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IRS Official Provides Insights for the new IRS Streamlined Compliance Procedures

Taxpayers who are in the Offshore Voluntary Disclosure Program to report their overseas assets can request the favorable penalty structure under newly expanded streamlined compliance procedures without giving up the audit and criminal liability protection offered by the OVDP, according to Jennifer Best, senior adviser to the IRS deputy commissioner (International).

The IRS June 18 announced it was expanding its streamlined procedures so both U.S. and non-U.S. residents who certify their tax noncompliance was non-willful can qualify for 5% or zero penalties.

At the same time, the IRS said it was making the OVDP—generally designed for taxpayers with willful failure to report their offshore assets—tougher by requiring disclosure of more information and payment of the 27.5 percent penalty up front.

In addition, the penalty will rise to 50 percent after Aug. 4 for taxpayers whose banks or facilitators of their offshore arrangements are publicly identified by the Justice Department as under investigation.

Best said taxpayers need to be very careful in asserting their conduct was non-willful through the streamlined procedures, noting that information from IRS offshore enforcement initiatives is pouring in. The government carries the burden of proving willfulness into the courtroom where “willfulness” has generally required demonstrating that the government prove the taxpayer’s actions were as a result of a “voluntary, conscious and intentional” act by the taxpayer. Taxpayers considering the streamlined procedures should carefully review the recent court decisions in United States v. Williams, No. 10-2230 (4th Cir. 2012) and United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) on the issue of determining “willfulness” for assertion of the more significant “willful” FBAR penalties (of up to 50% of the account balance, per year).

Additional considerations regarding someone being “non-willful” often include whether the existence of the account was disclosed to the return preparer or others; whether the account was at some point moved to another foreign financial institution; whether the taxpayer’s advisors had some degree of knowledge about the account; the perceived degree of financial and business sophistication and education of the taxpayer; whether foreign entities were involved as accountholders; documents provided to open the account [i.e. U.S. or foreign passport(s), identification card, etc.]; communications, if any, with others that occurred regarding bank secrecy, taxation, and/or disclosure of any foreign accounts; failure to seek independent legal advice about how to properly handle the foreign bank account and instructions or advice received regarding holding or receiving mail from the bank, etc. Further questions often lay within the responses to each of the foregoing questions.

Best said if taxpayers at the beginning of the process have already submitted their voluntary disclosure intake letters but decide they would rather apply for relief through the streamlined compliance procedures outside of the OVDP, they can do so, but should correspond with the IRS to let the government know they have changed their minds.

Best stressed that if taxpayers stay in the OVDP, they can still request the penalty structure of the streamlined program if they believe their conduct wasn’t willful.  While the transitional treatment may not be quite as favorable as the Streamlined Procedures, it is still better than the alternative, which is paying the full 27.5% or other applicable amount pursuant to the 2012 OVDI rules. While the offshore penalty under the transitional rules is reduced to the same 5% as the streamlined program, the transitional rules make no mention of the other penalties associated with OVDI.  Therefore, under the transitional rules, taxpayers are still liable for the 20% substantial understatement penalty, as well as any applicable failure to file and/or failure to pay penalties associated with your delinquent filings.

Best said even if taxpayers are denied the streamlined penalty, they will remain in the OVDP “at all times” and will still qualify for the 27.5 percent penalty and the protection from criminal prosecution.  Therefore, there seems to be little to lose to seek streamlined treatment.

Best said taxpayers who are in the OVDP and have decided to “opt out” of the process that would result in a closing agreement can request the lighter streamlined penalty as long as they haven’t received formal notice that the IRS is opening an audit.

Best counseled caution in certifications that conduct was non-willful. Best said the IRS will be cross-checking certifications against information that it gets in through treaty requests, John Doe summonses, and other government enforcement activities. “We’re still finalizing our plans of how we’re going to review these, but we’ll be balancing and cross-checking data that we get from all sources,” Best said. “We want to ensure the certifications that we’re getting are accurate and complete.”

Speaking at a separate event in New York on June 20, Best said it is possible that the IRS could go back and re-evaluate willfulness certifications if the client’s bank, through treaty requests or other means, produces account records or other information indicating the client was willfully keeping the account secret.

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.

Our firm presented an informational webinar on the Streamlined Filing Compliance Procedures. Materials from the webinar can be downloaded here: Game Changer Streamline.