STREAMIINED FILING COMPLIANCE PROCEDURES FREQUENTLY ASKED QUESTIONS ADDRESS ONE CONCERN AND CREATE ANOTHER

The IRS occasionally posts updates to its Frequently Asked Questions for the Streamlined Filing Compliance Procedures, both for taxpayers residing in and outside of the United States. The last update of the FAQs was made by IRS on July 18, 2016.The post highlights two question and answers that are notable for taxpayers seeking Streamlined penalty relief.

QUESTION 9 – I realized that I made a mistake in my submission to the Streamlined Filing Compliance Procedures. How do I correct my mistake?

ANSWER: If you made a mistake in your submission to the Streamlined Filing Compliance Procedures and your returns previously submitted are not under examination, you may correct the error by providing amended returns and/or an amended Form 14653. On the top of the certification form, write “amended” in red ink, and on the top of the first page of each corrected amended tax return write “Amended Streamlined Foreign Offshore” in red ink. Explain all facts and circumstances concerning the error in the original Streamlined submission. See SFO FAQ 6 for relevant information to provide.
Mail the amended submission to:

IRS
3651 S. IH 35
MS 6063 AUSC
Attn.: Streamlined Procedures
Austin, TX 78741

Example 1 (amended tax returns and amended Form 14653):
The taxpayer made an SFO submission on February 1, 2016, and she just realized she failed to address a foreign financial asset in the narrative statement of facts on Form 14653. Additionally, she failed to include income from that foreign financial asset on her Forms 1040 for the tax periods in her Streamlined submission, tax years 2012, 2013, and 2014. She must provide amended income tax returns for tax years 2012, 2013, and 2014, an amended Streamlined Certification on Form 14653, and payment for increases in tax and interest. The amended Form 14653 must include all facts and circumstances concerning the error in the original Streamlined submission. Additionally, if the taxpayer made a mistake in filing her FBARs with FinCEN, she must efile amended FBARs with FinCEN.

Example 2 (amended Form 14653 only):
The taxpayer made an SFO submission on February 1, 2016, and she just realized she failed to address a foreign financial asset in the narrative statement of facts on Form 14653. She fully reported all income from the foreign financial asset on her income tax returns in her original Streamlined submission. She must provide an amended Streamlined Certification on Form 14653 including all facts and circumstances concerning the error in the original Streamlined submission. Additionally, if the taxpayer made a mistake in filing her FBARs with FinCEN, she must efile amended FBARs with FinCEN.
Note: This question and answer also appear as FAQ 15 in FAQs for Persons Residing in the U.S.

QUESTION 10 – I am eligible for a Social Security Number (SSN) but do not have one at this time. May I make a submission to the Streamlined Filing Compliance Procedures without an SSN? If I make a submission without an SSN, what are the consequences?

ANSWER: If you are eligible for an SSN but do not have one, you may not use the Streamlined Filing Compliance Procedures. The terms of the Streamlined Filing Compliance Procedures require a valid Taxpayer Identification Number (TIN). For U.S. citizens, resident aliens, and certain other individuals, the proper TIN is a valid SSN. If you make a submission to the Streamlined Filing Compliance Procedures without a valid SSN, then the IRS may process your returns after assigning an IRSN. See IRM 3.13.5.70 and 3.13.5.71. But taxpayers that make submissions to the Streamlined Filing Compliance Procedures without valid SSNs are not eligible for the favorable penalty provisions of the Streamlined Filing Compliance Procedures. The IRS will process such returns subject to penalties applicable outside of the Streamlined Filing Compliance Procedures.
Note: This answer also appears as Question 16 in FAQs for Persons Residing in the U.S.

RSS COMMENTS:
1. Obviously, it is far better to be careful the first time around and not omit income on the Streamlined amended returns, foreign accounts in the Form 14653 or important facts in the Non-willful Certification. But, if inadvertently an error is discovered following one’s Streamlined filling, all is not lost and FAQ 9 provides a procedure for corrections.

2. Regarding the inability to use Streamlined procedures absent a Social Security Number, the IRS position seems unnecessarily harsh for expats who may for many reasons not have obtained an SSN. IRS should be able to come up with a procedure for affected expats to submit Streamlined fillings for example with a temporary taxpayer ID number. The problem with the IRS posture is that it is difficult and time-consuming for an expatriate to obtain a Social Security Number. Not all countries have embassies or consulates that can assist and the process can take many months. In the meanwhile, an audit letter from IRS will make the expatriate ineligible for Streamlined penalty relief. This seems unfair, especially since expatriates frequently fall on the lower rungs of the tax-culpability ladder. Of course, if not negligent, they can obtain penalty relief under the reasonable cause exception rules; but, most would prefer the comfort and greater certainty in qualifying as non-willful, a more lenient standard than “reasonable cause, that the Streamlined Filing Compliance Procedures offer.

