On February 24, 2015 I participated in an ABA Tax Section Webinar, “Answering Your Criminal and Civil Offshore Disclosure Questions.” On the Webinar panel were two IRS officials: David W. Horton, Director, IRS International Individual Compliance; and John C. McDougal, Senior Special Trial Attorney, IRS Office of Chief Counsel (Chief Counsel are the IRS in-house Attorneys).
Below I’ve paraphrased (not quoted verbatim) some of the comments of the two IRS officials without identifying who made what comment.
Criminal Enforcement
- The Department of Justice’s greater concern is over funds that originated in the U.S. as opposed to funds that were always offshore. Thus, U.S. profits and gains diverted to offshore accounts garner more attention on the criminal side than do foreign gifts or inheritances that were deposited into offshore accounts.
- Reliance on professional advice, once a defense, now has become evidence that the advisor and taxpayers were co-conspirators.
- IRS is following transfers of funds by so-called “leavers.” Who moved funds from UBS in 2009 and 2010 and views that foolish conduct as significant evidence of willfulness.
Swiss Bank Settlement Program
- Swiss Bank Secrecy laws still prevent banks in the program from turning over a client’s name unless:
- The client consents.
- A proper Treaty Request is made (must indicate fraud) such as where nominee entity was employed although a Treaty Protocol pending in the U.S. Senate would expose personal numbered accounts to being turned over.
- The banks must turn over the name and location of bank accounts to which “Leavers” transferred funds but not the name itself. With that information IRS will be able to identify the individuals by obtaining a John Doe Summons requiring the bank to turn over names.
- The banks in the program must close the accounts of U.S. depositors who fail to come into compliance with U.S. tax reporting.
- Banks in the program seeking to mitigate penalties are contacting customers to encourage them to enter the OVDP.
OVDP
- Most of the questions during the webinar concerned the Streamlined Process – see comments below.
- Preclearance of names is now taking much longer than when the Program first opened because IRS has much more data to go through in order to check a name.
- RSS Comment: That IRS has more data also means that IRS is more likely to discover a person’s identity.
- Valuations of included non-financial assets: IRS generally allowing no discounts (minority interest or lack of marketability) from fair market value as it views the inclusion of the value as “rough justice.” Any reasonable good-faith estimate of value is acceptable.
Streamlined Filing Compliance Procedures (or Streamlined Process)
- The IRS continues to see no value in offering examples of what sort of conduct it would view as willful or non-willful. Each determination is very fact specific and there is a large body of case-law is applicable. Thus, the call is up to the attorney. Nothing more will be forthcoming from IRS on the question of non-willfulness.
- Willful is one of those “know it when you see it” things.
- Ask yourself: Are you nervous about having no protection from criminal indictment, or about having to pay the civil fraud penalty or draconian FBAR penalties? If not, Streamlined is OK.
- Size of the account does matter but is not determinative other than at the extreme ends of the spectrum (very small being an indicator of non-willful conduct and very large being a strong indicator of willful conduct)
- If joint returns were filed both spouses must file under the Streamlined Process because a joint return must be amended with a joint return. That is because the tax is assessed on the return and not under a closing agreement as in the OVDP (where one or both spouses can enter).
- There is no acknowledgment of filing returns under the Streamlined Process because it is just a process for filing tax returns. Aside from the penalty relief it is just like filing a normal return.
- RSS Comment: But don’t make the mistake of thinking that Streamlined returns are ordinary returns. They are not. You are filing under threat of criminal prosecution if you do not meet the test of being non-willful, and of other charges if your Non-willfulness Certification is false or leaves out negative facts that make it misleading or if the returns you file are in any way false or misleading.
- IRS cashing of your check or sending a bill for additional interest is not an acknowledgment that your returns pass muster in the Streamlined Process. Your return can still be selected for audit later on and there is no process by which one can request an early audit.
- Taxpayers with accounts at listed banks (subject to the 50% OVDP penalty) can go Streamlined if non-willful.
- RSS Comment: In theory yes, but most with accounts at bad banks have engaged in conduct that would be viewed as willful (Nominee entity, structuring, loans etc.).
