Taxpayers’ Evidence of Non-Willfulness or Willfulness Factors

We have come across the below 3 questions numerous times with our clients.

What kind of evidence is relevant to demonstrate “non-willfulness” for purposes of the SDOP and the SFOP when the definition of non-willful conduct ranges from negligent conduct to conduct resulting from a good faith misunderstanding of the law?

How does a taxpayer actually prove that he/she did not know about including offshore income on his/her U.S. tax return or that he/she never knew about the FBAR filing requirement? What kind of supporting evidence does the taxpayer need to show?

In determining whether the taxpayer can legitimately certify that he or she is non-willful, ALL relevant facts and circumstances should be analyzed to determine whether the taxpayer’s conduct is really non-willful.

Unfortunately, the IRS has publicly stated that it will intentionally give no further definition of non-willful conduct for purposes of the Streamline Compliance Programs (SFOP or the SDOP). It has said that the concept of willfulness is well documented in case law and expects tax professionals to apply those definitions, as well as relevant portions of the IRS Manual in advising clients on whether their conduct fits within the definition of non-willfulness.

However over the years we have compiled a list of numerous practical factors which impact Taxpayers’ Non-Willful Status / Reasonable Cause Determination. Below are a few factors of various importance.

— failure to advise preparer about foreign accounts v. denying existence of such assets. Will the preparer confirm possibly erroneous advice?

— Did the taxpayer use an accountant or paid return preparer to prepare the tax returns? If so, was the taxpayer given a tax organizer? If yes, did the taxpayer fill it out truthfully? Does the taxpayer have a copy of the organizer?

— If the taxpayer did not receive an organizer from the tax advisor, was he/she asked about the existence of any offshore accounts or assets, or about any foreign source income?

— If the advisor did not ask the taxpayer the above questions, did the taxpayer affirmatively tell the accountant or tax return preparer about the existence of any offshore accounts, offshore assets, or foreign source income?

— failure to seek professional advice, or using “under-qualified” preparer

— impact of accounts being in “tax haven” countries

— impact of funds being untaxed income

— access to and use of funds, debit cards, etc. If so, did the taxpayer ever use it? If so, how frequently?

— inherited assets vs unreported income

— residence of taxpayer outside the U.S.

— existence of foreign entities to hold title to the account. Was an entity used when the account was opened? If so, did the bank require the use of an entity? Was it used to disguise the true identity of the account owner?

— accounts in country of residence v. other country where account holder has no other relationship

— role of foreign tax evasion / role of foreign tax compliance

— lawful reasons to have an account outside the U.S., e.g., asset protection, estate planning

— unfiled v. partially correct FBARs

— Did the taxpayer have any knowledge of the foreign source income, foreign accounts or foreign assets? Why was there income?

— What is taxpayer’s level and type of education? What is the perceived degree of financial and business sophistication and education of the account holder?

— Does the taxpayer have any specialized knowledge of tax rules or finance or the fact that the U.S. requires U.S. persons to report income on a worldwide basis on their tax returns?

— Does the taxpayer know anything about an FBAR or international information returns, such as a Form 5471?

— POAs as substitute for account holder/beneficial owner

— full compliance after notification from bank of reporting requirements

— actions on closure of accounts, “leavers” – transfers to yet another foreign institution, etc.

— Was the taxpayer a citizen or resident of the country where the accounts/assets were/are located? If not, why were the accounts opened in that country?

— If the taxpayer opened the account, did he/she do so with a U.S. passport, if applicable? Was the account opened in a jurisdiction with no bank secrecy laws?

— What were/are the sources of the funds in the accounts?

— Is the source of funds traceable to previously taxed income? Were the funds an inheritance? Were the funds from taxpayer’s work in the country where the accounts are located?

— “hold mail” instructions to the bank

— What type of activities took place with respect to the accounts? Deposits, withdrawals, wire transfers? If so, how frequent were these activities?

— Were there any trades in the accounts? If so, who managed the accounts?

— Did the taxpayer receive regular statements from the bank? If not, did a relative or friend receive statements or did the bank have instructions not to send any statements to the taxpayer?

— Has the account ever been moved? If so, why? Was it moved to a tax transparent country or to a jurisdiction with a tradition of bank secrecy?

Patel Law Offices has consulted with hundreds of clients regarding their non-willful advocacy and offshore asset compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.