Robert S. Steinberg, Esquire
www.steinbergtaxlaw.com

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THE DANGER OF RELYING ON MEMORY IN STREAMLINED NONWILLFUL CERTIFICATIONS

A Wall Street Journal article of July 27, 2016, “How Inaccurate Memories Can Be Good for You,” by Sue Shelenbarger, discusses a number of studies that found benefits to people from even inaccurate memories. More important that accuracy is that fact that recalled events from the past help define ourselves and create plans for the future.

But, these benefits do not change the well-established fact that our belief in the reliability of our ability to recall events accurately is highly overrated. The studies show, writes the author, that “memories are not just a storehouse for facts, but a creative blend of fact and fiction.” The author cites numerous examples of how we distort memories. These unconscious distortions can slip into the narrative that clients will tell attorneys assisting with streamlined filings. Here are some examples.

• The client may fictionalize a past event or just imagine something that never actually happened.
• The client may confuse when the recalled event occurred.
• The client may accentuate the helpful details and ignore or diminish in importance other details.
• The client may change the memory to conform to what is helpful.
• The client may change the memory based on information gleaned from recent sources like the internet.

In fact, we alter a memory a bit every time we recall the happening from our memory banks. The attorney must be attuned to the fact that memory is inherently unreliable. In relating their stories about offshore accounts clients may infer positive facts and ignore inconvenient facts. These distortions may be unconscious tricks of memory or intentional misstatements. The internet, including this blog, contains much information about what facts will likely establish non-willfulness and what acts will likely be viewed by IRS as indicative of willful conduct. People facing a tax noncompliance problem may unconsciously weave these published facts into their own story.

Thus, absolute, unclarified statements of fact based solely on memory may turn out to be false statements. The non-willful certification is signed under penalties of perjury. Material misstatements could lead to a perjury charge. Thus, statements based solely on memory should be preceded by a clarification or disclaimer phrase, “to the best of my recollection and belief.”

Still, the attorney should carefully interview the client to try to prod and probe his or her memory, to challenge inconsistencies, to seek the truth about how the offshore account came to be opened and how it was operated, from where funds came and to what other accounts funds were transferred; and, to establish the real beneficial owners of the accounts.

To the maximum extent possible statements of fact should be based on documentary evidence such as the account opening documents, withdrawal and deposit slips, bank statements, correspondence and emails. The foreign financial institution will likely have these documents and may also have recordings of telephone discussions. Do not assume that the truth will not be uncovered.

Relying on memory alone in making statements in the streamlined non-willful certification is dangerous.  As previously stated, the attorney should add a clarification or disclaimer statement for any facts included in the non-willful certification that are based solely on the client’s memory.

The first rule for any attorney assisting clients out of compliance is “Do no harm.” Do not make things worse than they are already by filing an inaccurate non-willful certification. The non-willful certification is an affidavit that should be given the respect any document signed under penalties of perjury deserves. Caution should be the watchword. Make sure that the non-willful certification is truthful, detailed and completely transparent, stating both good and bad facts.

Robert S. Steinberg, Esquire
http://www.rss@steinbergtaxlaw.com

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MORE ON INHERENT RISK IN STREAMLINED NON-WILLFUL CERTIFICATIONS

I have posted often about the risk of using the Streamlined Filing Compliance Procedures, specifically about the risk of making a statement under penalties of perjury of the reasons the taxpayer believes his or her conduct in failing to comply with the filing and reporting obligations was non-willful. For example, see post of 3/12/16“For Whom the Bell Tolls on Streamlined Filings”).

These non-willful affidavits must be included in both Form 14653 for persons qualifying as residing outside of the U.S. and Form 14654 for persons not so qualifying and considered to be residing inside the U.S.

The IRS and Department of Justice continue to emphasize that they are mining the data received from third-party sources and will compare such information with the information included in Non-willful Certifications submitted with streamlined filings.

For example David Voreacos in “Justice Department examining declarations of innocence,” (Bloomberg Law, 7/1/16) quoted Department of Justice Tax Division trial attorney Nanette Davis from her comments at the NYU Tax Controversy Forum, “We’re taking all that data and scrubbing it for leads.” She is said to have also noted that some of the data received could lead to prompt indictments.

The data she is referring to relates mainly to that received from Swiss banks under the Swiss Bank Settlement Program. These banks who had entered into non-prosecution agreements with the DOJ were permitted under altered Swiss bank secrecy rules to hand over account information including communications and recordings of conversations. Thus, taxpayers who had accounts with any of these Swiss Banks or with Swiss banks under criminal investigation by the DOJ (Category 1 banks) who attempt to make streamlined filings are at great risk. But, this warning also applies to taxpayers who had accounts at any bank or financial organization on the IRS list of enabling banks that subject an OVDP participant to the higher 50% miscellaneous offshore penalty (See OVDP FAQ 7.2). These individuals probably should be entering the OVDP if they still qualify, that is, if IRS or DOJ still does not have their names).

