The Streamlined Filing Compliance Procedures represent an IRS effort to find a viable method of encouraging U.S. taxpayers to come into compliance with their reporting and filing requirements associated with varying interests in foreign financial accounts and assets.[i] The Streamlined Procedures require the filing of original or amended tax returns and FBARs as well as a Certification of Non-Willful conduct on IRS Form 14653.[ii]
For eligible U.S. taxpayers residing outside the United States, all penalties are waived under the streamlined procedures. For eligible U.S. taxpayers residing in the United States, the only penalty under the streamlined procedures will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue (all income tax related penalties associated with the non-U.S. source income will be waived). All relevant facts and circumstances must be carefully analyzed before making a determination regarding the submission of a “non-willful” certification requesting participation in the Streamlined Procedures.
Douglas H. Shulman, Commissioner of Internal Revenue, Washington, D.C. , October 26, 2009 “If you are a US individual holding overseas assets, you must report and pay your taxes or we will be increasingly focused on finding you.”
DoJ Letter Re Investigation of Undeclared Foreign Financial Accounts. A few years back, various taxpayers received an unexpected warning letter from the Tax Division of the U.S. Department of Justice stating “The Department of Justice is conducting an investigation of U.S. taxpayers who may have violated federal criminal laws by failing to report they had a financial interest in, or signature authority over, a financial account located in a foreign country. We have reason to believe that you had an interest in a financial account in India that was not reported to the IRS on either a tax return or FBAR, Department of Treasury Form TD F 90-22.1, report of Foreign Bank and Financial Account. You are advised that the destruction or alteration of any document that may relate to this investigation constitutes a serious violation of federal law, including but not limited to obstruction of justice . . . You are further advised that you are a subject of a criminal investigation being conducted by the Tax Division [of the Department of Justice].”
Current Options for U.S. Taxpayers with Undisclosed Foreign Financial Assets
￭ 2014+ Offshore Voluntary Disclosure Program (OVDP) [iii]
￭ Streamlined Filing Compliance Procedures[iv]
￭ Delinquent FBAR Submission Procedures[v]
￭ Delinquent International Information Return Submission Procedures[vi]
Revisions to IRS Form 14653 – Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures. Form 14653 was revised in January 2016. The previous Form 14653 was issued in January 2015 and contained the following note (in red): “Note: You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.” Form 14653 (Rev. 1-2016) retains the foregoing language but is no longer highlighted in red.
Form 14653 (Rev. 1-2016) now includes the following revisions:
(1). There is now a detailed request for information regarding presence outside the U.S. during the Streamlined Procedures submission period: “Note: Both spouses filing a joint certification must meet the non-residency requirements. Complete one of the following (two) sections regarding your residency status:
(a). “If you are a U.S. citizen or lawful permanent resident (i.e., “green card holder”), complete this section: For the covered tax period, indicate whether you were physically outside the United States for each year. You must have been physically outside the U.S. for at least 330 full days in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, and you must not have had a U.S. abode. For more information on the meaning of “abode” see IRS Publication 54.I was physically outside the United States for at least 330 full days (answer Yes or No for each year) [with a chart containing “Yes/No” blocks to be completed for each of the 3-year Streamlined Procedures submission period]. Both spouses filing a joint certification must meet the non-residency requirement. If the number of days physically outside of the U.S. differs for each spouse, disclose that on the chart above or in an attachment to this certification.
(b). If you are not a U.S. citizen or lawful permanent resident, complete this section: If you are not a U.S. citizen or a lawful permanent resident, please attach to this certification your computation showing that you did not meet the substantial presence test under I.R.C. sec. 7701(b)(3). Your computation must disclose the number of days you were present in the U.S. for the three years included in your Streamlined Foreign Offshore Procedures submission and the previous two years. If you do not attach a complete computation showing that you did not meet the substantial presence test, your submission will be considered incomplete and your submission will not qualify for the Streamlined Foreign Offshore Procedures.
(2). Form 14653 (Rev. 1-2015) stated: “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. The field below will automatically expand to accommodate your statement of facts.”
