely has made more difficult the professional’s job of representing them. One client recently asked, “Why do you think that representation by a professional is often made more difficult when clients have represented themselves initially?”

I thought others might benefit from my response which is reprinted below.

While representing himself or herself, the client may:

  • Admit facts government would otherwise have to prove.
  • Waive Fifth Amendment rights against self-incrimination.
  • Tell IRS too much which results in more questions being asked and other issues being raised.
  • Give up documents that don’t have to be produced resulting in more questions being asked and more issues being raised; or, worse, incriminating themselves in a tax crime.
  • Overlook procedural requirements that results in options that might have been available being ruled out.
  • Misunderstand the law and make the wrong arguments because even lawyers who are not tax lawyers lack the tax background to fully grasp and appreciate many tax issues.   Also, cases do not always stand for what a lay person thinks they stand for.  This is one reason why CPAs sometimes misadvise clients on tax issues. They don’t know how to read a case.  They are not lawyers and certainly not tax lawyers.  No matter how much a client may read, he or she cannot make up for the training and experience of one who has lived with this mind twisting stuff for over 40 years.  There is also an underlying conceptual framework to the tax law, although it might not seem so, that a tax lawyer has at his or her recall in evaluating facts and law, but which a client does not have to draw on.
  • Finally, clients representing themselves don’t understand the process or how to deal with IRS at any level, agent, appeals or collections.

Thus, in my experience, coming into a case when the client has been proceeding without counsel is almost always problematical.  That is not to say that such problems will be encountered in every case.  But, it is common and reading Tax Court decisions in which the taxpayer has appeared pro see very cogently illustrates why.

Moreover, it is one thing for a client to self-prepare his or her tax return which may be perceived as straightforward, even though very little in current tax law is simple. The consequences of a mistake on a Form 1040 involve penalties that, although painful, will not destroy most taxpayers. It is quite another thing, for a client to self-represent when very serious consequences, possible jail time and draconian civil penalties, are at stake. These kinds of outcomes can destroy a person financially and emotionally.


© 2014 by Robert S. Steinberg, Esquire

All rights reserved

Posted in 214 OVDP, DIVORCE, EQUITABLE RELIEF, INNOCENT SPOUSE, NEW OVDP, TAX | Tagged , , , , | 1 Comment


The case of Kimberly A. Sorentino v Commissioner (Summary Opinion 2014-99, September 24, 2014) illustrates what can happen when a taxpayer doesn’t get the relief she needs because she’d asked for the wrong relief. Although the Court’s Summary Opinion may not be cited as precedent, it is instructive.

The case involved taxes owned on a putative joint return filed for the year 2007. The joint return filed had reported an overpayment and requested a refund. IRS determined that to the contrary taxes were owing on the joint return and sought to collect from Kimberly. Some of the facts are summarized as follows:

Kimberly and her husband George, who intervened in the case in opposition to her innocent spouse request, were divorced in 2008. Their marriage had been dysfunctional and volatile. They were married in 2005 after having met the year before. They separated in 2006 and initiated divorce proceedings then but later reconciled.  Kimberly testified that George had:

  • Physically assaulted, offended and humiliated her on numerous occasions.
  • Objected to her work-related travel.
  • Harassed her at work by calling frequently and showing up unannounced.
  • Caused her work performance to suffer resulting in her losing her job.
  • Caused her to lose two successive jobs with the same harassing behaviors.

Further, she testified that following a heated argument she packed up her belongings and left George. Her sister had to rush to pick her up after receiving a phone call from her that she was contemplating suicide.  As a result, Kimberly was admitted to a mental health facility for treatment which lasted from March 15 to March 20, 2008 and as an outpatient from March 21 to March 29, 2008.

On March 24, 2008 George sent a draft of a Marital Dissolution Agreement to Kimberly. Kimberly did not take part in drafting the agreement, was not represented by counsel, but signed the agreement on April 9, 2008.  The dissolution agreement did not address the 2007 tax but did state that the parties would file separate tax returns for 2008 and later years.

The case does not summarize all of the income items of each spouse for 2007 but states that during 2007 Kimberly received retirement plan distributions of $79,114 and $15,970 which she deposited into her bank account. George apparently had little income because he was a former police officer with failing health.

