For some time now, I’ve been receiving frequent calls from U.S. citizens or Green Card holders living outside of the U.S. and U.S. citizens, Green Card holders and residents living in the U.S. who have been out of compliance with U.S Tax Law vis a vis their foreign income producing activities and foreign financial assets.
I explain to them that to qualify for the Streamlined Filing Compliance Procedures, which provide a relatively simpler and less painful path back to compliance, they must certify under penalties of perjury that their failure to properly report income, file FBARs and foreign reporting forms was the result of non-willful. Further, that non-willful means that their conduct was not willful. And, that the courts have defined willfulness as the intentional violation of a known legal duty.
Thus, they either must have been ignorant of their duty to file FBARs and other foreign reporting forms and report foreign interest and other income; or, having knowledge, must have been negligent or careless in failing to file or report, but not willful. (For a discussion of willfulness see blog post of September 1, 2014 “Will-O-The Wisp Willfulness in the Streamlined Process.”
Beginning in 2015 and more urgently in 2016 Foreign Financial Institutions (FFEs) seeking to comply with FATCA’s due diligence requirements have begun inquiring of depositors whether they are U.S. citizens or residents and requesting completed Forms W-9 from deposits who are U.S. citizens or residents. Moreover, the FFEs are telling U.S. depositors to inquire about their U.S. tax reporting obligations.
Thus, U.S. expatriates and citizens and residents living in the U.S. who have been contacted by an FFE are learning of the U.S. income tax and foreign financial account reporting requirements and may no longer be able to state, under penalties of perjury, that their conduct at least with respect to 2015 and 2016 filings was non-willful.
To qualify for the Streamlined Filing Compliance Procedures the taxpayers conduct must have been non-willful for the entire period of noncompliance. Thus, absent other exigent facts and circumstances, if a taxpayer knew of the offshore reporting requirements for 2015 or 2016 filings and consciously or voluntarily did not or do not file or report, he or she will not be eligible to file amended or delinquent returns (persons living outside of the U.S) using the Streamlined Procedures.
1. A U.S. expatriate living in and paying taxes in a European country with unfiled U.S. returns is contacted by his or her foreign bank in November of 2015 requesting a Form W-9 and informing him of U.S. income tax filing and FBAR reporting requirements. The taxpayer who was previously ignorant of the offshore reporting requirements completes and returns the form to the bank but decides to ignore the newly acquired knowledge and does nothing about coming into compliance. In November of 2016 the taxpayer seeks professional assistance about how to come into compliance and plans to file delinquent returns for 2013, 2014 and 2015 and FBARs for 2010 through 2015 in early 2017.
2. Same facts as in example I above, except that the taxpayer upon being contacted by the bank immediately seeks professional help, files for an extension for 2015 in April 2016 but does not complete the delinquent returns for 2013, 2014 and 2015 or file FBARs for 2010 through 2015 until November of 2016. The delay is caused by the difficulty in obtaining all of the necessary information to file complete and accurate returns and in retaining a qualified return preparer and experienced tax attorney to assist with the Streamlined Filing Non-willful Certification.
3. Same facts as in example 1 above, except that the bank does not contact the taxpayer until June of 2016.
Conclusions: Caveat: these are overly simplified fact patterns that focus solely on when the taxpayer obtained knowledge of the offshore reporting requirements. The examples and conclusions are based on my discussion of November 15, 2016 with an OVDP Revenue Agent in Austin following my call to “The OVDP Hotline.” I had posed the question stated in Example 1. The agent emphasized that the timing of obtaining knowledge would be critical but that all facts and circumstances would be considered. The answers provided are informal opinions of the agent and are not necessarily binding on the IRS. Certainly, making willful versus non-willful determinations requires close and careful examination of all relevant facts and circumstances. See IRS FAQs for Streamlined Filing Compliance Procedures and Forms 14653 and 14654. For Tax Wars Blog discussions about what must be included in the Non-willful Certification see blog posts of January 28, 2016, “Non-willful Affidavits under the Streamlined Filing Compliance Procedures;” March 9, 2015, “Don’t Lie, Don’t Exaggerate and Don’t Cherry Pick Your Facts,” and others.
• Example 1: Absent extenuating facts and circumstances, the IRS would likely view the taxpayer’s conduct as willful. On April 15, 2016 the taxpayer knew he or she was required to file an income tax return for the year 2015 and on June 30, 2016, knew he or she was obligated to file and FBAR, but consciously did not file. Thus, the taxpayer is ineligible for making a Streamlined Filing because his or her conduct would be deemed willful with respect to 2015 even though conduct was non-willful prior to the 2015 filing deadlines
• Example 2: Absent other damaging facts the IRS would likely view the taxpayer’s conduct as non-willful for all relevant years. If damaging facts are present, they must be stated in the non-willful certification statement and explained, if there is a cogent explanation.
• Example 3: As in example 3, absent other damaging facts the IRS would likely view the taxpayer’s conduct as non-willful for all relevant years.
In addition, as noted in prior blog posts Caroline Ciraolo, Principal Deputy Assistant Attorney General in the Tax Division of the Department of Justice, has stated her skepticism whether any taxpayer could claim to be non-willful at this late date, after all of the publicity about offshore non-compliance. While I have disagreed with her statement in prior blog posts, it is certainly becoming more difficult, although not impossible in every case, to disagree with that conclusion.
It is imperative for those desirous of employing the Streamlined Filing Compliance Procedures to come into compliance to make sure to be fully compliant regarding offshore activities and assets in their 2016 income tax return and FBAR. That means filing a timely and accurate Form 1040 with all required foreign reporting forms as well as a timely and accurate FBAR. Those taxpayers having knowledge of the filing and reporting obligations who do not file timely compliant 2016 returns will have a difficult time establishing non-willfulness and, depending on the specific facts and circumstances, may need to enter the OVDP or file amended returns outside of the formal IRS OVDP or Streamlined procedures with statements claiming non-willfulness and/or claiming mitigating factors that justify abatement or reduction of the willful or non-willful FBAR penalty. Properly filed amended returns, in an appropriate case, may be viewed by IRS as a traditional Voluntary Disclosure under the IRS’s long-standing informal Voluntary Disclosure Policy. (See IRM 184.108.40.206 Voluntary Disclosure Practice). If deemed a Voluntary Disclosure, the taxpayer would not likely be charged with a tax crime.
It is also imperative that those seeking to come into compliance under either the Streamlined Filing Compliance Procedures or the Offshore Voluntary Disclosure Program do so at the earliest possible time. Following his inauguration, President Trump will nominate a new Secretary of the Treasury and IRS Commissioner. Both will be confirmed unless the Senate Democrats filibuster to delay the nominations from taking effect. In that case, the Republican majority may change the 60 vote requirement to a simple majority. Thus, there likely will be a new Treasury team running the show sometime in 2017. The new sheriff in town may decide that the two amnesty programs have run their course and that leniency is no longer desirable tax policy. Thus, either one or both programs may be eliminated. The IRS has repeatedly stated that there is no guarantee that these special programs will continue in their present form or at all.
The need to take action about coming into compliance is made more compelling by the growing likelihood of discovery. See blog post of November 3, 2016 “18 USC 3287 – The Statue without Limitations – Impact on OVDP Decisions.”
For a discussion of the OVDP compared with the Streamlined Filing Compliance Procedures, see blog post of May 19, 2016, “Comparison Chart – OVDP vs. Streamlined Filing Compliance Procedures.”
© 2016 by Robert S. Steinberg, Esquire