The Internal Revenue Service announced major changes in its offshore voluntary compliance programs, providing new…
New Warnings in the IRS’ Streamlined Filing Compliance Procedures
The Internal Revenue Service has recently updated the certification forms required to be filed by taxpayers seeking to avail themselves of the Streamlined Filing Compliance Procedures. The streamlined program was significantly expanded by the IRS in June 2014 in order to provide a meaningful way for non-willful taxpayers to remedy past non-compliance with respect to non-U.S. bank accounts and income associated with those accounts. Any taxpayer seeking to utilize the streamlined program must submit a form entitled Form 14654–Certification by U.S. Persons Residing in the United States for Streamlined Domestic Offshore Procedures (SDOP) (for U.S. residents) or Form 14653–Certification by U.S. Persons Residing Outside of the United States for Streamlined Foreign Offshore Procedures (SFOP) (for non-U.S. residents).
The streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. In order to enter the streamlined offshore procedures, the taxpayer must officially certify that their failure to report all income, pay all tax, and file all required information was due to non-willful conduct.
In either version of the form, the taxpayer is certifying, under penalties of perjury, that:
“My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that 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.”
This is a very important element of the streamlined process. Any taxpayer who cannot make such a certification is ineligible for the relief afforded by the Streamlined Filing Compliance Procedures. As part of the certification, the taxpayer is required to provide a factual statement explaining the reasons for non-compliance, including if such non-compliance was attributable to advice received from a professional advisor:
“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. The field below will automatically expand to accommodate your statement of facts.”
Some taxpayers apparently have been submitting the certification form without the narrative statement. As a result, the IRS has updated the forms to now include, in bright red font, the following warning:
“Note: You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.”
In spite of the standardization of the forms, very careful drafting and persuasive legal advocacy of a taxpayer’s particular circumstances are still recommended for a clear demonstration of non-willfulness. Beware: the statement can be used against the taxpayer. The narrative portion of the certification form has always been the most important part of the streamlined submission, because that is what the IRS will review in order to determine whether the taxpayer’s failure to file FBARs and report income from offshore accounts was non-willful. All certifications are reviewed carefully by the IRS. The updated form with its new conspicuous warning language further confirms the important nature of the narrative. Taxpayers who choose to submit certification forms without a narrative, or who cannot complete the narrative for whatever reason, are now warned that their streamlined applications will be rejected.
Whether a taxpayer’s conduct is non-willful is a critical question of fact and law, based largely on the taxpayer’s particular facts and circumstances. Taxpayers with foreign accounts would be wise to retain tax legal counsel, to better analyze the taxpayers’ position. In our experience, good facts applied to the law will result in a result. Legal research, careful drafting and legal advocacy of a taxpayer’s particular circumstances are still strongly recommended for a favorable result.