“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 permanent residents who reside outside of the U.S.  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 permanent residents living outside the United States.

Streamlined Procedures for U.S. citizens or residents living outside the U.S.

  • Who can utilize?
    • Must be U.S. Citizen, Green Card holder or estate of such individual who in any one or more of the most recent three years for which the U.S. tax return due date has passed (including extensions),did not have a U.S. abode and was physically present outside the U..S. for at least 330 full days.
      • Not disqualified if temporarily present in U.S. or maintain a dwelling in the U.S.
      • Rules under Section 911 dealing with the Foreign Earned Income Exclusion will apply regarding questions of whether a dwelling is an abode that disqualifies the taxpayer from the Streamlined Process (See IRS Publication 54 for a discussion).
    • Individuals who are not U.S. Citizens or Green Card holder may have had returns and / or FBARS due if they had met the Substantial Presence Test for tax residency in any year.  Such individuals or their estates will qualify if in one or more years of the most recent three year period for which the tax filing due date has passed (including extensions), such individual did not meet the substantial presence test of IRC Section 7701(b)(3) (See IRS Publication 519) for a discussion of the substantial presence test).
    • 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.
    • 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.
    • Taxpayers who wish to participate in the Streamlined Process will have to obtain a Taxpayer Identification Number (TIN), if they do not already have a Social Security Number or TIN.
  • Advantages of the 2014 Streamline Process over the 2012 Process for expats.
    • There is no vague compliance risk determination by IRS that could exclude taxpayers from the program.
    • There is no top limit on the amount of tax liability as under the 2012 process which excluded taxpayers with a liability of greater than $1,500, or, some unstated amount.
    • There is no questionnaire to complete.
    • Delinquent and amended returns may be filed unlike the 2012 process which excluded a taxpayer who had filed even a single tax return during the three-year period.
  • Disadvantages of the 2014 Streamlined Process compared to the 2012 process:
    • The major disadvantage as discussed below is the requirement to certify under penalties of perjury that the failure to file or report income was due to non-willful conduct.
    • No criminal protection as in OVDP bit will not likely be a major problem for most expats who have little criminal exposure.
  • Advantages of Streamlined Process over the OVDP:
    • Three year income tax filing period in lieu of 8 year OVDP period.
    • Six year FBAR filing period in lieu of the 8 year OVDP period.
    • In lieu of the OVDP penalty of 27.5%, no offshore penalty will apply on account of the failure to have filed timely FBARS.
    • Lower tax and interest due to fewer returns amended.
    • Lower legal and accounting fees due to less work required.
    • No failure to file, failure to pay or 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.”
      • Willfulness may less of a factor for expats living in high-tax jurisdictions or who did not know they had a U.S. tax filing obligation.
      • 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.
    • 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.
          • 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 and considering these additional for and against factors:
      • For: opportunity to keep the OVDP criminal protection and benefit from the Streamlined Process elimination of the FBAR penalty.
      • For: Opt-out from OVDP not required under Transitional Rules but it appears that you may be able to 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.

      Conclusion:  The addition of Streamlined Procedures and the Transition Rules to the offshore pot offers some alternative routes for resolving offshore non-filing problems. Although many who live outside the U.S. will have facts clearly indicating non-willfulness, others will find themselves having grayer factual situations.  In either case the Streamlined Process offers additional opportunities and complexities requiring careful legal and factual analysis which should be undertaken by experienced tax counsel.

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


This entry was posted in 214 OVDP, FBARS, OFFSHORE BANK ACCOUNTS, TAX, TAX CRIMES, UNFILED RETURNS, VOLUNTARY DISCLOSURE and tagged , , , , , . Bookmark the permalink.

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