As for streamlined filings, the lynchpin to a successful effort, continues to be a non-willful certification that is complete, truthful and accurate, and, which states both the helpful facts as well as facts that are not helpful or which tend to imply willfulness. One can and should explain the bad facts but trying to cherry-pick facts may get the taxpayer into a heap of trouble. That troubles-heap could include criminal sanctions, substantial civil FBAR penalties, and income tax assessments, interest and penalties for all years open under statutes of limitations provided for in the Internal Revenue Code, Bank Secrecy Act and general federal criminal code (Title 18 of the United States Code). For an extensive discussion of the impact of statutes of limitation see post of 8/10/15, “Statutes of Limitation and Streamlined Filings or File Forward Strategies.”

Robert S. Steinberg, Esquire
http://www.steinbergtaxlaw.com

 

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COMPARISON CHART – OVDP VS. STREAMLINED FILING COMPLIANCE PROCEDURES

COMPARISON CHART – OVDP VERSUS STREAMLINED

© 2016 by Robert S. Steinberg, Esquire. All rights reserved

http://www.steinbergtaxlaw.com

 

CHARACTERISTIC OVDP STREAMLNED
Up Front Qualification? Yes -Names clearance (30 days) & Provisional acceptance after OVDP letter (45 days) – CI reviews for specific info received about taxpayer & reviews OVDP letter for completeness. No – Not told up-front

if qualifying

 

 

 

 

 

Eligibility requirements

Individuals, estates, or entities – E.G, corps, partnerships, trusts (FAQ 13)

Offshore but can include Domestic

 

 

 

Generally, Unreported income

Not presently under examination – civil or criminal

• Civil exam start – receipt of audit letter (i.e., 2202, 2202B, 2205A

• Exam end – signed 4549 & IRS acceptance letter 987 (agreed) received

• No open NOD

Individuals or estates – not entities

(U.S. Citizen, Green Card, SPT.

For offshore but can include domestic

Generally, Unreported income (see FAQ 7 for persons living in US)

 

 

Not presently under examination – same meaning as for OVDP

Source of income test

 

 

Non-willful certification

 

 

No residency test

 

 

 

 

 

Must cooperate

 

 

Make good faith arrangements to pay

 

Meet requirements of IRM 9.5.11.9 which encompasses the above.

 

.

 

Legal source

 

 

 

N/A – but if op-out must support reasonable cause or non-willful or mitigation

 

Residency test – 2 groups

·         Outside US – No US abode (where live) & 330 days out.in any look back yr.

·         Living inside US.- Fail to meet living outside test

No cooperation required but see IRM Vol. Disclosure rules

 

Must pay with filing –   Probably could request installments – Call OVDP Hotline.

Streamlined filing might meet IRM Vol Disclosure test if complies with IRM 9.5.11.9

Legal source

 

 

Legal source

 

Must submit under penalties of perjury – see below

Non-willful = Negligence •

• Inadvertence • Mistake

• Conduct resulting from good faith misunderstanding of requirements of law.

Joint of separate returns? Spouses may submit jointly or separately or only one may submit Joint original return – must file joint amended return.

Spouse won’t sign – submit joint return with one signature if return shows net increase in tax due.

 

 Returns eligible

 

 

Due diligence required?

Filed or unfiled

 

 

Yes

Only filed 1040s or 1041s if living in U.S.

File & unfiled if outside U.S.

 

Yes

Years included Eight for which due date of 1040 passed

FBAR inclusion linked to 1040 years included. (due 90 days following provisional acceptance)

3 for which due date of 1040 passed; 6 for which due date of FBAR passed.

Exclude compliant years from submission.

Criminal amnesty? Yes No, but perhaps Vol Disclosure
Income tax penalty 20% accuracy related, FTF (if delinquent returns filed), FTP Outside US

None for amended or delinquent returns.

• Living inside US

None – for amended returns.

• If audited

None for reported assets or income as long as original return not fraudulent & FBAR not willful.

Any additional deficiency subject to all penalties.

• Previously assessed penalties – not abated.

 

Misc. Offshore Penalty 27.5% to 50% if any account with enabler bank at any time during OVDP period. Living out of U.S. – none

Living in U.S. – 5% (if non-willful)

(audit – as for income. Tax)

Asset Base for Offshore Penalty

 

 

 

Valuation

 

All assets connected to non-compliance – FAQ 35

But, not assets for which income was reported – FAQ 45

Any reasonable method

Foreign Financial Assets not correctly reported on FBAR or 8938 or income on such assets not reported even if asset on FBAR or 8938.

Year-end balances.

Amount penalty applied to Highest aggregate value for year in OVDP 8-year period Highest year-end aggregate balance in Streamlined six-year period
Certainty of result – civil?

 

 

Certainty of result – criminal?

Yes as to foreign issues – unless opt-out. No as to domestic issues.

Yes

No

 

 

No

SOLs Applied?

