The Internal Revenue Service announced major changes in its offshore voluntary compliance programs, providing new…
How to Demonstrate Non-Willfulness Under The Streamlined Filing Compliance Procedures
The IRS recently announced Streamlined Filing Compliance Procedures in an effort to encourage U.S. taxpayers to come into compliance with their reporting and filing requirements associated with varying interests in foreign financial accounts and assets. The streamlined procedures require the filing of original or amended tax returns reporting whatever foreign source income was generated in each of the applicable tax years as well as properly report any U.S. source income and deductions for each of the applicable tax years.
For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the streamlined procedures. For eligible U.S. taxpayers residing in the United States, the only penalty under the streamlined procedures will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue. All income tax related penalties associated with the non-U.S. source income will be waived
The streamlined procedures do not provide protection from a possible criminal prosecution referral. Also taxpayers pursuing resolution of a foreign account issue within the streamlined procedures are required to certify under penalties of perjury that their conduct was “non-willful.” For purposes of the streamlined procedures, non-willful conduct is defined as 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.
The certification requires that the taxpayer “provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs.
People who are considering opting for the more lenient, streamlined program must be aware of the meaning of “willful” in tax law. Those who sign the statement in error are at risk of severe penalties and criminal prosecution. The IRS has stated that “willfulness is determined by the facts and circumstances of each case,” and that it will depend on tax professionals “to help taxpayers get the right answer in individual cases.”
Evidence of willfulness often includes the following: having an account in a country with bank secrecy rules; holding the account in a trust, foundation or other entity typically used to conceal ownership; moving the account from a firm under U.S. pressure to another, presumably to avoid disclosure; making large cash withdrawals; instructing a firm not to mail statements to the U.S., or communicating in code with it; or having secret meetings with advisers or account representatives. The amount of money is also important: the larger the asset value, the less likely it is nonwillful.
Evidence of nonwillful behavior could include having a small account, especially in comparison to the taxpayer’s other assets; an account on which no U.S. tax is due; a foreign government-sponsored savings or pension account; minimal or no withdrawals; and no prior U.S. tax filings.
There is no perfect fact pattern or objective test for non-willful conduct. The IRS certification requires a signed sworn statement that “[the taxpayer’s] non-willful conduct 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.” Furthermore the taxpayer must “provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.” See the “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertUSResidents.pdf.
Persuasive advocacy is required to affirmatively and persuasively demonstrate credible legal grounds for non-willfulness. Do not disclose too much and beware of badges (evidence) of willfulness, blind willfulness, concealment, etc. For more information see IRS IRM 18.104.22.168.5. It is likely that the IRS will carefully monitor taxpayer filings with large accounts making fraudulent claims in the streamlined program and seek to punish them severely to send a warning.
While the streamlined program offers a welcome option for many taxpayers with undeclared accounts, other ways to address past noncompliance remain viable, including the OVDP program and Delinquent FBAR Submission Procedures and Delinquent International Information Return Submission Procedures.