“Beware of false knowledge; it is more dangerous than ignorance.”

– George Bernard Shaw

Shaw’s admonition is applicable to the recently announced Streamlined Process and Transitional as alternatives for resolving offshore noncompliance exposure of U.S. citizens and residents.  Calls I’ve received from several accountants and taxpayers demonstrate that many are aware of these new alternatives but are ignorant of the nuances, complexities and risks of attempting to utilize them, or, of what other alternatives remain.  Deciding how to proceed in offshore cases depends entirely on the specific facts of each taxpayer and requires both knowledge of the law and sound judgment in applying it.  Given that, one can still state some obvious and general advantages and disadvantages of these alternatives to the OVDP as related to U.S. citizens or residents.  I’ll discuss expats in a later blog entry.

Streamlined Procedures for U.S. citizens or residents

• Who can utilize? See my blog post of June 19, 2014, “Initial Thoughts on IRS Changes to Offshore Voluntary Disclosure Program and Streamlined Process for Non-willful Taxpayers.”
  • Must be U.S. Citizen, Green Card holder or tax resident by virtue of having spent too much time in the U.S. over 3 year a testing period (Substantial Presence Test) not residing overseas.
  • Must not be currently participating in the OVDP
    • Submitting names for clearance or even receiving clearance letter is not participation.
    • One is participating upon having mailed the OVDP Letter and required attachments and until signing of the Form 906, Closing Agreement or, if opted-out, until a letter initiating an examination has been received together with a Notice 609.
  • Must have previously filed a US. return for each of the most recent 3 years for which the return due date has passed.
  • Like the OVDP, must have unreported income from a foreign financial asset. There may also be delinquent FBARS.
  • Must not already be under civil examination by IRS or under criminal investigation by IRS are ineligible
  • Taxpayers who are in the OVDP as of July 1, 2014 may qualify for special transitional rules that allow them to elect the Streamlined Process but with certain modifications.
• Advantages of Streamlined Process:
  • Three year income tax filing period in lieu of 8 year OVDP period.
  • Six year FBAR filing period in lieu of the * year OVDP period.
  • In lieu of the OVDP penalty of 27.5%, an offshore penalty of 5% will apply to the aggregate highest ending balance over the three-year period.
  • Lower tax and interest due to fewer returns amended.
  • Lower legal and accounting fees due to less work required.
  • No 20% accuracy related penalty on the income tax reported in the disclosure unless an examination shows fraud or willfulness.
  • No automatic audit – rather return processed like any other return and selected for audit under normal IRS procedures ( but see disadvantages below)
• Disadvantages:
  • Must certify under penalties of perjury (“Certification of U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures”) that:
    • “My failure to report all income, pay all tax, and submit all required information returns, including FBARS, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of good faith misunderstanding of the requirements of the law.’
    • “I recognize if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could led to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.”
    • IRS has stated that submissions under the Streamlined Process may be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors and other sources. Therefore,”Taxpayers who are concerned that their failure to report income, pay tax and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/ or substantial monetary penalties should consider participating in the OVDP and should consult with their professional tax or legal advisors.”
    • My worry: clients often have a fuzzy, or worse inaccurate recollection of details pertaining to opening their account or accounts, what was discussed and what was written in emails or other communications. IRS or DOJ may obtain information from banks that differs from what the client remembers.
    • Another worry: the willful versus non-willful characterization is a partly subjective analysis that depends to a large extent on the “eyes of the beholder.” Thus, IRS may view as willful that which the taxpayer and even the best counsel may have perceived as non-willful.
    • Certification is a confession or at least an admission of all of the facts regarding opening and operation of the offshore account.
    • If willful other penalties may apply, e.g., civil fraud penalty.
  • Cannot enter OVDP if apply but found ineligible for Streamlined Process. Hence, no criminal immunity if IRS determines non-compliance was crime.
  • Not available for delinquent returns.
• Some general considerations:
  • Ends of the bell Curse are easy:
    • Those with facts at the non-willful extreme should normally not enter the OVDP but either –
      • Enter the Streamlined Process.
      • File amended returns with a reasonable cause and non-willful explanation.
      • Use the new option for filing delinquent FBARS if all income has been reported but FBARS not filed (Replaces old FAQ 17).
      • Use the new option for filing delinquent information returns such as Forms 3520 or 5471 if all income was reported but information returns not filed (replaces old FAQ 18)..
    • Those with facts clearly indicating willfulness, are probably tax criminals and should normally enter the OVDP.
  • Those in the middle of the Bell Curve have a difficult decision.
    • In most instances, safer to go OVDP and deal with the 8 years filings.
      • The income tax owed and 20% accuracy penalty are often modest and not game changers.
      • Opting-out:
        • If no notice of exam received can still enter the Streamlined Process but then must deal with Certification and exposure to criminal charges since there is no immunity under the Streamlined Process.  The lack protection from criminal prosecution makes this  a very risky strategy
        • Or, can just opt-out and face audit for all open years, subject to all penalties and mitigation of the FBAR penalty under the Internal Revenue Manual Guidelines, if IRS determines the omissions or non-filing to be willful.
• Those participating in the OVDP (see above for what is participation) on before July 1, 2014 may consider the Transitional Rules, with advantages and disadvantages discussed above for Streamlined Process (except lack of criminal immunity which is obtained under the Transitional Rules) and considering these additional for and against factors:
  • For: opportunity to keep the OVDP criminal protection and benefit from the lower 5% penalty in the Streamlined Process.
  • For: Opt-out from OVDP not required under Transitional Rules but it appears that you may opt-out and seek Streamlined Treatment as well outside of the transitional rules.
  • For: The special OVDP PFIC modified rules still may be elected.
  • Against: OVDP period remains the same (8 years for 2012 OVDP)
  • Against: 20% accuracy related penalty still applies.
  • For and Against: Form 906, Closing Agreement must be executed.
  • Against: Must submit all documents required by OVDP.
  • Against: Must sign Non-willful Certification under penalties of perjury (see above for concerns).
  • Against: IRS must approve and will review each request to determine eligibility and whether certification of non-willfulness is complete and the available information is consistent with the certification.
  • Against: an IRS Central Review Committee may also review the facts to ascertain if the examiner’s determination and rationale are consistent with other determinations made across the IRS.
  • For and Against: Less risky than the naked Streamlined Process but still requires Certification of non-willfulness under penalties of perjury.

  Conclusion:  The addition of Streamlined Procedures and the Transition Rules to the offshore pot offers some alternative routes for resolving offshore cases, albeit of questionable value to U.S. citizens and residents, but has also complicated considerably the consideration of these cases.  The discussion in this blog post should not be used by lay taxpayers as a basis for taking actions on their own.  Only an experienced tax lawyer who has reviewed all of the facts and circumstances, can help them reach a sound judgment about how to proceed in any particular case.

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