 

 

872 Required to be signed?

No – unless opt-out as to foreign issues.

Yes – domestic issues if audit

• Yes & FBAR extension

Yes – In theory IRS can audit back more than 3 years – but

would frustrate stated goal.

• No 872 or FBAR extension

Time to complete 1 ½ year to 2 years Usually 1-3 months to filing
Automatic audit? No (open only as to domestic issues) No (but all issues fair game)

Penalties – see above

Public disclosure? No No
Suggested for

 

 

 

 

Tax criminal, or

Civilly willful

Non-willful or reasonable cause but wanting to cut risks of non-willful FBAR penalty & income tax penalties if quiet filing.
Special PFIC rules available? Yes, FAQ 10 No
Document production scope Large – FAQ 25 Non-willful certification
Cost Extremely expensive Expensive
Phases Five: (1)names clearance (2) OVDP Letter.(3) Package submission (4) Agent review (5) Closing agreement One: File returns with Non-Willful Certification (Form 14653 or 14654)
Concluded by Signing Form 906, Closing Agreement on Final Determination Covering Specific Matters No document signed – No acknowledgement – Must wait out SOLs.
Payment due With package submission but not being strictly enforced With Streamlined Filing
Foreign entity reporting relief? Yes – For nominee entities – if Statement of Abandoned Entities filed.(FAQ 29) No- all required foreign reporting forms must be filed.
Relief for Canadian Registered Retirement Income Fund – failure to elect Treaty deferral? Yes – under Rev. Proc. 2014-55 (FAQs 54.2-54.4) Yes – under Rev. Proc. 2014-55 (FAQs 8 – 12 for persons living in US & FAQs 2 – 5 for persons living outside the US)
Last 3 years compliant – but FBARS not filed for years 4-6 going back N/A – if not criminal or civilly willful If no reasonable cause – file Streamlined using FAQ 7 for per persons living in US).
Posted in OFFSHORE VOLUNTARY DISCLOSURE PROGRAM, STREAMLINED FILING COMPLIANCE PROCEDURES | Tagged , , , | Leave a comment

WAITING IS A DANGEROUS GAME FOR THOSE STILL NOT IN COMPLIANCE WITH FOREIGN REPORTING RULES

Over 55,000 taxpayers have come into compliance by entering the Offshore Voluntary Disclosure Program. An untold number of less culpable non-willful taxpayers have come into compliance under the Streamlined Filing Compliance Procedures.  Some with reasonable cause have used the delinquent FBAR procedures or delinquent foreign reporting form procedures or have made “quiet disclosures.”   But, many more are still out of compliance with U.S. tax law.  Those still out in the cold, so to speak, run the gamut of culpability ranging from not negligent (reasonable cause) to non-willful (streamlined eligible) to civilly willful but not criminal to criminal conduct.

Whatever the reasons for not having come into compliance the time is growing very late for taking action that will avoid the most severe FBAR civil penalty or criminal indictment. Said simply, it is becoming more difficult to find how someone would not have known about the FBAR and foreign reporting requirements as more and more is written about these matters in the press.  That is not to say, however, that it has become, as the one Department of Justice Tax Division senior official has recently indicated, inconceivable that one failing to file a 2015 FBAR would not have known about the filing obligation.  But, it is definitely more difficult to establish facts that explain how a person would not have known.

Not only is it becoming continuously more difficult to establish non-willfulness for the Streamlined Program, but it is becoming increasingly more likely that one’s non-compliance will be discovered or made public. A taxpayer becomes ineligible for the OVDP if the IRS or DOJ have identified him or her as being connected to offshore non-compliance. Taxpayers under examination (received an audit letter) are ineligible for the Streamlined Program.  Thus, sticking your head in the sand can have disastrous results. You are virtually a letter away from a much more expensive proposition to come into compliance or, even worse, possible incarceration.

Think you have a good hiding place? Think your bank or advisors keep secrets?  It the so called “Panama Papers” proves anything it is that the expectation of complete secrecy and privacy are fantasy.  Somebody always knows, governments are always snooping, criminals always obtain and sell information and hackers always breach security systems for the satisfaction of revealing private information.  Those who still think otherwise are deluding themselves. The Swiss veil of secrecy was pierced and other walls of secrecy are crumbling all over the globe.  And the news will get worse, not better.  Just a few developments:

  • Already, some 100 countries have adopted the OECD Common Reporting Standard (CRS) for sharing information aimed at deterring tax evasion.
  • Beginning in 2017 some 60 early adopters of the CRS will begin to automatically exchange 2016 financial information (AEI) for financial institutions including banks, brokers, custodians, etc. The information reported will include information such as the account holder name, address, country of residence, date of birth, account number, account balances and, gross earnings
  • The G-20 countries are considering further sanctions on tax havens that refuse to adopt the OECD information sharing regime.
  • The DOJ is marshalling information gleaned from 100 banks through the Swiss Bank Settlement Program. The DOJ and IRS will be carefully reviewing information obtained from these banks and under treaty requests. They also have information from whistleblowers and cooperating witnesses.
  • The U.S. Treasury is considering rules that will require the disclosure of beneficial owners of shell entities formed in the U.S.
  • The IRS has amassed a large data-base from OVDP submissions that enables it to cross reference and cross check names in search, countries, banks, enablers in search of other tax evaders.
  • The DOJ and IRS are extending their investigatory tentacles beyond Switzerland to the Caribbean, Middle East, Asia and Central America. The net is being cast farther and wider.
  • FATCA coming online has resulted in foreign banks implementing due diligence practices with regard to depositors. U.S. citizens are being asked to complete Form W-9.
  • The DOJ has opened a criminal investigation regarding matters pertainig to the Panama Papers.  This development should come as no surprise to anyone.

Moreover, the IRS continues to stress that the OVDP and Streamlined Programs are not permanent programs and may be ended or changed at any time. Recall that the Miscellaneous Offshore Penalty has already been increased four times going from 20% (2009) to 25% (2011) to 27.5% (2012) and to 50% for those with accounts at listed enabler foreign financial institutions (2014).

The net is tightening around those who are still out of compliance. When someone has dug himself or herself into a hole, the first step to solving the problem is to stop digging. Fleeing from one bank to another or one country to another digs the hole deeper.  Those who engage in funds-flight are simply creating evidence of wilfulness.

Stop digging the hole deeper. Consult with a tax attorney experienced in these matters. There is no one-size-fits-all solution.  The OVDP may be appropriate for one taxpayer and may be overkill for another.  Similarly, the Streamlined Filing Compliance Procedures may be safe, if handled properly, for one taxpayer but very risky for another.  Filing quietly based on reasonable cause may also still be appropriate for some who can clearly establish that their actions in not filing did not amount to negligence.

Deliberations about which course has the best chance of arriving at a safe harbor for a particular taxpayer is a matter for the experienced tax attorney. CPAs and other non-lawyers, or, even lawyers who lack experience in this practice area, should not advise taxpayers about whether they should enter the OVDP or employ another means by which to come into compliance.. Further, whatever path is chosen, the execution of the plan should be overseen by the tax attorney.  Filing returns under these programs should never simply be handed over the return preparer, however competent a return preparer he or she may be.  The entire process, whether OVDP, Streamlined or quiet disclosure, is definitively legal in nature, with criminal possibilities tottering about if not handled properly.

Robert S. Steinberg, Esquire
www.steinbergtaxlaw.com

 

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OFFSHORE NONCOMPLIANCE: THE NIGHTMARE THAT MORNING DOES NOT END

From every bad dream there is an awakening. Morning brings you back to sanguinity.For those with offshore activities who are out of compliance with U.S. tax law, however,  morning will not come unless and until they undertake some course of action to cure the malady. The Panama Papers scandal demonstrates that there is no secret that cannot be uncovered.  Someone always knows and someone is bound to be snooping and hacking these days.  So, using the ostrich defense of sticking your head in the sand and hoping the problem will disappear is increasingly dangerous.

What corrective action is required depends on what kind of non-compliance is presented. Non-compliance can involve:

  • Failing to report income from offshore activities such as foreign bank account interest, foreign mutual fund profits or rentals from real estate located outside of the U.S.
  • Failing to file various U.S. foreign reporting forms such as Form 5471, Form 3520 etc.
  • Failing to file FBARs.
  • A combination of all three of the above.

These failings must be legally characterized under various U.S. laws, regulations and case-law authority as criminal, civilly willful or non-willful, reckless, grossly negligent, negligent or due to reasonable cause (meaning not negligent).

Thus, the tax lawyer is the central figure in helping a taxpayer come into compliance. This blog post will discuss the alternatives for coming into compliance and tax lawyer’s role in OVDP and Streamlined Filings.

 

OVDP

To begin the climb out of non-compliance the taxpayer should retain an experienced tax attorney to address where his or her conduct falls on the above ladder of culpability. Those who’ve failed to report income most often will end up in the OVDP or use the Streamlined Filing Compliance Procedures.  The tax lawyers task it to:

  •   Determine if the taxpayer should enter the Offshore Voluntary Disclosure Program.
    • An OVDP submission may be necessary if the taxpayer has exposure to criminal prosecution or to the civil fraud penalty, maximum FBAR civil penalty or large income tax in earlier years for which the statute of limitations on assessment has no expired.
    • An OVDP submission may be suggested for those who cannot subject themselves to even a remote risk of criminal conviction. For example, an attorney who would be disbarred, a visa or greed card holder who could be deported or older individuals for whom prison or a draconian fine would be devastating.
    • The attorney and not the CPA preparer should oversee the entire OVDP process. The attorney should carefully monitor and supervise the CPA’s work and review all positions taken in the tax returns and FBARs being submitted to the OVDP.   Returns submitted to the OVDP are part of a criminal process and therefore require the preparer and lawyer to undertake a due diligence process to verify information being reported in the tax return. This process is unlike that which applies to timely filed returns outside of the OVDP where the preparer can accept information provided by the client as long as it is reasonable on its face.