Kimberly did not file a separate return for 2007 and believed (albeit erroneously) she had sufficient withholding tax taken out of her retirement distributions to cover the tax liability. Before 2007 the Kimberly and George had filed jointly for each year of their marriage. Still, Kimberly testified that she did not know that George intended to file a joint return and did not meet with the return preparer regarding the filing of a joint return or otherwise authorize the filing of a joint return.

The joint return was e-filed by the return preparer even though only George had signed Form 8879, IRS e-File Signature Authorization, which the preparer is required to obtain before transmitting an e-filed return.

When IRS assessed and attempted to collect taxes due from Kimberly, she retained counsel and filed Form 8857, Request for Innocent Spouse Relief. She claimed that she’d been a victim of spousal abuse in 2007, was not involved in preparing the joint return or in handling household finances, did not sign the joint return, and, was filed she was suffering a mental breakdown at the time the joint return was filed.

George’s testimony at trial disputed Kimberly’s.   He testified that he did not abuse or harass her and that she’d visited the return preparer with him and intended to file jointly. Strangely, the return preparer did not testify at trial.

Tax Court Decision

The Court denied innocent spouse status to Kimberly because if found that no valid joint return had been filed. One of the requirements for obtaining innocent spouse relief from a joint return liability is that a joint return was indeed filed.

Generally, one must sign a joint return to be held jointly and severally liable for the tax liability related to that return. This is so because each spouse must indicate his or her affirmative election to file jointly.  But a signature of both spouses is not always required.  A joint filing will be found to have been made when the facts indicate that both spouses intended to file jointly.  Intent will be gleaned from the surrounding facts and circumstances including a history of filing jointly. In finding that no joint return had been filed, the court was influenced by evidence that showed:

  • Form 8879 was not signed by Kimberly.
  • An extremely dysfunctional marriage.
  • The absence of objective evidence contradicting Kimberly’s testimony.
  • The lack of credibility of George’s testimony which was inconsistent.
  • That the preparer did not testify.
  • That Kimberly was contemplating suicide near the time for filing the 2007 return and had been hospitalized.
  • That these facts made credible Kimberly’s testimony, that she’d decided to abandon filing jointly and did not intent to file jointly with George for 2007.

So, Kimberly was found not to have filed a joint return but was denied innocent spouse relief. Well, where does that leave her?   On the IRS books of account, she is still listed as jointly liable for a tax due on a return the Tax Court says was not a return.

An American Bar Association Tax Section practitioner forum discussed what Kimberly should do next procedurally. My suggestion was:

The mistake made in this case was asking for innocent spouse relief which the court denied as it had to since no joint return was found to have been filed. Interestingly, the tax could be higher on a MFS return. An MFS return filed now will probably be rejected by the IRS computer since a return has already been recorded under client’s SSN. You can request, as has been suggested, that IRS abate the joint assessment against client. If IRS is not cooperative, the Taxpayer Advocate should be able to help clear up the client’s account since you have the Tax Court decision that no joint return was filed. Alternatively, if client has already received her due process collection notice on this assessment Appeals consideration can still be requested.

This is not a forgery case, by the way. The former husband submitted an unauthorized putative joint return, which the court rejected. He did not forge the client’s signature, however. Another question: Why did the return preparer transmit the joint return without having in her possession a Form 8879 signed by the wife? She has a malpractice issue.

Also, I would not be surprised if the former husband goes back into family court alleging that the former wife breached the dissolution agreement, arguing that the agreement’s statement that the parties would file separate returns in 2008 implicitly means that they would file jointly in 2007. He cannot compel her to file jointly, but would seek damages for her refusal to file jointly. I don’t suggest he would be successful, only that he might try.


  • The Martial Dissolution Agreement should have explicitly covered whether a joint return would be filed for 2007.
  • Ideally, Kimberly would have been advised (not the case here) about how much money filing jointly would save her over filing separately.
  • Then she could have (again, not the case here due to her mental condition) weighed the dollar savings against not being party to a joint return with violence prone George. She might have wanted to have nothing to do with him and just pay the toll charge for filing separately. Sometimes personal considerations outweigh financial ones.
  • Kimberly should have filed a married filing separately return if she did not want to file jointly. That would have prevented George from being able to claim she’d intended to file jointly.
  • Not having done that, she should have based her appeal of collection activity against her by arguing that no joint return had been filed because she did not sign the return, consent to file jointly or intend to file jointly; and, submitted a MFS return to appeals.
  • Still, the Tax Court decision will be helpful in obtaining an abatement of the joint return liability. But, she’ll have to file a separate return.
  • From a strictly financial position, Kimberly may have been misguided in objecting to the joint return liability to begin with, since it appears that most of the income was attributable to her retirement distributions and she will likely owe more tax on an MFS return.
  • Thus, it is important to understand your best option to minimize the tax liability before claiming innocent spouse status. For, in this case, even if a joint return had been found to have been filed, Kimberly would not have been relieved of most of the joint return liability, as most of the income items on the joint return were her own income items.

