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 www.steinbergtaxlaw.com