The Streamlined Filing Compliance Procedures may be more appropriate for many taxpayers, especially for expatriates living abroad.

If the taxpayer is not a tax criminal and does not fear the draconian consequences discussed above, the tax lawyer must determine eligibility for the Streamlined Process with the understanding that IRS has the final say on eligibility and there is no guarantee of its agreeing with our determination. If the taxpayer is determined to be a candidate for a streamlined filing, the lawyer further must:

    • Draft the required non-willfulness statement required under the Streamlined Filing Compliance Procedures (Streamlined Process) of the Internal Revenue Service.
    • Review the returns, related foreign forms and FBARs prepared by the return preparer to make sure nothing in the returns could be viewed as untruthful or as indicating a lack of candor, being misleading, or being inconsistent with the non-willful certification.
    • Prepare or suggest exculpatory statements to be included in the return, where appropriate, for example, if estimates or assumptions are employed due to any necessary records required for U.S. tax reporting not being available.  This is not uncommon because non-U.S. banks do not have programmed the generation of U.S. tax information forms.
    • Review the final streamlined package and submit to IRS with a cover letter.

The remainder of this blog post shall deal with the Streamlined Process. I have many other blog posts dealing with the OVDP. Search The Tax Wars Blog using key word “OVDP”

Streamlined Filing Compliance Procedures (Streamlined Process)

The Streamlined Process is a special program under which IRS provides a relatively simpler route by which many U.S. taxpayers cam potentially resolve past tax oversights and become compliant with U.S. tax reporting rules regarding income, foreign bank accounts or other required foreign reporting forms.

Streamlined eligibility

The program is aimed at taxpayers who are not tax criminals and who meet the following eligibility requirements.

    • Meet a certain residency or non-residency tests.
    • If residing outside of the U.S., Have filed returns or have unfiled returns for the past three years for which the due date has passed.
    • If residing inside the U.S., have filed returns for the past three years for which the due date has passed.
    • Have failed to report the income from a foreign financial account as required by U.S. tax law and / or failed to file correct FBARs.
    • Certify that the failure to report all income, pay all tax and submit all required information returns was due to non-willful conduct. The courts and IRS have defined willfulness as “the intentional violation of a known legal duty.” That phrase is easier to recite than to clarify and IRS has been coy about how aggressively it will review taxpayer certifications of non-willfulness. The test turns on both factual analysis which IRS seems to want to apply a “gut-test” and legal conclusions from those facts. With regard to eligibility for the Streamlined Process, IRS has the final say. For a more comprehensive  discussion of willfulness read my blog post on www.the-tax-wars.net “Will-O-The Wisp Willfulness in the Streamlined Process “(9/1/14)).

The Streamlined Process benefits

    • Allows one to come into compliance by filing only three years of returns and six years of FBARS instead of the eight years of returns required under the OVDP.
    • Avoids the OVDP harsh penalty regime which, may be inappropriate for many who are not tax criminals or willful violators and in all fairness should not be subject to the maximum FBAR penalties for willful violations. Instead, the Streamlined Process allows those residing outside of the U.S. to come into compliance without paying any FBAR penalty on unreported foreign financial assets or accuracy related penalty (can be 20%) on any increased income tax liability (persons residing inside the U.S. must pay a 5% FBAR penalty).
    • Removes the cloud of fear hanging over one’s head about discovery of the non-compliance and possible passport revocation or non-renewal.
    • Brings the taxpayer into compliance without identifying him or her as a tax-violator and without disclosing to the public that he or she has entered the program.

Expatriates versus persons living in the U.S.

Expatriates may find it less difficult to qualify for the streamlined filing benefits because they are less likely to have learned of the U.S. filing and report obligations before FATCA kicked-in.  Now, they are learning of these obligations because their foreign banks, which are not foreign to them, are contacting them and requesting Forms W-9.  Persons living in the U.S. have a more arduous task in convincing IRS that their conduct was non-willful.  But, these are very fact-intensive determinations and no two cases I have seen are quite the same.  The person with a Masters in Taxation is obviously held to a higher standard of care and knowledge than a person with a high school diploma who works as a sales clerk.  What would a reasonable person with the same educational background and work experience be expected to have known about reporting offshore income or filing FBARS?   What distractions arising from work, health and family were going on in their lives during the reporting period?  Answering these questions goes a long way towards resolving whether the taxpayer’s conduct was willful or non-willful.