© 2014 by Robert S. Steinberg, Esquire
All rights reserved

Posted in DIVORCE, INNOCENT SPOUSE, JOINT RETURNS, TAX | Tagged , , , , , | Leave a comment


Alison Bennett of Bloomberg BNA’s article “Questions surround Standard of Willful Path Conduct under Streamlined Version of OVDP” (9/17/14), summarizes some of her interviews with tax lawyers around the country concerning the Streamlined Filing Compliance Procedures announced by IRS on June 16, 2014.

I’ve questioned the usefulness of the Streamlined Process for U.S. persons in prior blog posts and my colleagues interviewed by Ms. Bennett have similar reservations. Some of the comments are summarized below, namely:

  • The government may take a stricter view of non-willfulness for those trying to transition out of the OVDP into the Streamlined Process under the transitional rules also announced on June 16, 2014.
  • One practitioner’s experience is that most transitional applications are being rejected by IRS.
    • Apparently, as I’ve discussed in earlier posts there is no appeal of this IRS decision.
  • The IRS seems to be interpreting non-willfulness using a stomach test: Did you know in your gut that you had a legal obligation to report the foreign accounts?
    • But that test goes to knowledge of the legal obligation and should not necessarily mean per se that the failure to disclose was willful.
  • The Streamlined Process is laden with risk to the taxpayer who is going out on a limb by giving an affidavit under oath.
    • There is no guidance from IRS about how it will apply the willfulness standard under the Streamlined Process. For example:
      • Will U.S. persons be held to a tougher standard than expats? I would not be surprised if that is the case, but IRS is silent.
      • Willful Blindness: What will constitute in the eyes of IRS a conscious effort to avoid learning about the reporting requirements?
        • The IRS Internal Revenue Manual says not checking the box on Schedule B of Form 1040 will not alone establish willful blindness, but does not say what facts will?
      • Look back period for facts to establish willfulness: Though a taxpayer must only file three years of income tax returns and six years of FBARS under the Streamlined Process, will IRS go back further searching for badges of fraud or other acts indicative of willfulness?
        • IRS could go back to the opening of the account.
    • Can one, knowing the frailties of memory, make, under oath, an affirmative certification of non-willfulness?
    • I am certain that most, if completely honest with themselves, will not be able to make that assertion in good faith or with any degree of intelligent certainty.
  • All who represent clients in Voluntary Disclosure matters would like to see IRS at least publish some broad brushstroke guidance on how the view thewillfulness issues, such as
    • Will the standard be differently applied for U.S. persons versus expats?
    • Under what circumstances will willful blindness be asserted?
    • What are the largest factors in the eyes of IRS leaning towards willfulness?
    • What are the largest facts leaning towards non-willfulness?
    • Are there any safe harbors on which practitioners can rely in advising clients?
  • To date the IRS has been want to provide guidance because it says, the facts in every case are so divergent. While this is true, some broad guidance would be helpful.

Robert S. Steinberg, Esquire


Posted in 214 OVDP, TAX | Tagged , , , , , , , , | 1 Comment


A New Hampshire U.S. District Court decision U.S. v. Baker 13-cv-213-PB2014 DNH 176, August 22, 2014) highlights some important lessons about the priorities of a divorce decree against a federal tax lien on one of the spouses.

