On February 24, 2015 I participated in an ABA Tax Section Webinar, “Answering Your Criminal and Civil Offshore Disclosure Questions.”  On the Webinar panel were two IRS officials:  David W. Horton, Director, IRS International Individual Compliance; and John C. McDougal, Senior Special Trial Attorney, IRS Office of Chief Counsel (Chief Counsel are the IRS in-house Attorneys).

Below I’ve paraphrased (not quoted verbatim) some of the comments of the two IRS officials without identifying who made what comment.

Criminal Enforcement

  • The Department of Justice’s greater concern is over funds that originated in the U.S. as opposed to funds that were always offshore. Thus, U.S. profits and gains diverted to offshore accounts garner more attention on the criminal side than do foreign gifts or inheritances that were deposited into offshore accounts.
  • Reliance on professional advice, once a defense, now has become evidence that the advisor and taxpayers were co-conspirators.
  • IRS is following transfers of funds by so-called “leavers.” Who moved funds from UBS in 2009 and 2010 and views that foolish conduct as significant evidence of willfulness.

Swiss Bank Settlement Program

  • Swiss Bank Secrecy laws still prevent banks in the program from turning over a client’s name unless:
    • The client consents.
    • A proper Treaty Request is made (must indicate fraud) such as where nominee entity was employed although a Treaty Protocol pending in the U.S. Senate would expose personal numbered accounts to being turned over.
    • The banks must turn over the name and location of bank accounts to which “Leavers” transferred funds but not the name itself. With that information IRS will be able to identify the individuals by obtaining a John Doe Summons requiring the bank to turn over names.
  • The banks in the program must close the accounts of U.S. depositors who fail to come into compliance with U.S. tax reporting.
  • Banks in the program seeking to mitigate penalties are contacting customers to encourage them to enter the OVDP.


  • Most of the questions during the webinar concerned the Streamlined Process – see comments below.
  • Preclearance of names is now taking much longer than when the Program first opened because IRS has much more data to go through in order to check a name.
  • RSS Comment: That IRS has more data also means that IRS is more likely to discover a person’s identity.
  • Valuations of included non-financial assets: IRS generally allowing no discounts (minority interest or lack of marketability) from fair market value as it views the inclusion of the value as “rough justice.” Any reasonable good-faith estimate of value is acceptable.

Streamlined Filing Compliance Procedures (or Streamlined Process)

  • The IRS continues to see no value in offering examples of what sort of conduct it would view as willful or non-willful. Each determination is very fact specific and there is a large body of case-law is applicable. Thus, the call is up to the attorney. Nothing more will be forthcoming from IRS on the question of non-willfulness.
    • Willful is one of those “know it when you see it” things.
    • Ask yourself: Are you nervous about having no protection from criminal indictment, or about having to pay the civil fraud penalty or draconian FBAR penalties? If not, Streamlined is OK.
  • Size of the account does matter but is not determinative other than at the extreme ends of the spectrum (very small being an indicator of non-willful conduct and very large being a strong indicator of willful conduct)
  • If joint returns were filed both spouses must file under the Streamlined Process because a joint return must be amended with a joint return. That is because the tax is assessed on the return and not under a closing agreement as in the OVDP (where one or both spouses can enter).
  • There is no acknowledgment of filing returns under the Streamlined Process because it is just a process for filing tax returns. Aside from the penalty relief it is just like filing a normal return.
    • RSS Comment: But don’t make the mistake of thinking that Streamlined returns are ordinary returns. They are not. You are filing under threat of criminal prosecution if you do not meet the test of being non-willful, and of other charges if your Non-willfulness Certification is false or leaves out negative facts that make it misleading or if the returns you file are in any way false or misleading.
    • IRS cashing of your check or sending a bill for additional interest is not an acknowledgment that your returns pass muster in the Streamlined Process. Your return can still be selected for audit later on and there is no process by which one can request an early audit.
  • Taxpayers with accounts at listed banks (subject to the 50% OVDP penalty) can go Streamlined if non-willful.
    • RSS Comment: In theory yes, but most with accounts at bad banks have engaged in conduct that would be viewed as willful (Nominee entity, structuring, loans etc.).
  • Preclearance – Practitioners stated that some are submitting names preclearance even if they intend to go Streamlined, just in case evidence of willfulness is discovered.
    • The IRS people discouraged this tactic. If non-willful why submit names?
    • The reason is that the accounting and investigative work in reviewing statements for the Streamlined may turn up evidence of willfulness. If names are submitted you will probably have 50 days before the OVDP Letter is due. During that time you should have a better idea if you can, in fact, certify non-willfulness.
    • You can also pull transcripts to ascertain if an audit has been commenced. But, the transcript may show an audit code before the audit has commenced. It is the sending of the audit notice and due process rights letter that commences the audit and disqualified a taxpayer from the Streamlined Process, not the entering of the code in the system.
    • If a taxpayer is declined for OVDP in the names submission, he or she can still enter the OVDP if otherwise qualified, but believe that would be a rare case.
  • The key element for IRS in ultimately agreeing or disagreeing with the non-willful certificates is when the taxpayer learned of the filing requirements.
    • Those who learned of the filing requirement but stayed out of the OVDP for fear of the high penalty, but now want to avail themselves of the zero penalty (non-U.S. person) or 5% (U.S. person) would likely be viewed by IRS as willful.
  • PFICs: There is no OVDP short-cut rule for PFICs in the Streamlined Process.
  • Upfront Rejections from Streamlined: Are due mainly to the Certification on its face being insufficient and not reciting specific facts supporting the non-willful assertion. The IRS is not rejecting applicants merely because it disagrees with the conclusion that the conduct is non-willful. The IRS may, however, take that position if and when it audits the taxpayer’s returns.
  • The taxpayer no longer has to be otherwise tax-compliant to file returns under the Streamlined Process. The returns filed can be delinquent returns.