The waiting period

Unlike the OVDP, the streamlined filer will not initially know if IRS has accepted them into the Streamlined Process. While an IRS audit of streamlined filed returns will not be automatic, returns may be selected for audit under normal IRS audit guidelines and IRS may determine that conduct, in its eyes, was not non-willful. In that case, IRS could go back further than three years and could assert an FBAR penalty at the conclusion of the audit process. The IRS would have to act within the period allowed under law for making income tax assessments, normally three years unless large amounts of income (more than 25% of all income reported) are found to have not been reported in your returns. This limitations period on making assessments would start to run from the filing date of  returns. These limitations periods, however, do not apply to a year for which IRS successfully proves that fraud was committed in filing the return. The limitations period for IRS assessing the FBAR civil penalty is six years from the due date of the particular FBAR. For a fuller discussion of the impact of limitations periods, read my blog post on www.the-tax-wars.net “Statutes of Limitations and Streamlined Filings or File Forward Strategies” (8/10/15).

Paths into compliance outside of the Streamlined Process 

Those who can establish that they were not negligent may still be able to file amended returns outside of the streamlined procedures and pay no penalty: but, tax counsel must feel strongly that they meet the legal standard in having a reasonable cause for  not having timely filed or reported. These will usually involve exceptional factual situations where events beyond the taxpayer’s control prevented compliance.

Those who have reported all offshore income but have failed to file FBARs or other foreign reporting forms can follow either the delinquent FBAR procedure or the delinquent foreign reporting form procedures found on www.irs.gov.

A word about return preparers

There are many capable return preparers in the U.S. But, not all capable return preparers are familiar with the unique issues involved in making an OVDP submission or in filing returns under the Streamlined Filing Compliance Procedures. These are not ordinary return filings and the preparer should be familiar with the OVDP or streamlined process and understand the additional due diligence necessary in preparing returns for these programs. In addition, returns with offshore activities present complex tax issues that many return preparers do no regularly encounter in their tax practice. These can include such matters as Passive Foreign Investment Companies, Forms 5471 filings, Forms 3520, special nominee entity rules to name just a few. Thus, I will not accept an engagement unless the client also engages a return preparer who is experienced in these matters.

Conclusions

The most difficult aspect of offshore non-compliance cases is determining the surest course to a safe harbor that is reachable with the least burdensome cost. Taxpayers and lawyers need to be aware that as more time passes, non-willfulness becomes more difficult to establish.   The Department of Justice has stated it is becoming skeptical of non-willfulness claims and intends to compare streamlined certifications of non-willfulness with information it is receiving from other sources. In light of these remarks, taxpayers and lawyers need to take great care in preparing accurate, truthful and transparent streamlined affidavits. The affidavit should state both favorable and unfavorable facts. Caveat: if too unfavorable, statements may add up to admitting facts sufficient for an indictment. That is why streamlined filing should be overseen by an experienced tax attorney. There is a fine line between helping a client out of a jam and getting them into an even bigger jam. Do not harm is always my legal gyroscope.

What should be very clear and require no further elaboration? Taxpayers still out in the cold should act sooner than later to retain counsel and start the wheels in motion that will bring them into compliance. Waiting is a sure no win game at this juncture.

© 2016 by Robert S. Steinberg, Esquire
www.steinbergtaxlaw.com

Posted in OFFSHORE VOLUNTARY DISCLOSURE PROGRAM, STREAMLINED FILING COMPLIANCE PROCEDURES, Uncategorized | Tagged , , , , , , , , , | Leave a comment

FOR WHOM THE BELL TOLLS ON STREAMLINED FILINGS

A Tax Analysts Tax Notes article (Richman, Nathan J., “International Tax Enforcement Efforts Include Civil Tools”) quoted Acting Assistant Attorney General of the Department of Justice Tax Division, Caroline Ciraolo who was speaking at the March 4th Federal Bar Association Section on Taxation annual meeting. Ms. Ciraolo stated:

After three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received.

The Acting Assistant Attorney General suggests that it would seem extraordinary at this late date that anyone with an unreported offshore bank account could convince IRS that a lack of knowledge on their part was the cause of their non-compliance with the tax filing and reporting obligations.

Her statement, not unreasonable on its face, seems to me to overstate and oversimplify the determination of willfulness versus non-willfulness.

For one thing, the publicity to which the Assistant Attorney General refers, while widespread is not part of the mass media news that most regular people digest. FBAR news and prosecutions is not usually mentioned on the nightly local TV news or reported with great fanfare in the non-financial daily newspapers.

Her statement is most appropriately related to those who opened accounts in tax havens with funds originating in the U.S. and who employed all sorts of devious means to hide their identity from the IRS. These people are not your average ordinary person but are the tax criminals who should have entered the Offshore Voluntary Disclosure Program. For a list of overt acts that usually accompany a tax crime see my post, “If You Did These Things You Belong in the OVDP.” (11/6/2015).

For those in this category who have yet to come forward, the bell is tolling loudly. The IRS having concluded its Swiss Bank Settlement Program with almost 100 banks is shifting its focus to banks in other countries that have assisted U.S. persons with evading tax. These countries of new emphasis include, but are not limited to: The Bahamas, The Cayman Islands, Australia, India, Singapore and Israel.