The facts of the case

  • Mr. and Mrs. Baker filed for divorce on 2/28/08, after ten years of marriage.
  • The Bakers owned two parcels of land in New Hampshire as tenants with rights of survivorship.
  • The two properties had been purchased by them in 2000 and a quitclaim deed recorded with the Register of Deeds reflecting their ownership rights.
  • The Massachusetts state issued a divorce judgment on 2/28/08.
  • The divorce judgment became final on 5/29/08.
  • The judgment of divorce approved and incorporated the Baker’s separation agreement.
  • The Massachusetts court found the separation agreement to be “fair and reasonable and not the product of any fraud, duress or coercion.”
  • The agreement states in part:
    • The Wife shall own solely the piece of land located at Micion Rd., Campton, New Hampshire (“Land”). Within thirty (30) days following the date of the Agreement the Husband shall execute a deed transferring and conveying to the Wife all of his right, title and interest in and to the Land, free and clear of all existing liens. The Husband hereby waives and releases any and spousal rights in the Vacation Home, which he may have or acquire under the present and future laws of any jurisdiction.
  • Neither the divorce judgment nor a deed conveying the Land to Mrs. Baker was recorded with the Register of Deeds subsequent to the divorce.
  • On May 14, 2009 the U.S. assessed unpaid income taxes against Mr. Baker.
  • On October 21, 2009 the U.S. sent a levy notice to Mr. Baker.
  • The IRS then recorded its federal tax lien in the amount of $2,458,609 on November 9, 2009.
  • The IRS later assessed additional taxes against Mr. Baker and send to him a second levy notice on 7/29/10 and on 8/9/10 recorded a second notice of federal tax lien for $1,133,687.
  • On May 1, 2013 the U.S. sued both Mr. and Mrs. Baker seeking a judicial sale of the Land transferred to the Wife under the divorce decree as partial satisfaction of Mr. Baker’s tax liability now totaling over $4 million.

Government’s Argument and Court’s decision

The government argued that the failure to execute and record the deed as required in the Separation Agreement invalidates the conveyance to the Wife. The government argued that since the deed was not recorded, a subsequent bona fide purchaser for value would have priority over the wife’s interest in the property.  The Court rejected the government’s argument.  That Mr. Baker could defeat the Wife’s interest by making a fraudulent transfer to a purchaser without knowledge of the earlier transfer who pays full value is irrelevant.  Mrs. Baker could still enforce her full title rights against Mr. Baker.

Under New Hampshire law (applied as the property is located in NH) the Separation Agreement effectuated an immediate severance of the Joint tenancy and transfer of Mr. Baker’s interest to Mrs. Baker.  The deed requirement was not intended in the Separation Agreement to be a condition precedent. The Separation Agreement  did not require that the deed be recorded before Mr. Baker ceased to have an interest in the Land.

“Mr. Baker lost his right to own, transfer or encumber the properties when the divorce judgment became final.” NH law did not give him any enforceable right to the properties after that date.

Whether one has an interest in property is determined under state law. Whether the federal tax lien attaches to such property interests is a matter of federal Law.  In U.S. v. Baker, the U.S. District Court found that Mr. Baker ceased to have any property interest in the Land conveyed to Mrs. Baker under the divorce decree upon entry of the divorce judgment.  Thus, there was no property interest of Mr. Baker against which the federal tax lien could be enforced.


  • The result could in this case be different for property located in a state with a race to record statute.
  • Mrs. Baker prevailed in this case, but the dispute would have been averted if she had simply made sure that the deed was recorded.
  • The Lesson: Record all divorce conveyances that can be recorded. Record both the judgment and deed or other document of transfer.
  • In this case the tax lien arose and was recorded after the divorce judgment had been entered. But, don’t assume there are no income taxes unpaid or no tax liens recorded. Spouses should obtain federal and state tax transcripts and conduct a search for tax liens before signing a Separation Agreement.
  • A tax attorney knowledgeable on federal tax liens and state property law should resolve issues of tax lien priority.   A CPA is not trained to make these legal determinations.

© 2014 by Robert S. Steinberg, Esquire
All rights reserved

Posted in SUITS TO COLLECT TAX, TAX | Tagged , , , | Leave a comment


“A will-o’-the-wisp is an atmospheric ghost-light seen… at night, especially over bogs, swamps or marshes. It resembles a flickering lamp and is said to recede if approached, drawing (sojourners) from the safe paths.”(Wilkipedia).  Most clients with unreported offshore accounts who contact me these days want to enter the new IRS Streamlined Filing Compliance Program and insist that their conduct was and is non-willful. They are moved by the lower 5% penalty for U.S. persons, much less severe than the OVDP 27.5% penalty or 50% penalty for those having accounts with banks on the DOJ’s under investigation list.   But, non-willfulness like the will-o-the-wisp is a fickle fire.  You may see it but IRS may not, for non-willfulness or willfulness to a great extent is in the eyes of the beholder.  There is significant uncertainty about how IRS and the courts will apply the willfulness element of FBAR civil violations. Two court decisions have implied there may be strict liability when a return is signed without reporting a foreign financial account.   IRS has not provided guidance on what specific factors will influence it to accept or reject a Certification of Non-Willfulness.  At a June Tax Controversy Forum John McDougal, special trial attorney and division counsel, IRS Small Business and Self-Employed Division, was quoted to have remarked: “The concept of willfulness is well documented in the case-law…. We’re depending on the practitioners to help clients work their way through what the risk is of criminal prosecution and significant penalties.”