Quiet Disclosures

  • IRS is screening for amended returns filed outside the OVDP or Streamlined Process. So, taxpayers taking this route may expect an audit.
  • May be applicable to persons if not worried about criminal charges or willful FBAR penalties and feel strongly that reasonable cause is present.
    • Reasonable cause means not negligent.
    • RSS Comment: perhaps for some U.S. persons. But, non-U.S. persons better off in Streamlined Process since less likely to be selected for audit.

RSS Comment

Each case requires a decision about how to proceed.  These decisions are complex and require the assistance of a tax attorney experienced in these matters.

© 2015 by Robert S. Steinberg, Esquire All rights reserved



Consider the following fact pattern:

Father and daughter are participants in the OVDP who submitted their OVDP Letters after August 4, 2014.   Each owned separate unreported offshore bank accounts during the OVDP period 2006 through 2013.

The father’s account was with a bank on the IRS list of banks for which, after August 4, 2014 OVDP submissions, accounts are subject to a 50% Miscellaneous Offshore Penalty.

The daughter’s account is not on the list and would normally be subject to the 27.5% Miiscellaneous Offshore Penalty.

But, In October, 2013 the father added the daughter’s name to his listed bank account making her a joint owner.  The daughter was added to the account after the father suffered a mild stroke and feared he might suffer another more serious stroke and become incompetent.

Clearly the father’s listed account is subject to the 50% penalty; but, does the daughter’s joint ownership[ of father’s listed account for three-months render her non-listed account also subject to the  50% Miscellaneous Offshore Penalty?

Let’s look at the FAQs.


FAQ 1.1

A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.

FAQ 7.2

Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation:  an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.  Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.   A list of foreign financial institutions or facilitators meeting this criteria is available.


Once the 50-percent miscellaneous offshore penalty applies to any of the taxpayer’s accounts or assets in accordance with the terms set forth in the paragraph above, the 50-percent miscellaneous offshore penalty will apply to all of the taxpayer’s assets subject to the penalty (see FAQ 35), including accounts held at another institution or established through another facilitator for which there have been no events constituting public disclosures of (a) or (b) above (emphasis added).



I called the OVDP Hotline, leaving the usual voicemail message with my question.  Usually, one receives a call-back no earlier than the following day.  This time I received a call back in about an hour.  The OVDP agent told me he’d called back quickly because my question was novel. He said that the IRS position is that the OVDP FAQs are applied literally and to the letter.  The above quoted  FAQs 1.1 and 7.2  (“Frequently Asked Questions” that govern OVDP submissions) state in essence that if you own any interest in a listed bank at any time during the OVDP period all of your accounts are subject to the  50% penalty.  The OVDP agent initially thought, from a literal reading of the FAQs, that the 50% penalty would apply to the daughter’s separate account.   But, he felt that result to be harsh given my client’s unusual facts..  He discussed my question with others in his office and they concluded that the OVDP would follow the stringent rule even in these unfortunate circumstances.  He suggested, however, that when my client’s submission is reviewed by the field agent, I could raise the issue even though the OVDP FAQs are publicly stated to be rigidly applied.  The agent, he said, could elect send the matter to a higher level and a technical specialist would than review that interpretation of the FAQs to the above facts.