But, those not committing overt acts in an attempt to evade U.S. tax are not home free. For, civil willfulness does not necessarily require overt acts of commission and the civil FBAR penalty may apply to one who is not a tax criminal. When present, overt acts often represent the nails in the coffin of willfulness, if not establishing a tax crime.

Willfulness for purposes of assessing the draconian FBAR civil penalty can be established by showing knowledge of the obligation to file and intentionally not filing.

The Streamlined Filling Non-willful certification is all about stating facts that show negligence, even gross negligence, or ignorance, but do not indicate knowledge of the reporting and filing rules and intentionally ignoring them. This analysis is both legal and factual and must delve into all of the facts surrounding the opening and operation of the offshore account – the why, from what source, how, when, where, who, and for how long.

Some examples of facts relating to the non-compliant-non-tax-criminal person, which, if present, might tend to evidence lack of knowledge and intentional non-reporting are:

  1. The person has no post-secondary school education.
  2. The person has a BS and Master’s Degree in Biology or other technical field and not one in taxation or finance with courses in taxation.
  3. The person inherited the account from a parent who lives in the foreign country.
  4. The person did not transfer funds offshore; but, rather the funds in the account originated offshore.
  5. The person has a close connection to the foreign country with family there with frequent visits.
  6. The person works as an IT specialist and has no background or contact with tax issues and international finance.
  7. The person works as a department store clerk or in another non-skilled job.
  8. The person prepared his or her own tax returns and misunderstood the program instructions. I’ve seldom reviewed a self- prepared return with offshore activities reported correctly.
  9. The person is an expatriate living in a high tax country and owes little tax to the U.S.
  10. The person living out of the U.S. has bank accounts only in his or her country of residence which are not viewed by him or her as foreign but as their local bank account.
  11. The person has recently immigrated to the U.S. and has been preoccupied with adapting to the new country, culture, lifestyle, language or a new spouse.
  12. The person who recently immigrated to the U.S came from a country that does not tax its citizens on world-wide income.
  13. The person living in the U.S. or outside of the U.S. has during the filing period suffered severe emotional, medical, family or business hardships.
  14. The person is not a sophisticated investor whose investments consist solely of an employer 401(k) and IRA.
  15. The person’s tax return preparer was a store-front operator who did not inquire about offshore bank accounts or provide a tax organizer to clients.

The above list represents but a handful of illustrative facts that combined with other facts might help establish that the non-compliant person’s conduct was not willful. The analysis and determination of what these individual facts collectively mean is a job for a tax attorney experienced in these matters. CPAs, however competent in preparing tax returns, are not trained to decipher this difficult and consequential legal question: Whether a client’s conduct is criminal, willful or negligent. The consequences of getting this determination wrong can be disastrous.

Finally, the increase in OVDP penalty from 27.5% to 50% for taxpayers with accounts at banks that IRS has added to its list of facilitators, has motivated some attempts by willful tax-evaders to sneak into compliance by making a Streamlined Filing.  The DOJ has stated it is on the lookout for Streamlined Filings that state facts inconsistent with facts it has obtained from other sources such as banks who has signed Non-prosecution Agreements under the Swiss Bank Settlement Program.   These taxpayers might include the so called “Leavers” who have transferred funds to other countries or smaller Swiss Banks from UBS or other large Swiss banks under criminal investigation in the hope of avoiding detection, or, those who have used nominee entities to hide their identity. Those in this category who’ve made Streamlined Filings have chased Fool’s-Gold seeking a lower penalty all the while subjecting themselves to much greater risks, yet higher penalties (generally up to 100% under IRS published guidelines) or criminal prosecution. Acting Attorney General Ciraolo suggested in her March 4 comments that these ill-considered taxpayers might be able to gain entrance into the OVDP, notwithstanding that the OVDP FAQs suggest otherwise. Whether such efforts are wise or would prove fruitful remains to be seen.

The OVDP remains the avenue of choice for tax criminal and those who rightfully fear maximum willful FBAR penalties even if there is insufficient evidence to convict them of a crime. The Streamlined Filing Compliance Procedures remain viable for those who can establish that their conduct did not amount to an intentional violation of a known legal duty to file an FBAR or report offshore income.

The bell has certainly not tolled on all Streamlined Filings but the process is risky and the taxpayer should employ an experienced tax attorney. The attorney should conduct a voir-dire examination of the client to make sure that the client’s explanations appear truthful and not rehearsed, or learned from the internet, and, should ascertain that sufficient facts are present to support non-willfulness and that the affidavit in support thereof is completely transparent, stating both favorable and unfavorable facts.

© 2016 by Robert S. Steinberg, Esquire
AV rated (preeminent) by Martindale Hubbell
www.steinbergtaxlaw.com

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