In light of this uncertainly and ambiguity in IRS’s position on willfulness, the Streamlined Process could become a swamp some will come to rue having entered. Why? Because those entering the new Streamlined Process must certify under penalties of perjury that their conduct was non-willful, that sly will-o-the-wisp again.

In determining non-willfulness, one must, in effect, rule out willfulness.   The rule of law is easy to state.  Conduct is willful when there is a voluntary, intentional violation of a known legal duty.

To decide that the failure to file an FBAR was willful, a court must find:

  • That there was a legal duty to file imposed on the taxpayer.
  • That the taxpayer had knowledge of the legal duty to file, and
  • That the taxpayer voluntarily and intentionally did not file as required.


Legal duty

In the case of an FBAR, the Bank Secrecy Act Sec. 5314 broadly imposes a duty to file on those U.S. persons having an interest in or authority over one or more foreign financial accounts the aggregate value of which exceeds $10,000 at any time during the calendar year.  The report is due by June 30 of the following year to which it relates.  This question of whether one has a financial interest in a foreign account can, itself involve a complex web of tax and foreign law, but I shall not discuss that question in this post.

Knowledge of legal duty

The next question is did the person know of that obligation?  The Fourth Circuit Court of Appeals (Williams case) and District Court  for the Southern District of Utah (McBride case) on facts replete with evidence of willfulness, held that a taxpayer is presumed to have read his or her return and is charged with knowledge of the information contained in the return.  Thus, the taxpayer is charged with knowledge of the FBAR requirement because Schedule B asks “do you have an interest in a foreign financial account,” and refers taxpayers to the instructions that explain the FBAR filing requirement.’’  This is the concept of “willful blindness,” that is, taking steps to prevent acquiring knowledge of the filling requirement (in the case discussed, failing to read the return and instructions). These two decisions  found that willful blindness not only established knowledge but willfulness as well because the conduct of signing a return without reading explicitly referenced instructions about the FBAR requirements showed a reckless disregard that establishes willfulness..  But, both Williams and McBride had so many overt acts of bad intent that the court did not need to base its decision on the Schedule B question alone; and, it is uncertain whether the suggested strict liability proposed in those two cases will apply on more innocent facts.

Intentional violation

Putting aside the Schedule B question for the moment, in analyzing willfulness or whether the violation was intentional, it is helpful to think of the bell curve.  Conduct at the two extremes is easy to characterize, but conduct in the middle of the bell curve is more difficult.  Usually, one begins to add up overt acts indicative of willful conduct until the pile of willful acts becomes a mass, which taken together convinces that the failure to file was volitional.  These acts could include:

  • Using a coded or numbered account.
  • Using a structured investment with a nominee title holder.
  • Using an intermediary who has been indicted or is under investigation.
  • Using a bank under DOJ criminal investigation, has been indicted or has entered into a non-prosecution agreement or deferred prosecution agreement.
  • Using a bank in a country with strict bank secrecy laws.
  • Making systematic withdrawals of cash just under $10,000.
  • Instructing the bank to hold mail and not send statements to the U.S. address.
  • Having a very large account balance.
  • Having large unreported income compared to reported income on your U.S. return.
  • Telling your tax return preparer who asks about foreign bank accounts, that you have none (whether asked in person or in a tax organizer provided by the preparer).
  • Lying to or evading questions posed by a Revenue Agent or attempting to impede the examination.
  • Checking the “No” box as to the foreign bank account question on Form 1040, Schedule B (But, may require some of the above other acts evidencing willfulness in addition).


Burden of proof

The burden of proof has two elements:

  1. Who must sustain the burden as to the level of proof required?  and,
  2. What level of proof is required to establish willfulness?

Who must prove willfulness?