Of course, he also said my client could opt-out, but that is not a helpful option for my clients for   reasons not germane to the question discussed in this post.

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



Posted in 214 OVDP, NEW OVDP, OFFSHORE BANK ACCOUNTS | Tagged , , , , , | Leave a comment


New IRS Form for Certification
The IRS in January 2015 issued new Form 14653 (14654 for U.S. persons residing in the U.S.) which revises and replaces the required Certification by. U.S. Person Residing Outside of the Unites States for Streamlined Foreign Offshore Procedures.   Formerly, the Certification statement did not have a Form number.  More importantly, the new form includes in bold-red type-face the following admonition:

Note: You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.

 The above boldface paragraph is followed by the same statement contained in the original Certification format, namely:

Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts. The field below will automatically expand to accommodate your statement of facts.

Although not publicly stated, apparently IRS has been deluged with Streamlined Submissions that do not state an adequate predicate for concluding that the taxpayer’s conduct was non-willful.  At a recent American Bar Association (ABA) Tax Section meeting IRS officials indicated that IRS will not further clarify what level of conduct of the taxpayer will be considered non-willful under the Streamlined Program.

No preclearance for Streamlined Filers
At the ABA meeting IRS officials also indicated that the agency has no plans to implement a preclearance process for Streamlined Submissions akin to the OVDP names preclearance procedure.  Also, taxpayers cannot secure their eligibility (i.e., not under examination) by submitting a letter of intent to enter the program.  Thus, the tax, information returns and certification must be submitted before IRS commences a civil examination of the taxpayer.

Streamlined filings not inexpensive
Not surprisingly in light of IRS’ coyness in refusing to more clearly define non-willfulness, one tax attorney commented at a the above ABA meeting that his firm spends more time on Streamlined cases than on many OVDP cases.  To insure that the Streamlined filing does move the client from the frying pan into the fire (i.e., subject him or her to criminal charges and draconian FBAR penalties), clients are asked to provide bank records, documents showing ownership and signature authority, bank correspondence and are questioned about communications with their return preparer. Certainly, the above is essential for submission by U.S. persons and sometimes for non-U.S. persons but not necessarily for all. For example, if a client has only one offshore bank account located in the country of residence it may not be necessary to review all bank records if the client is certain that no transfers have been made to offshore accounts in other countries. But, what documents should be examined depends heavily on the facts of a particular client.  In every case, however, I personally oversee the submission of the amended or original returns and FBARs and do not leave that part of the process to the return preparer acting alone.

Social Security Numbers required and obtaining one causes delays
The IRS officials acknowledged that taxpayers who need Social Security Numbers for participation in the Streamlined Program are often frustrated by delays of from six to nine months, the time it is taking to obtain an SSN.

Domestic Streamlined Filers receive more scrutiny
While IRS has yet to tabulate statistics concerning the Streamlined Filing Process, it appears that domestic filers are more closely scrutinized.  For example, domestic streamlined cases with five or more foreign information returns are referred to the IRS Large Business and International Division (IRM

Note: The comments of IRS officials and attorneys at the ABA meeting mentioned in this post were obtained from a Tax Analysts article by Andrew Velarde, “ABA Meting: No Letters of Intent Allowed before Entering Streamlined Program,” (February 3, 2015).

© 2015 by Robert S. Steinberg, Esquire
All rights reserved



Today the IRS released IR-2015-9, “Hiding Money or Income Offshore Among the “Dirty Dozen” List of Tax Scams for the 2015 Filing Season” which provides verbatim:

WASHINGTON — The Internal Revenue Service today said avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore,” said IRS Commissioner John Koskinen. “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 50,000 disclosures and we have collected more than $7 billion from this initiative alone.  The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

The IRS remains committed to our priority efforts to stop offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.

Through the years, offshore accounts have been used to lure taxpayers into scams and schemes.

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shut down scams and prosecute the criminals behind them.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced.

RSS Comments:

  1. The IRS is not relenting in its search for those who still have unreported offshore bank accounts and income.
  2. It has expanded its field of view from Switzerland to other regions including the Middle East (Israel), Asia (India and Singapore) and the Bahamas (John Doe Summons issued to CIBC).
  3. IRS tentacles will continue to reach into more jurisdictions that in the past have harbored unreported accounts of U.S. citizens or residents.
  4. The likelihood of being discovered is growing as the IRS data-base grows and IRS is able to link up people and will grow yet faster as FATCA and tax-information sharing arrangements between countries are implemented.
  5. More can expect to receive letters from their offshore banks that names will be disclosed unless the account holders certify U.S. tax reporting compliance or entry into the OVDP.
  6. The penalties presently imposed in the OVDP (27.5 or 50% [for banks on the IRS published list of bad-actor banks] of highest aggregate balance during OVDP period) or outside of the OVDP (as high as 300% of account balance) are not likely to lessen as time goes by and the OVDP miscellaneous offshore penalty may increase yet again at some juncture.
  7. For all of the above reasons, those still out in the cold should contact a tax attorney experienced in OVDP submissions about how to come into compliance with the least risk of criminal sanctions and lowest possible financial pain.


