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

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

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

Robert S. Steinberg, Esquire

www.steinbergtaxlaw.com