- Preclearance – Practitioners stated that some are submitting names preclearance even if they intend to go Streamlined, just in case evidence of willfulness is discovered.
- The IRS people discouraged this tactic. If non-willful why submit names?
- The reason is that the accounting and investigative work in reviewing statements for the Streamlined may turn up evidence of willfulness. If names are submitted you will probably have 50 days before the OVDP Letter is due. During that time you should have a better idea if you can, in fact, certify non-willfulness.
- You can also pull transcripts to ascertain if an audit has been commenced. But, the transcript may show an audit code before the audit has commenced. It is the sending of the audit notice and due process rights letter that commences the audit and disqualified a taxpayer from the Streamlined Process, not the entering of the code in the system.
- If a taxpayer is declined for OVDP in the names submission, he or she can still enter the OVDP if otherwise qualified, but believe that would be a rare case.
- The key element for IRS in ultimately agreeing or disagreeing with the non-willful certificates is when the taxpayer learned of the filing requirements.
- Those who learned of the filing requirement but stayed out of the OVDP for fear of the high penalty, but now want to avail themselves of the zero penalty (non-U.S. person) or 5% (U.S. person) would likely be viewed by IRS as willful.
- PFICs: There is no OVDP short-cut rule for PFICs in the Streamlined Process.
- Upfront Rejections from Streamlined: Are due mainly to the Certification on its face being insufficient and not reciting specific facts supporting the non-willful assertion. The IRS is not rejecting applicants merely because it disagrees with the conclusion that the conduct is non-willful. The IRS may, however, take that position if and when it audits the taxpayer’s returns.
- The taxpayer no longer has to be otherwise tax-compliant to file returns under the Streamlined Process. The returns filed can be delinquent returns.
Quiet Disclosures
- IRS is screening for amended returns filed outside the OVDP or Streamlined Process. So, taxpayers taking this route may expect an audit.
- May be applicable to persons if not worried about criminal charges or willful FBAR penalties and feel strongly that reasonable cause is present.
- Reasonable cause means not negligent.
- RSS Comment: perhaps for some U.S. persons. But, non-U.S. persons better off in Streamlined Process since less likely to be selected for audit.
RSS Comment
Each case requires a decision about how to proceed. These decisions are complex and require the assistance of a tax attorney experienced in these matters.
© 2015 by Robert S. Steinberg, Esquire All rights reserved
The Tax Wars Blog 
Sorry Robert but I have to indirectly disagree with your statement or notion that “Reasonable cause means not negligent“……..to be and act negligent is NOT a disqualifier for nonwillfulness !
Negligent conduct is not sufficient to constitute willfulness.
Although by law the IRS has to prove “willfulness,” the IRS is not put to this burden until the
taxpayers takes it to court. But nevertheless many FBAR penalty investigations will result in non-willful penalties, not because the person did not act willfully, but because the Service cannot meet their burden to prove that the person acted wilfully.
The current IRS definition of NW conduct (SDOP,SFOP) is conduct that is due to NEGLIGENCE, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. Factors tending to show NW : 1. only signature authority over the “foreign” bank account 2. did not participate in an abusive tax avoidance scheme
3. tax compliance 4. relied upon the advice of a CPA 5. full compliance after notification of FBAR reporting requirements 6. “Foreign” account disclosed to return preparer 7. person owns the account in his name 8. business reason for the “foreign” account 9. family or business connection to the foreign country 10. no previously-filed FBARs 11. no illegal income in the “foreign” account.
The general definition of NW is an involuntary, unintentional violation or disregard of a known legal duty, meaning the person lacked an intent to violate the law, but nonetheless did violate the law. The most important factor is whether the person acted in good faith considering experience, knowledge, and education. If the evidence tends to show NW, then shift the focus of the investigation to RC :
1. person opened the account for a legitimate purpose (lived in the foreign country at the time)
2. person did not use the account for tax evasion
3. person relied on the advice of a qualified CPA
4. person complied with the tax laws of the country of residence by reporting all taxable income and paying the correct amount of tax
5. person reported all income from the undisclosed “foreign account” (not possible for NF)
6. person has only a De minimus US tax deficiency as a result of the undisclosed “foreign account”
7. person filed promptly delinquent FBARs after becoming aware of his obligation and timely subsequent FBARs.