Comments © 2015 by Robert S. Steinberg, Esquire All rights reserved

Posted in 214 OVDP, OFFSHORE BANK ACCOUNTS, TAX, VOLUNTARY DISCLOSURE | Tagged , , , , , , , | 1 Comment


An article authored by Edward Robbins, Jr. Steven Toscher and Dennis Perez, “What’s Your Client’s Criminal Exposure on His Undeclared Foreign Bank Account? (Journal of Tax Practice, October – November 2012 pp 67-74), astutely summarizes the most likely charged tax crimes in an offshore bank account case and what the government must prove to obtain a conviction.  The article was written for tax attorneys but I shall summarize the lessons to be gleaned from the analysis and some not discussed in the article.

From the article:

The two elements that must be present before the Department of Justice will authorize a criminal tax prosecution in an offshore bank account case are a substantial tax deficiency (informally at least $40,000 cumulatively for all years); and, sufficient ‘badges of fraud” to indirectly prove that the taxpayer knew he or she had an obligation to file an FBAR, answer the bank account question on Form 1040 truthfully,  and/or report all offshore income; and, knowingly failed to file, or falsely filed and/or failed to report all offshore income.  The evidence must be weighty enough to satisfy the Department of Justice that the case has a reasonable probability of conviction.

Criminal tax cases require intensive IRS investigations and arduous gathering of proof.  But, once evidence is gathered the cases are not difficult to convict on.

My analysis of risk:

Taxpayers who enter the OVDP obtain certainty that they will not be prosecuted if they comply with the terms of the OVDP process.  Some taxpayers, however, decide to go outside of the OVDP and assume the risk of being found-out, being indicted and going to jail, no less paying a draconian FBAR penalty.  These taxpayers may choose to:

  • Do nothing. They file no amended returns and, do not enter the OVDP. Essentially, they stick their heads in the ground and hope they are not found-out. These are the real gamblers who choose to play the audit lottery. There are so many fish in the barrel, they tell themselves, that IRS will choose another fish. They have a high risk-tolerance and can sleep at night even if the house has faulty electrical wires and may burn down at any moment. But, what if they are the unlucky fish that gets hooked?
  • Make a quiet disclosure by filing amended returns directly with the IRS Service Center instead of going through the OVDP or Streamlined Process. These taxpayers want to hedge their bets a bit. They think if I am caught at least filing returns may mitigate their criminal exposure and civil penalty. Maybe so for some, but then again, maybe not.
  • Certify their non-willfulness and make a Streamlined Process filing. These taxpayers are attracted to the 5% Miscellaneous Offshore Penalty but overlook the risk of making a certification under penalties of perjury and of being rejected from the Streamlined Process. If the worst occurs they will be left out in the criminal and FBAR-penalty cold without an overcoat.

In all of these instances a tax lawyer may be able to give an opinion as to the likelihood of prosecution but no lawyer can give assurances.  There is always the risk of the unlikely indictment. What troubles is that in making these decisions, people often miss the boat in attempting to understand risk.  The make critical strategic mistakes in:

  • Focusing on “risk-tolerance” and not understanding that “risk-tolerance” or a willingness to assume great risk will not earn them a star in the offshore school. They may be willing to live with danger but can they afford to?
  • Not focusing on “risk-capacity” or their ability to withstand the hit should the unlikely come to pass as do all unlikely events with regularity (Chaos Theory).
  • Undervaluing the benefit of having certainty about a prospective result.

