A Tax Analysts Tax Notes article (Richman, Nathan J., “International Tax Enforcement Efforts Include Civil Tools”) quoted Acting Assistant Attorney General of the Department of Justice Tax Division, Caroline Ciraolo who was speaking at the March 4^th Federal Bar Association Section on Taxation annual meeting. Ms. Ciraolo stated:

After three very well-publicized voluntary disclosure programs, nearly 200 criminal prosecutions, ongoing criminal investigations and the increasing assessment and enforcement of substantial civil penalties for failure to report foreign financial accounts, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are, quite simply, neither credible nor well-received.

The Acting Assistant Attorney General suggests that it would seem extraordinary at this late date that anyone with an unreported offshore bank account could convince IRS that a lack of knowledge on their part was the cause of their non-compliance with the tax filing and reporting obligations.

Her statement, not unreasonable on its face, seems to me to overstate and oversimplify the determination of willfulness versus non-willfulness.

For one thing, the publicity to which the Assistant Attorney General refers, while widespread is not part of the mass media news that most regular people digest. FBAR news and prosecutions is not usually mentioned on the nightly local TV news or reported with great fanfare in the non-financial daily newspapers.

Her statement is most appropriately related to those who opened accounts in tax havens with funds originating in the U.S. and who employed all sorts of devious means to hide their identity from the IRS. These people are not your average ordinary person but are the tax criminals who should have entered the Offshore Voluntary Disclosure Program. For a list of overt acts that usually accompany a tax crime see my post, “If You Did These Things You Belong in the OVDP.” (11/6/2015).

For those in this category who have yet to come forward, the bell is tolling loudly. The IRS having concluded its Swiss Bank Settlement Program with almost 100 banks is shifting its focus to banks in other countries that have assisted U.S. persons with evading tax. These countries of new emphasis include, but are not limited to: The Bahamas, The Cayman Islands, Australia, India, Singapore and Israel.

But, those not committing overt acts in an attempt to evade U.S. tax are not home free. For, civil willfulness does not necessarily require overt acts of commission and the civil FBAR penalty may apply to one who is not a tax criminal. When present, overt acts often represent the nails in the coffin of willfulness, if not establishing a tax crime.

Willfulness for purposes of assessing the draconian FBAR civil penalty can be established by showing knowledge of the obligation to file and intentionally not filing.

The Streamlined Filling Non-willful certification is all about stating facts that show negligence, even gross negligence, or ignorance, but do not indicate knowledge of the reporting and filing rules and intentionally ignoring them. This analysis is both legal and factual and must delve into all of the facts surrounding the opening and operation of the offshore account – the why, from what source, how, when, where, who, and for how long.

Some examples of facts relating to the non-compliant-non-tax-criminal person, which, if present, might tend to evidence lack of knowledge and intentional non-reporting are:

1. The person has no post-secondary school education.
2. The person has a BS and Master’s Degree in Biology or other technical field and not one in taxation or finance with courses in taxation.
3. The person inherited the account from a parent who lives in the foreign country.
4. The person did not transfer funds offshore; but, rather the funds in the account originated offshore.
5. The person has a close connection to the foreign country with family there with frequent visits.
6. The person works as an IT specialist and has no background or contact with tax issues and international finance.
7. The person works as a department store clerk or in another non-skilled job.
8. The person prepared his or her own tax returns and misunderstood the program instructions. I’ve seldom reviewed a self- prepared return with offshore activities reported correctly.
9. The person is an expatriate living in a high tax country and owes little tax to the U.S.
10. The person living out of the U.S. has bank accounts only in his or her country of residence which are not viewed by him or her as foreign but as their local bank account.
11. The person has recently immigrated to the U.S. and has been preoccupied with adapting to the new country, culture, lifestyle, language or a new spouse.
12. The person who recently immigrated to the U.S came from a country that does not tax its citizens on world-wide income.
13. The person living in the U.S. or outside of the U.S. has during the filing period suffered severe emotional, medical, family or business hardships.
14. The person is not a sophisticated investor whose investments consist solely of an employer 401(k) and IRA.
15. The person’s tax return preparer was a store-front operator who did not inquire about offshore bank accounts or provide a tax organizer to clients.

The above list represents but a handful of illustrative facts that combined with other facts might help establish that the non-compliant person’s conduct was not willful. The analysis and determination of what these individual facts collectively mean is a job for a tax attorney experienced in these matters. CPAs, however competent in preparing tax returns, are not trained to decipher this difficult and consequential legal question: Whether a client’s conduct is criminal, willful or negligent. The consequences of getting this determination wrong can be disastrous.

Finally, the increase in OVDP penalty from 27.5% to 50% for taxpayers with accounts at banks that IRS has added to its list of facilitators, has motivated some attempts by willful tax-evaders to sneak into compliance by making a Streamlined Filing.  The DOJ has stated it is on the lookout for Streamlined Filings that state facts inconsistent with facts it has obtained from other sources such as banks who has signed Non-prosecution Agreements under the Swiss Bank Settlement Program.   These taxpayers might include the so called “Leavers” who have transferred funds to other countries or smaller Swiss Banks from UBS or other large Swiss banks under criminal investigation in the hope of avoiding detection, or, those who have used nominee entities to hide their identity. Those in this category who’ve made Streamlined Filings have chased Fool’s-Gold seeking a lower penalty all the while subjecting themselves to much greater risks, yet higher penalties (generally up to 100% under IRS published guidelines) or criminal prosecution. Acting Attorney General Ciraolo suggested in her March 4 comments that these ill-considered taxpayers might be able to gain entrance into the OVDP, notwithstanding that the OVDP FAQs suggest otherwise. Whether such efforts are wise or would prove fruitful remains to be seen.

The OVDP remains the avenue of choice for tax criminal and those who rightfully fear maximum willful FBAR penalties even if there is insufficient evidence to convict them of a crime. The Streamlined Filing Compliance Procedures remain viable for those who can establish that their conduct did not amount to an intentional violation of a known legal duty to file an FBAR or report offshore income.

The bell has certainly not tolled on all Streamlined Filings but the process is risky and the taxpayer should employ an experienced tax attorney. The attorney should conduct a voir-dire examination of the client to make sure that the client’s explanations appear truthful and not rehearsed, or learned from the internet, and, should ascertain that sufficient facts are present to support non-willfulness and that the affidavit in support thereof is completely transparent, stating both favorable and unfavorable facts.

© 2016 by Robert S. Steinberg, Esquire
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