Form 14653 (Rev. 1-2016) now includes an expanded request for a factual explanation (similar to the recently issued FAQs[vii]), in bold: “Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Include the whole story including favorable and unfavorable facts. Specific reasons, whether favorable or unfavorable 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. Additionally, explain the source of funds in all of your foreign financial accounts/assets. 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. And explain your contacts with the account/asset including withdrawals, deposits, and investment/ management decisions. Provide a complete story about your foreign financial account/asset. 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. The field below will automatically expand to accommodate your statement of facts. Both spouses filing a joint certification must meet the non-residency requirement. If the number of days inside the U.S. differs for each spouse, disclose that on the chart above or in an attachment to this certification.
(3). An additional signature line has been added for “For Paid Preparer Use Only (the signature of taxpayer(s) or fiduciary is required even if this form is signed by a paid preparer)” as well as an authorization for the IRS “allow another person to discuss this form with the IRS.”
Am I “Non-Willful”? Taxpayers pursuing resolution of a foreign account issue within the Streamlined Procedures are required to certify under penalties of perjury that their conduct was “non-willful.” For purposes of the streamlined procedures, non-willful conduct is defined 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.”[viii] The relatively more culpable standards of “willfulness” or “willful blindness” are not referenced in the Streamlined Procedures.
The streamlined certification process poses unique challenges to taxpayers and their representatives. The required certification Form 14653 (Rev. 1-2016) requires that the taxpayer “provide specific reasons” for the prior non-compliance can be troubling for those who simply did not know and/or were not advised of the requisite filing and reporting requirements. Beyond “I didn’t know,” it has often been difficult to get more specific.
The IRS is to be commended for now providing guidance within Form 14653 (Rev. 1-2016) suggesting that the taxpayer provide information “whether favorable or unfavorable 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 re returns, including FBARs. Additionally, explain the source of funds in all of your foreign financial accounts/assets. 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. And explain your contacts with the account/asset including withdrawals, deposits, and investment/ management decisions. Provide a complete story about your foreign financial account/asset.”
While experienced tax professionals may be familiar with case law and secondary source materials as to what factors bear relevance in these matters, the foregoing IRS guidance is intended to assist, to the extent possible, those taxpayers who choose to complete the forms without access to professionals. Moreover, expressly indicating that both “favorable or unfavorable” factors should be provided within Form 14653 (Rev. 1-2016) will remind potential participants that few, if any, streamlined cases involve only beneficial facts, and that individuals with a mixed bag of facts remain appropriate candidates for the expanded Streamlined Procedures.
Caution Required. Returns submitted under the Streamlined Procedures may be subject to IRS examination resulting in additional tax and penalties with respect to any audit related adjustments. Also, the Streamlined Procedures do not provide protection from a possible criminal prosecution referral to the U.S. Department of Justice. However, if a taxpayer satisfies the “non-willful” requirement for participation in the Streamlined Procedures, they should not be a candidate for a criminal prosecution in any event.
Further, the IRS Voluntary Disclosure Practice set forth in IRS Internal Revenue Manual (IRM) 126.96.36.199 would seem to provide a pass from a criminal referral if the appropriate “bells and whistles” set forth in IRM 188.8.131.52 are followed (a “truthful, timely, complete” disclosure, “willingness to cooperate”, “taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable,” etc.). If the taxpayer’s conduct is somehow deemed “willful,” they would not be a viable candidate for the Streamlined Procedures and should consider coming into compliance through the current IRS Offshore Voluntary Disclosure Program (OVDP).
The Streamlined Procedures do not limit the civil penalties otherwise associated with the reporting of U.S. (domestic) source income. IRS OVDP Frequently Asked Question 7.1 provides “The offshore penalty structure only resolves liabilities and penalties related to offshore noncompliance. Domestic portions of a voluntary disclosure are subject to examination.” The original OVDP was created in 2009 around the theory that those who failed to report any interest in a foreign financial account did so with the intent to evade a U.S. tax obligation. This theory obviously ignored the realities of life for most residing outside the U. S. as well as for many recent immigrants.
What to Anticipate from the IRS Regarding the “Non-Willful” Certification? The IRS has indicated it will review each certification of non-willful status seeking participation in the Streamlined Procedures. The source of funds held in the foreign account may be an important factor. If the source of funds in the account was from unreported income, the situation can become somewhat problematic. However, having inherited funds in a foreign financial account, without more, might not be considered deserving of non-willful status by the IRS. The IRS has expressed an intention to treat taxpayers consistently and numerous individuals having inherited funds in an undeclared foreign account have been subjected to the stated OVDP penalty.
