Recent Court Decision Shows Risks of IRS Streamlined Filing Compliance Procedures

A recent court decision from the United States Court of Federal Claims shows the impact of a poorly advised Streamlined Filing Compliance Procedures (Streamlined Program or SFCP) submission.  See Flint v. U.S., No. 21-1202T (Fed. Cl. Aug. 23, 2022).  In Flint, the taxpayer failed to file FBARs regarding significant holdings in foreign accounts.  After the taxpayer’s husband passed away, the estate (Taxpayer) attempted to become compliant through the IRS’s Streamlined Domestic Offshore Procedures (“SDOP”).  The IRS flagged the submission and assessed the maximum willful FBAR penalties against the Taxpayer because the IRS determined that the Taxpayer was willful.

Who Is Eligible for the Streamlined Program?

The single most significant eligibility requirement for the SFOP and SDOP is that the taxpayer was “non-willful” in his or her failure to report all income, pay all taxes and submit all required information returns (including the FBAR).

The taxpayer must certify his or her non-willful conduct in a narrative statement signed under penalties of perjury. The certification should include the specific facts (good and bad) surrounding the non-filings, the taxpayer’s personal background, the source of funds in the foreign accounts, the taxpayer’s relationship with the foreign country where the foreign financial accounts are located, and the name and contact details for any professional adviser the taxpayer may have relied upon.

Because the Streamlined penalty framework is so favorable, we have found that it is common for taxpayers to fail to highlight potentially negative facts when speaking with their tax legal counsel. For this reason, it is critical that tax counsel fully review and analyze the non-willful position, including a review of all relevant facts and supporting documents. Tax counsel must carefully evaluate and professionally assess a taxpayer’s eligibility for the Streamlined Program, then draft a narrative statement that complies with the Streamlined Program requirements. Legal counsel must make a legal determination as to whether the conduct falls within the SFCP requirements.

If a taxpayer fails to provide a complete and detailed narrative statement, the IRS may reject the taxpayer’s Streamlined submission. And worse, if the taxpayer provides false or fraudulent information in the narrative statement, the taxpayer could potentially face criminal prosecution.

In the Flint decision, the court concluded that there was sufficient evidence to support the IRS’s determination that the Taxpayer had acted recklessly or with willful blindness. More specifically, the facts showed that Taxpayer failed to: (1) advise her tax preparer of the foreign accounts each tax year; and (2) check the boxes “yes” regarding her interests in foreign accounts.  In finding against Taxpayer, the court used specific statements that Taxpayer had made as part of her SDOP submission.

In summary, the court decision reminds us that there are risks of submitting an improper SFCP submission to the IRS, particularly where there are bad facts or no facts to support an argument that the conduct was non-willful.

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