To avoid the penalty,TP must show he acted with RC and in good faith(§6664(c)(1). RC requires the TP to exercise ordinary business care and prudence to the disputed item. Good faith has no precise definition but means an honest belief and intent to perform all lawful obligations.
RC objective test : did the TP act like an ordinary, reasonable, prudent person.(consider TP education, sophistication, business knowledge, experience and familiarity with tax issues).
The Service does not assert NW FBAR penalties if they find RC for the violation and the person files correct FBARs.
Mike, you are confusing reasonable cause with non-willfulness. The Streamlined Process requires the taxpayer to certify his or her non-willfulness, that is, that he or she did not have knowledge of the FBAR requirement or intentionally fail to file the FBAR. Negligence is not willfulness but it is also not reasonable cause. Reasonable cause comes into play when events beyond one’s control lead to the failure to file, such as serious illness. Reliance on a tax professional, if reasonable, may create reasonable cause for positions taken in a return but not generally as to timely filing of the return itself. The factors you cite above are relevant to certifying non-willfulness and should be covered in the Non-willful Certification. Reasonable cause comes into play most often in quiet disclosures and opt-outs of the OVDP. RSS
Sorry Robert but I am not confusing RC with NWs. Btw. you made your statement under QDs. Further you are just repeating my explanation from above where I explained both with examples. I repeat again…. to be and act negligent is NOT a disqualifier for nonwillfulness either in SDOP or SFOP or during an audit after a QQD or traditional QD ! Negligent conduct (emphasis) is not sufficient to constitute willfulness. With regards to trier of facts and importance : 1st comes NW or W and 2nd. RC – not the other way around.
Your answer is confusing again lay readers in wrongly believing that possible negligent conduct (excluding other bad facts….as I mentioned above 1.-7.) precludes them from a successful SDOP,SFOP or QQD submission. It is correct that negligence on its own is not RC but that is really only secondary – that is why I did write that I indirectly disagree with you. Your hyperbole might have certain TP draw the wrong conclusions from their possible negligent conduct. If the evidence shows NW conduct …including negligence the examiner will shift his focus to RC where in over 90% of the cases the TP has many good facts including : 1. person opened the account for a legitimate purpose (lived in the foreign country at the time) 2. person did not use the account for tax evasion
3. person relied on the advice of a qualified CPA 4. person complied with the tax laws of the country of residence by reporting all taxable income and paying the correct amount of tax 5. person reported all income from the undisclosed “foreign account” (not possible for NF) 6. person has only a De minimus US tax deficiency as a result of the undisclosed “foreign account” 7. person filed promptly delinquent FBARs after becoming aware of his obligation and timely subsequent FBARs.
Negligence as RC would or does carry no weight and is therefore secondary to over 90% of the TP but it does not disqualify the TP from NWs. ……. the more important of the two.
Mike, I appreciate your comments but I still believe you are misunderstanding what I’ve said. I was not saying that the IRS official said that negligence disqualifies one from being non-willful. It does not. A merely negligent taxpayer is not willful. But, negligence will prevent a taxpayer from escaping a penalty when reasonable cause and not non-willfulness is the standard, This would not occur in the Streamlined Process because the standard for penalty relief in that filing process is non-willfulness not the more stringent test of reasonable cause. But, if one seeks complete penalty relief after having filed outside o the Streamlined Process, i.e., in a quiet disclosure, or in an Opt- out, reasonable cause is the standard for complete penalty relief and the absence of negligence must be established. In an Opt-out, as opposed to the Streamlined Filing Process, the non-willful penalty is not zero but $10,000 per violation. Thus, complete penalty relief requires establishing reasonable cause. By the way, the blog-post merely paraphrased what the IRS officials participating in the webinar stated. I happen to agree with their statement, however. I don’t disagree with what you are saying. I just think we are talking about two different things.
