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Taxpayer’s Beware: Proving Non-Willful Conduct in the new IRS Streamlined Filing Compliance Procedures

Taxpayers should think carefully before entering a new Internal Revenue Service program titled Streamlined Filing Compliance Procedures for offshore-account holders whose conduct was not “willful”. On June 18th, the IRS announced significant changes to its limited-amnesty programs for U.S. taxpayers holding undeclared offshore accounts abroad. These offshore-account holders now can opt for a new “streamlined procedure.” Participants must file three years of back tax returns and six years of Foreign Bank Account Reports. Participants must also sign a statement certifying that their previous mistakes were “due to non-willful conduct.”

Under this new option, there is a 5% penalty on the balance of the undisclosed account for taxpayers living in the U.S.—and none at all for taxpayers living elsewhere.

Taxpayers in the IRS’s Offshore Voluntary Disclosure Program—for those who intentionally hid money abroad—must pay a much higher penalty: 27.5% of the account’s peak balance. Interest, other penalties and advisers’ fees can raise the total cost to about 50% of the account’s value.

People who are considering opting for the more lenient, streamlined program to 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.   Advocacy is required to affirmatively and persuasively demonstrate 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 4.26.16.4.5.

It is likely that the IRS will carefully monitor taxpayer filings with large accounts making fraudulent claims in the streamlined program and 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.

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