In determining eligibility for the Streamlined Process, it is the taxpayer who must establish the facts supporting non-willfulness or that his conduct was due to negligence, inadvertence, mistake or conduct that is the result of a good faith misunderstanding of the requirements of law.  In the end, however, the government to convict in a criminal case or successfully collect the FBAR penalty will have the burden of proof.  If that is the case, what difference does it make that the taxpayer must establish non-willfulness for eligibility under the Streamlined Process?   For one thing, the failure to file, failure to pay, and accuracy-related penalty will be in play even if the result of a trial is that the taxpayer is found to have been non-willful.  A court will not likely second guess the IRS on its decision to reject a taxpayer from the Streamlined Process because the IRS did not have to offer the relief and the taxpayer did not have to apply.  Thus, a low threshold is likely to apply to IRS actions on eligibility questions.

On the other hand, the burden of proof is on the government in all criminal cases, in penalty cases under the Internal Revenue Code, and in FBAR penalty actions under the Bank Secrecy Act.

Level of Proof

The District Courts in both Williams and McBride held that the government must prove willfulness by only a “preponderance of the evidence”.  This means that the greater weight of the evidence must indicate that the taxpayer’s conduct was willful.  These were cases in which the penalty was assessed and the government sued the taxpayer to obtain a judgment for the debt on which it could then seek to collect.  “Preponderance of the evidence” is a much lower standard than “beyond a reasonable doubt” required in criminal prosecutions or even “clear and convincing evidence”, as required in civil fraud penalty cases under the Internal Revenue Code.  “Clear and convincing” proof falls in between a “preponderance of the evidence” and “beyond a reasonable doubt:”

A 2006 IRS Chef Counsel’s Memorandum and its Internal Revenue Manual indicate that IRS believed “clear and convincing evidence” was necessary to establish willfulness in an FBAR collection suit.  Now, however, IRS is arguing that the lower “preponderance of the evidence” burden applies.  Since only two district courts have ruled on this issue, uncertainty will prevail until higher courts rule.

When will I know if IRS has accepted my “Certification of Non-willfulness?”

Unlike the OVDP, IRS will not acknowledge your Streamlined submission or enter into a closing agreement (Form 906) with you.  Thus, you will not initially know if IRS has accepted you submission under the Streamlined process.  Rather, you will wait.  Wait for what?  For the statute of limitations on assessment to run.  IRS normally has three years from the filing date to assess additional tax but this time limit is increased to six years if gross income is understated by more than 25%.  Fraudulent returns have no time limit after which IRS cannot assess tax.  IRS can assess a fraudulent return at any time.

This seems unfair.  IRS should at least notify a taxpayer if he or she has been accepted or rejected under the Streamlined Process as to non-willfulness.

Suggestion: for a deceased taxpayer, file a Request for Prompt assessment under IRC Sec. 6501(d) on Form 4810 after filing your Streamlined submission to shorten the statute of limitations to 18 months.  Nothing says that you cannot and this may be an excellent idea.

What happens if IRS says my conduct was willful?

Bad things can happen and apparently there is no appeal from the IRS determination about one’s eligibility for the Streamlined Process.  What happens then if you are kicked out of Streamlined?  Some consequences:

  • Your returns for all open years under the statute of limitations may be audited, not just the three-years filed.  If fraud found, all years are fair game for audit. Thus, you may be assessed substantial additional income tax.
  • You have no criminal protection for FBAR and income tax violations.  Thus, you can go to jail and expect IRS to make some examples out of some filing frivolous non-willful certifications.
  • You may be assessed the maximum income tax penalties including late payment, late filing, accuracy related and/ or civil fraud penalty..
  • You will have appeal rights with regard to the income tax penalties proposed or assessed upon examination.
  • IRS may assess the FBAR penalty but will have to sue you within two years of assessment to collect as the income tax levy procedures do not apply.
  • You may be charged with perjury for your false certification of non-willfulness.


The linchpin of the Streamlined Process is the willful / non-willful determination.  This is a very complex issue, made more difficult by uncertainly about how the IRS will determine willfulness and what burden of proof will be applied. An attorney experienced in criminal tax matters should conduct the analysis of whether the client’s conduct was willful or non-willful.  A CPA, accountant or enrolled agent, apart from having no communications privilege, is not trained to make such legal determinations.

Cautionary Note

This post is intended to provide the lay reader with a basic understanding of some of the willfulness / non-willfulness issues and is not intended as an exhaustive or scholarly dissertation on the subject.   Thus, citations by and large are not included and the discussion is general in scope.  This summary is not intended as legal advice and should not be relied upon for any specific solution to an FBAR problem.