Some examples may help to shed light on these concepts:

  1. Consider John Chen, attorney at law. He inherited a $2 million offshore bank account from his grandfather 12 years ago and has not reported the account. He did not inform his tax return preparer of the account and answered “No” to the Form 1040 bank account question. The cumulative unreported income was $100,000. He only visited the bank in Singapore once but did make some wire transfers to the U.S. for the college education of his children. John believes IRS will not discover the account because it is not in Switzerland, the Bahamas, Israel or India, focus countries of the Department of Justice. John wants to repatriate the funds and wait-out the IRS hoping the criminal statute of limitations and civil FBAR penalty will run. He will explain the transfers to his long-term banker and friend as an inheritance so that the bank will not file a suspicious activity report. John has enough other assets so that the OVDP 27.5% penalty would not impact his lifestyle. Is John being smart? The answer is no, John is not being smart. If found-out, indicted and convicted, John would be disbarred and lose his livelihood apart from losing his freedom for a while. John should enter the OVDP which is private, not disclosed to the state bar, and averts the public humiliation of media coverage.
  2. Alfonso Ortiz has a U.S. Green card. He is 72 years old. The facts are similar to that of Mr. Chen but the account is located in Mexico. Alfonso should also enter the OVDP because of his age and also because conviction of a tax crime could result in his deportation from the U.S.
  3. Mac Brown, 83, is a U.S. citizen with $50 million in liquid assets within the U.S. and another $10 million cash stashed away in the Bahamas and titled in the name of Hidden Cash Ltd. Mac loves to go to Las Vegas and is a big-time gambler. He has no problem with rolling the dice over his offshore indiscretions. But, Mac is not thinking clearly. Betting he’s the longshot here would be a large error of judgment. He can well afford the OVDP toll-charge. The $2,750,000 penalty (or, even a 50% penalty if his bank has been publicly spotlighted by the DOJ) would not impact his lifestyle. On the other hand, he would greatly benefit from the certainty of knowing he will not be prosecuted for tax or FBAR violations. At his age, he wants to spend his remaining years enjoying his grandchildren and having something to leave them, not by commiserating with fellow inmates.

For offshore clients, the most valued asset of a tax attorney is wisdom and good judgment.  All can recite the law; but, not all have the maturity and good judgment to constructively advise their client to a sound decision about how to proceed in an offshore matter where the cost of poor or ill-conceived advice may prove devastating.

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

Posted in 214 OVDP, FBARS, OFFSHORE BANK ACCOUNTS, TAX, VOLUNTARY DISCLOSURE | Tagged , , , , , , , , , , , | Leave a comment


Many believe that you can bifurcate the Streamlined Process between the criminal aspect and civil aspect.  That once you have a non-willful opinion from the criminal tax lawyer, the process becomes civil and any competent civil tax lawyer or tax return preparer can by himself or herself complete the filings.  I believe this view to be mistaken.

First of all, the willful non-willful determination can only be made when all of the foreign financial statements and sometimes U.S. bank statements have been reviewed.  Only then will the tax attorney fully understand where all of the tentacles lead and what other communications or even entities may have been forgotten.  Even then, the non-willful opinion is unfortunately just an opinion.  IRS can reject the certification and find the taxpayer ineligible for the Streamlined Process.  There is no appeal from that determination.

Then, where it the taxpayer?  Right back in the criminal or quasi-criminal FBAR penalty soup. Obtaining the criminal tax lawyer opinion will not even necessarily insulate the taxpayer from perjury charges because, unless the lawyer reviews the underlying documents, facts will be taken as given by the client.  In my experience, clients often have a very tenuous grasp of past events relating to their offshore accounts.  Thus, there may be incriminating email or written communications that the client has forgotten about but which can be obtained by IRS directly from the foreign financial institution.

In the event of rejection of the non-willful certification, how the returns have been prepared and submitted may influence whether IRS chooses to indict and/or whether the reviewing agent decides that a draconian FBAR penalty is appropriate.  The returns themselves if carelessly prepared may be viewed as indicating that there is continuing criminal conduct.   In other words, these are not normal, run of the mill tax returns and must be prepared with a different and protective mindset.  Therefore, a lawyer experienced in criminal tax matters should not only determine the willful / non-willful issue but oversee the entire Streamlined submission just as in the case of an OVDP submission.

Is this overkill?  No. When dealing with potential criminal exposure, it is wise to be extraordinarily cautious than to later be regretful for not having been.  For the return preparer the regret may include angst from becoming a witness against his or her client and being sued by the client. Now, there may be some very vanilla cases at the non-willful end of the Bell Curve that do not require such close scrutiny by a criminally informed tax lawyer.  But, few cases are completely straightforward.  In most cases the old trusted saying will prove true: “discretion is the better part of valor.”

Personally, I do not accept engagements to give a willful/ non-willful opinion unless I am to oversee the Streamlined submission.

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


Posted in 214 OVDP, FBARS, OFFSHORE BANK ACCOUNTS, TAX, VOLUNTARY DISCLOSURE | Tagged , , , , , , | Leave a comment


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