I receive many inquiries about Streamlined Filings from U.S. citizens or Green Card holders living outside the U.S. as well as from recent immigrants to the U.S. or work visa holders living inside the U.S. In all of these cases, the individuals have read a good deal about Streamlined Filings and often OVDP submissions on the internet. They frequently have spoken to any number of other professionals about these alternatives for coming into compliance. And, most often they are totally confused, misinformed or have misunderstood what they have read or been told.

Let me try to clear up some common misconceptions:

1. Nature of Streamlined Filing Compliance Procedures (SFCP).   The OVDP is an offspring of the IRS general Voluntary Disclosure Procedures found in the Internal Revenue Manual IRM), with added features that include prescribed FBAR penalty and income tax penalty provisions along with the grant of amnesty from criminal prosecution for disclosed criminal conduct related to the offshore accounts.   The SFCP on the other hand do not represent a formal voluntary disclosure program and do not grant amnesty from criminal charges.   Rather, the SFCP are procedures for filing delinquent returns and foreign reporting forms of non-willful taxpayers under a filing process that offers penalty relief. Unlike the OVDP there is no upfront screening of candidates for the Streamlined Process and the process does not end with the signing of a closing agreement, a contract between IRS and the taxpayers, resolving all tax issues for the years covered. Streamlined Filings, after a preliminary facial review by IRS Streamlined personnel in Austin Texas, are processed like other tax returns but subject to Streamlined relief as to penalties.   Because the Streamlined Procedures do not offer criminal amnesty taxpayers whose conduct borders on criminal or could be viewed as criminal, should not attempt to come into compliance under the Streamlined Process. Yet some comfort may be taken from the likelihood that a Streamlined Filing which IRS considers to flow from willful noncompliance, nonetheless may qualify as a Voluntary Disclosure under the Voluntary Disclosure policies stated in the IRM. This could be a vital fallback argument should IRS disagree with the conclusion of the Non-willful Certification.
2. Streamlined returns are not ordinary returns: Streamlined returns may be processed like other delinquent or amended returns but they are not ordinary tax filings. Because there is no criminal amnesty grant, IRS could still treat the taxpayer’s conduct as willful or even criminal. Therefore, streamlined returns must be prepared with much greater care and due diligence than would be required for a timely filed original return.  All items of income, deduction and credit should be verified by the return preparer. It is imperative that no mistakes or errors appear in the Streamlined returns. Normally, a return preparer need not review underlying source documents but can take the taxpayer’s word for amounts of income, deduction and credit that do not appear unreasonable on their face. Not so in a Streamlined filing. The return preparer must examine all source documents and make sure that the items are properly reported both as to amount, year and character of the item being reported. Being cavalier about a Streamlined filing can lead to disastrous results. As a result, Streamlined returns will be more costly than timely filed returns or most amended returns that do not seek to correct offshore noncompliance.
3. Streamlined filings have a legal component: Streamlined Filings required submission of Form 14653 or Form 14654, Non-willful Certifications. The forms, signed under penalties of perjury contain some tax and foreign account information but also require a detailed statement of the reasons why the taxpayer believes his or her conduct is non-willful. Characterizing a taxpayer’s conduct as negligent, grossly negligent, inadvertent, ignorant, reckless, willful, willfully blind, non-willful or criminal is a legal determination. It requires that an attorney experience in these matters who must:
   1. Obtain documents concerning the foreign financial accounts from the client, foreign financial institutions, others and IRS records on the taxpayer;
   2. Interview the client and other individuals having knowledge of the facts.
   3. In all of this gathering of facts attempt to preserve, in so far as may be possible, attorney-client privilege, the client’s Fifth Amendment Privilege against self-incrimination, and attorney work product privilege.
   4. Draw legal conclusions as to the character of the client’s conduct based on all of the evidence obtained.
   5. CPAs or Enrolled Agents, usually are capable return preparers, but they are not licensed or trained as attorneys and therefore commit malpractice and do clients a serious disservice when attempting, as some do, to complete the legal component of Streamlined filings.
4. Husbands, Wives and the 330 day rule: Taxpayers who spend 330 days outside of the U.S. in any one of the three most recent years for which the filing due date has passes are treated as residing outside of the U.S and may file under the Streamlined Procedures for persons residing outside of the U.S.   A husband and wife are tested separately for this rule. Thus, if a couple live outside of the U.S., have no U.S. abode but the husband spent more than 35 days in the U.S. during all three most recent delinquent return years, the couple will not be able to file delinquent joint returns under the Streamlined Process. Nor will the husband be able to file Married Filing Separately returns under the Streamlined Process. Rather, the choices available are:
   1. Assuming as stated above that no returns have previously been filed for the three most recent years for which the due date has passed:
