In the midst of tough tax season, many U.S taxpayers are unfortunately surprised to discover that they have a U.S. tax reporting obligation on financial accounts or assets held overseas. Once they discover their tax and reporting obligation, there are a number of programs through which they can become compliant. One option, if the taxpayers meet the requirements, is to file under the Streamlined Domestic Offshore Procedures (SDOP) or the Streamlined Foreign Offshore Procedures (SFOP). \u00a0This article focuses on the SDOP, which is for taxpayers who reside in the United States.<\/p>\n
The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).<\/p>\n
The IRS introduced SFCP in June 2014 as an alternative to its existing Offshore Voluntary Disclosure Program (OVDP), which was designed more for taxpayers with evidence of willful failure to disclose foreign assets.\u00a0 Specifically, SFCP is for taxpayers who non-willfully failed to disclose foreign assets. Under the SFCP, non-willful conduct is specifically defined as \u201cconduct 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\u201d.<\/p>\n
The most important first step in analyzing whether a taxpayer is eligible to participate in the streamlined procedures is to ascertain whether the taxpayer\u2019s compliance failure, including the failure to file an FBAR, was actually non-willful. The IRS has defined \u201cnonwillful conduct\u201d as \u201cconduct 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.\u201d\u00a0 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) \u00a74.26.7).\u00a0 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)).<\/p>\n
It is extremely important that a taxpayer\u2019s eligibility is carefully analyzed because once the SFCP 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 SFCP 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 SFCP and be able to demonstrate their non-willfulness.<\/p>\n
The SDOP has numerous requirements.\u00a0 Specifically, in addition to filing any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed, the taxpayer must submit: (1) amended tax returns, together with all required information returns for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date has passed); (2) the full amount of the tax and interest due in connection with the amended returns; (3) a completed and signed Certification by U.S. Person Residing In the U.S. (Form 14654); and (4) the Title 26 miscellaneous ONE TIME offshore penalty (which is equal to 5 percent of the highest aggregate year-end balance\/value of the taxpayer\u2019s foreign financial assets that are in the SFCP penalty base).\u00a0 However, taxpayers who enter the SDOP are NOT subject to other various penalties (e.g., failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties or FBAR penalties).<\/p>\n
Taxpayers in the SDOP must submit Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures).\u00a0 As part of such certification, the taxpayer must provide specific facts and reasons (generally on a signed attachment) why their conduct was non-willful. In February 2016, the IRS revised Form 14654 to require more disclosure.\u00a0 Now the IRS also instructs the taxpayer to:<\/p>\n
Include the whole story<\/em> including favorable and unfavorable<\/em> facts.\u00a0 Specific reasons, whether favorable or unfavorable<\/em> to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs.\u00a0 Additionally, explain the source of funds in all of your foreign financial accounts\/assets.\u00a0 For example, explain whether you inherited the account\/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.\u00a0 And explain your contact with the account\/asset including withdrawals, deposits, and investment\/management decisions.\u00a0 Provide a complete story about your foreign financial account\/asset.\u00a0\u00a0 If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. (italics added)<\/p>\n This is the third revision to this form in the last 18 months. The revision indicates that the IRS is receiving many incomplete disclosures. In fact, our law firm has cleaned up many rejected incomplete or inadequate SFCP nonwillful certifications. As a result of the revision, the IRS is requesting the \u201cwhole story\u201d in exhaustive detail.\u00a0 The revision poses a very delicate balance for our advocacy for our clients:\u00a0 we need to share enough information in order to persuasively demonstrate non-willfulness, including unfavorable facts and circumstances; however excessive unnecessary disclosure(s) could lead to new questions and complications.<\/p>\n Whether a taxpayer\u2019s conduct is non-willful is a critical question of fact and law, based largely on the taxpayer\u2019s particular facts and circumstances. While the streamlined program offers a welcome option for many taxpayers with undeclared accounts, other ways to address past noncompliance remain viable, including the\u00a0OVDP<\/a>\u00a0program and Delinquent\u00a0FBAR<\/a>\u00a0Submission Procedures and Delinquent International Information Return Submission Procedures. The analysis to enter the one program versus other alternative options is complex and requires full legal analysis by a competent experienced tax attorney.<\/p>\n Our firm presented an informational webinar on the\u00a0Streamlined Filing Compliance Procedures<\/a>. Materials from the webinar can be downloaded here:\u00a0Game Changer Streamline<\/a>.<\/p>\n