© 2014 by Robert S. Steinberg, Esquire
All rights reserved

Posted in TAX | Tagged , , , , , , , , , , , , , , , | 4 Comments


This predicament is not an uncommon occurrence.  Many taxpayers may have had a foreign bank or brokerage account and reported the income in their tax returns or earned no income but did not know they had to file an FBAR.  They are often panic-stricken over what they have heard are horrific consequences.  But, there is now light at the end of the tunnel thanks to a new IRS procedure aimed at these taxpayers.

Should these taxpayers with delinquent FBARS enter the OVDP?

Absolutely not.  The Offshore Voluntary Disclosure Program or OVDP is for tax criminals or those who fear imposition of a draconian civil FBAR penalty.  The OVDP is not for those who’ve reported all income from an offshore account but failed to file an FBAR or other foreign information return.

Should they elect the new Streamlined Compliance Procedures?

No, they should not.  The Streamlined Procedures (which are really two processes one for expats and one for U.S. residents) is for those taxpayers who have unreported income and / or unfiled or FBARS, where the non-reporting or failure to file was not willful but due to, “negligence, inadvertence or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.” (Language from Streamlined Process Certification). The Streamlined Process is not for those who’ve reported all income or had no income to report on the account but simply neglected to file an FBAR.

How could the taxpayers have no income on an account?

  • Two examples:
    • A non-interest bearing account such as a checking account maintained for the convenience of paying expenses when visiting the foreign country on as a tourist or on business.
    • A trading account that earns no income or incurs a loss during the year.

Then, what should the taxpayer do?

These taxpayers should follow the Delinquent FBAR Submission Procedures published by IRS on June 18, 2014.

Who may use the Delinquent FBAR Submission Procedures?

A taxpayer who:

  • Did not file an FBAR, when required.
  • Is not currently being civilly examined by IRS and is not currently the target of an IRS criminal investigation.
  • Has not been contacted by IRS about the delinquent FBARS.
  • Does not need to file delinquent or amended tax returns to report and pay additional tax.

How do you file delinquent FBARS under the Delinquent FBAR Submission Procedures?

  • E-file the delinquent FBARS as provided in the FBAR filing instructions using the BSA E-Filing System. You generally cannot paper file the FinCEN Form 114 which replaced the TD 90-22.1 form which had been filed with the Department of the Treasury in Detroit.
  • On the first page of the E-filing input screens there is a drop down menu where the filer must indicate the reason for filing late.  The most common reason for those who have reported all income will be, “Did not know I had to file,” but there are other selections including “Other,” for which an explanation must be provided in limited space.
  • If for some reason you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975.

Will I be penalized for filing late?

No. The IRS in its announcement of the Delinquent FBAR Submission Procedures states:

“The IRS will not impose a penalty for failure to file delinquent FBARS if you properly reported on your U.S. tax return, and paid all tax on, the income from foreign financial accounts reported on the delinquent FBARS and you have not been previously contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARS are submitted?”

Will my income tax returns or FBARS be audited?

The IRS announcement regarding Delinquent FBAR Submission Procedures states:

“FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.”

While the announcement does not mention income tax returns, presumable the same no-automatic-audit rule will apply.  If an audit later reveals that income was not reported on the account, the taxpayer will face potentially severe FBAR and income tax civil and criminal sanctions.

How many years of delinquent FBARS must I file?

File delinquent FBARS for the years open under the Statute of Limitations for assessing FBAR civil penalties.  Normally that will be six years because the Statute of Limitations is six years from the due of the delinquent FBAR, (June 30).  Unlike the Statute of Limitations on income tax assessments, the FBAR Statute begins to run even if no FBAR was filed.  Thus, a 2007 FBAR, due June 30, 2008 would not be required to be filed now because the Statute of Limitations expired on June 30, 2014.  Assuming the 2013 FBAR was timely filed, one would file for the years 2008 through 2012.

Can my CPA prepare and e-file the FBAR for me?

In most cases yes, if it is clear that all income earned on the account was reported. Caveat: There is no di minimis rule; even nominal unreported income will disqualify a taxpayer from using the Delinquent FBAR Submission Procedures and relegate him to employing the OVDP or Streamlined Offshore Compliance Procedures.

Unless it is clear that no income went unreported, taxpayers should probably first consult with an experienced OVDP tax attorney about how to proceed. A CPA has no communications privilege as does an attorney and may be told incriminating admissions about which he can for compelled to testify.


© 2014 by Robert S. Steinberg, Esquire – CPA All rights reserved.