Robert I am fully aware what you are trying to say – and that is what I indirectly disagree with because it is misleading again for the lay reader. I disagree that RC is the more stringent test compared to NWs , especially if you include willful blindness , willful ignorance, deliberate ignorance, conscious avoidance.
It is always phrased as “due to RC and not willful neglect“ (LTR3503C). When you look a the many possible RC factors that apply to over 90% of the TP – your whole emphasis on negligence as RC is of no importance in the real world. It makes no sense to constantly point out the exceptions or outliers. We all know by now that the mere uninformed belief (negligence) that no return is due, no matter how genuine, is not reasonable cause unless the taxpayer make inquiry. Issue is intent – not motive.
The standard of RC is and was met by over 90% of the TP . The IRS will use the NW FBAR penalty mitigation guidelines only where there is no RC. The Service will not assert NW FBAR penalties if the examiner finds RC for the violation and the TP files correct FBARs.
Here again a few examples :
1. Business Care and Prudence (IRM. 20.1.1.3.2.2) : A taxpayer may establish reasonable cause by providing facts and circumstances showing that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with the law .
2. Honest Misunderstanding (IRM .20.1.1.3.2.2.3) : A taxpayer`s misunderstanding of fact or law may constitute reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.
3. Ignorance of the law (IRM. 20.1.1.3.2.2.6) : The 26,000-page tax code of 1986 has grown to more than 70,000 pages. In the last decade alone, there have been more than 4,400 changes to the code – more than one a day. There are currently 7332 pages of instructions, 16 IRS publications, and 667 pages of tax forms that are applicable to overseas US. Citizens.
A taxpayer`s ignorance of the law may give rise to reasonable cause. The IRS Penalty Handbook acknowledges that in some instances taxpayers may not be aware of specific obligations to file and / or pay taxes. It further acknowledges that reasonable cause “may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances”, such as the level of complexity of a tax or compliance issue. The IRS Penalty Handbook also recognizes that a taxpayer may have reasonable cause for non-compliance if the taxpayer was unaware of a requirement and could not reasonably be expected to know the requirement.
4. Reasonable reliance (IRM. 20.1.1.3.2.2.5) : A taxpayer`s reasonable reliance on an independent, qualified, fully-informed tax professional often reaches the level of reasonable cause. For purposes of the reasonable-reliance defense, the regulations broadly define the concept of “advice” to cover “any communication” from a qualified advisor and clarify that advice does not have to be in any particular form.
5. Reasonable Cause in Accordance with IRS Fact Sheet FS-2011-13…….In IRS Fact Sheet FS-2011-13 , dated August 4, 2012, it is stated that factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include :
“ that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.“
Mike, thanks for your additional comments. I don’t think the IRS official’s comment that reasonable cause is not negligent is inconsistent with what you are saying. All of the factors you state would indicate the absence of negligence. My experience in penalty appeals has been that Appeals looks for the absence of negligence and considers all of the factors you mention. But, in the end, reasonable cause is the opposite of negligence. I do think that reasonable cause is a more stringent test than non-willful. Your reference to willful blindness is well taken, however, as two recent decisions have found taxpayer’s willfully blind in signing returns without checking the box to indicate the existence of foreign financial account and without filing an FBAR. These are troublesome decisions because contrary to prior law(and the Service’s view of prior law) they do not require that the taxpayer even know about the FBAR requirement to be willfully blind. He or she is presumed to know. So, the taxpayer does not even have the opportunity to argue that he or she was merely negligent or that he or she had reasonable cause. One is presumed to have read his or her return and to know the contents of the return. You can call me if you want to pursue this subject further.
RSS
Practical analysis – I learned a lot from the information . Does someone know if I could grab a template a form example to fill in ?
Unfortunately, there is no template for making decisions about whether one has committed a tax crime, whether one’s conduct, although not criminal, is willful for purposes of the civil FBAR penalty, and, whether one, consequently, should enter the OVDP or file returns under the Streamlined Filing Compliance Procedures. There is no one-size-fits-all approach. These are individualized questions, heavily dependent on a complete analysis of the particular facts and applicable tax and Bank Secrecy Act laws. A tax attorney experienced in these matters should be consulted.