      • Wife files a Married Filing Separately Streamlined return under the Streamlined Foreign Procedures; and, Husband files a Married Filing Separately returns outside of the Streamlined process. Under this approach:
        • Wife pays no Miscellaneous Offshore Penalty on the penalty base representing her interest in the highest balance of couples’ foreign financial accounts for the most recent six years for which the FBAR due date has passed.
        • Husband will pay no penalty if he establishes in a statement attached to his delinquent returns that he has reasonable cause for the delinquency. Such a filing should be made only if a compelling argument can be made for reasonable cause because IRS will carefully examine amended returns with offshore disclosures made outside of the Streamlined Process of OVDP.
        • Husband and wife both enter the OVDP. Note that is wife makes a Streamlined filing the husband will be ineligible for the OVDP. According to the OVDP Hotline neither must have made a Streamlined Filing for either to be eligible to enter the OVDP.
   2. Assuming joint returns have been filed for the three most recent years for which the due date has passed:
      • Streamlined filing: File a joint Streamlined filing for persons living inside the U.S. and pay a 5% penalty on the highest balance of their combined foreign financial accounts.
      • Wife cannot file a MFS Streamlined return as in (1) above because a joint return can only be amended by a joint return.
      • If compelling case for reasonable cause can be made, file amended returns outside of the Streamlined Process understanding again that such a filing shines a light on the taxpayers and offers neither protection from penalties nor criminal amnesty.
5. Husbands, Wives and Non-willfulness: Be mindful that husbands and wives often act in concert but also often act independently of one another. Determinations of willful versus non-willful conduct are specific to each taxpayer. Legal determinations of the culpability of each spouse will play a large part in deciding how to proceed with coming into compliance. Refer to paragraph 3 above.
6. Calculation of the offshore penalty for Streamlined Domestic Offshore filings:
   1. Under the OVDP regime the penalty base is expansive and includes all assets connected to the noncompliance on which income was not reported. Thus, the value of a rental property on which the rental income was not reported, is included in the penalty base.
   2. For Streamlined filings the penalty base is much narrower and includes only foreign financial assets required to be reported in an FBAR or foreign financial assets reported on those forms but on which the income was not reported. Thus, not reporting rental income does not result in the value of the rental property being included in the Streamlined Domestic penalty base.
7. Most compelling reasons for entering the OVDP:
   1. You have committed a tax crime or may be viewed as having committed a tax crime and want to avoid being charged.
   2. You fear that the maximum FBAR willful penalty may be assessed against you.
   3. You feel you were non-willful but had very large foreign accounts and want the certainty of not being charged with a crime and more time to consider opting-out of the OVDP penalty regime to argue for a lower FBAR penalty amount on audit.
   4. Taxpayers not falling into the above categories do not belong in the OVDP.
8. Most compelling reasons for filing returns under the Streamlined Filing Compliance Procedures:
   1. You committed no overt acts that would tend to evidence, “the intentional violation of a known legal duty,” such as by hiding your identify behind a non-operating, nominee entity, using mail-holds or other incriminating means of deception, programmed repatriation of funds in amounts under $10,000 and so on. Again, these determinations must be made by a tax attorney experienced in such matters.
   2. Your tax filing history, educational background, investment experience, financial sophistication, work experience and other detailed facts establish that your failure to property file or report was due to negligence, inadvertence, mistake or good faith ignorance of the law but was not reckless, willful, or, conduct seeking to willfully avoid knowledge of the FBAR reporting requirement; and, also establish that, upon gaining such knowledge, that you promptly began to rectify the noncompliance. Other facts might include:
      1. That the amounts of income not reported are relatively small compared to the income reported in your filed returns.
      2. That the value of assets offshore not reported is relatively small compared to the value of U.S. based assets.
      3. That the assets and income were located in a country from which you immigrated to the US or in which you now live and were not located in a known tax haven country to which you had no connection other connection apart from owing the foreign financial asset.
      4. You’ve lived outside of the U.S. for a long period of time.
      5. Circumstances in your life such as illness prevented you from timely filing or reporting.
      6. Any other facts and circumstances tending to negate willfulness.

Conclusion

The Streamlined Filing Compliance Procedures may seem simple to the uninformed. In reality however, Streamlined filings are very risky to navigate and require specific legal tax expertise as well and sound legal judgment. A Streamlined filing that should not have been made may subject the taxpayer to both criminal prosecution and potentially draconian FBAR and income tax penalties. Thus, taxpayers should carefully select tax counsel seeking legal tax knowledge, experience and mature judgment. Taxpayers should be suspicious of promised results or unreasonably low fees. The wise man sayeth: “When the stakes are high, seek the best advice available.”

© 2017 by Robert S. Steinberg, Esquire
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www.steinbergtaxlaw.com