What Is The Difference Between the SDOP and the Current OVDP program?: Willfulness

What Is The Difference Between the SDOP and the Current OVDP program?

The Streamlined Offshore Procedures (SDOP and SFOP) liberalizes the old restrictions and rewards taxpayers that disclose their offshore assets with a lower penalty and a very low tax. Taxpayers will only have to file 3 years of amended income tax returns instead of the current OVDP program’s requirement of 8 years of amended income tax returns. They will be assessed a penalty of only 5% of the account with the highest balance instead of the OVDP program’s 27.5% penalty.

In addition, the SDOP radically expands the previous Streamlined Program for Non-US residents which was only for non-tax filers with under $1,500 of income that was unreported.

SDOP Filing Risk Factors

It is extremely important that a taxpayer’s eligibility is carefully analyzed because once the SDOP is elected and the taxpayer claims the violations were non-willful, the taxpayer will not be eligible for the OVDP any longer. There are possible risk factors that need to be considered and analyzed such as the evidence of willfulness including intent of laws, knowledge and violations.

Although filing an SDOP does not automatically select the taxpayer for an IRS audit, the taxpayers is still subject to the possible normal audit selection. The taxpayer needs to be prepared to defend filing a SDOP and be able to demonstrate their non-willfulness and show there was no fraud.

Nonwillfulness certification

In the streamlined procedures, taxpayers must certify that their failure to report foreign financial assets and pay all tax due was not the result of willful conduct (click here for further details). A taxpayer must complete and execute a certification form, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.

The most important first step in analyzing whether a taxpayer is eligible to participate in the streamlined procedures is to ascertain whether the taxpayer’s compliance failure, including the failure to file an FBAR, was actually non-willful. The IRS has defined “nonwillful conduct” as “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 definition is a little different from other legal cases. For failure to file FBARs, the IRS must establish knowledge of the law and evaluating indicators of willfulness (Internal Revenue Manual (IRM) §4.26.7).

Willfulness in criminal tax cases generally means a voluntary, intentional violation of a known legal duty (Cheek, 498 U.S. 192 (1991)). The taxpayer does not have to have an improper motive or a bad purpose. All that is required is that the taxpayer knew of the duty and intended to violate it (Pomponio, 429 U.S. 10 (1976)).

Willfulness means not only knowing violations, but reckless ones as well. For example, “[a] responsible person is reckless if he knew or should have known of a risk that the taxes were not being paid, had a reasonable opportunity to discover and remedy the problem, and yet failed to undertake reasonable efforts to ensure payment” (Jenkins, 101 Fed. Cl. 122, 134 (2011), aff’d, No. 2012-5019 (Fed. Cir. 2012)). “[W]illfulness has been found where ‘the facts and circumstances of a particular case, taken as a whole, demonstrate’ that the taxpayer ‘knew or should have known that there was a risk [of noncompliance] and failed to take available corrective action,’ with the result being the violation of the law” (McBride, 908 F. Supp. 2d 1186, 1209 (D. Utah 2012).

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.