Deposits and withdrawals to the foreign account can reveal intentions and knowledge of various individuals involved. In reviewing the “non-willful” certification, the government can be expected to inquire about the manner in which deposits and/or withdrawals were made to/from the foreign account(s); the mechanics of how deposits/withdrawals were made; the form in which deposits/withdrawals occurred (i.e. cash, check, wire, travelers’ check, etc.); amounts of each withdrawal/deposit; when such deposits/withdrawals occurred; where such deposits/withdrawals occurred; whether there were there limitations on the amounts that could be deposited/withdrawn; and documents received when a deposit/withdrawal occurred (i.e. receipt, credit memo, debit memo, etc.)?
Additional considerations regarding someone being “non-willful” often include whether the existence of the account was disclosed to the return preparer or others; whether the account was at some point moved to another foreign financial institution; whether the taxpayer’s advisors had some degree of knowledge about the account; the perceived degree of financial and business sophistication and education of the taxpayer; whether foreign entities were involved as accountholders; documents provided to open the account [i.e. U.S. or foreign passport(s), identification card, etc. – note that it might not be a good fact for a taxpayer having dual passports to open an account with their non-U.S. passport]; communications, if any, with others that occurred regarding bank secrecy, taxation, and/or disclosure of any foreign accounts; failure to seek independent legal advice about how to properly handle the foreign bank account and instructions or advice received regarding holding or receiving mail from the bank, etc. Further questions often lay within the responses to each of the foregoing questions.
Lastly, in reviewing the non-willful certification under the Streamlined Procedures, resident taxpayers should anticipate the government inquiring as to whether the foreign accounts remain open and if not, where the funds were transferred when the account(s) were closed. Some resident taxpayers closed accounts and transferred the funds directly to a domestic account. Others closed accounts and transferred the funds through various means to other foreign accounts. Further questions often lay within the responses to each of the foregoing questions. An interview by an IRS agent (in person or by phone) should be anticipated and is more likely with respect to resident taxpayers.
How Does the Preparer Impact the Determination? The IRM defines the test “willfulness” in the FBAR context as a determination of whether there was “a voluntary, intentional violation of a known legal duty.”[ix] The burden of establishing willfulness is on the IRS and may be demonstrated by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.[x] In the FBAR situation, the only thing that a person need know is that he has a reporting requirement.[xi] If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement may a conscious choice not to file the FBAR.[xii]
Should the taxpayer have inquired of their return preparer about the need to report an interest in a foreign financial account? Should the preparer have gone beyond providing a tax organizer that recites the Schedule B reference relating to an interest in a foreign financial account and perhaps explained what types of foreign interests are reportable?[xiii] Will a return preparer actually step up and confirm they knew of the existence of a reportable interest in a foreign financial account and to some degree advised the taxpayer the FBAR was not required? Will the IRS punish the preparer who steps up and gave the wrong advice . . . or no advice when faced with an objective duty to inquire about the possible existence of a foreign financial account?
Was the definition of “non-willful” conduct set forth in the Streamlined Procedures intended to be significantly more user friendly than the historic definitions of “willfulness” and “willful blindness” in the FBAR context? Can taxpayers rely upon the Streamlined Procedures if their return preparer declines to confirm a lack of inquiry about the existence of an interest in a foreign financial account? Can taxpayers rely upon the Streamlined Procedures if they simply failed to advise their return preparer of the existence of an interest in a foreign financial account? The IRS Internal Revenue Manual affirmatively concludes that “The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.”[xiv] Does a common sense definition of “non-willful” conduct apply . . . or not? Feel lucky?
Civil vs. Criminal Resolution? If there are material, possibly intentional, misstatements set forth in the non-willful certification, the taxpayer might anticipate exposure to the extensive criminal enforcement powers of the U.S. government. The certification Form 14653 (Rev. 1-2016) required to be signed by the taxpayer under the Streamlined Procedures provides “I recognize that if the Internal Revenue Service receives of discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to [IRS] Criminal Investigation.” If there are any uncertainties or potentially difficult factual scenarios involved, consult with experienced counsel.
The government may already have or might subsequently receive information that does not support non-willful conduct asserted in a completed Form 14653 (Rev. 1-2016). All relevant facts and circumstances must be carefully analyzed before making a determination regarding the submission of a “non-willful” certification requesting participation in the streamlined procedures.
What to do? Taxpayers not currently participating in an OVDP who meet the eligibility requirements for the Streamlined Procedures should consider requesting streamlined treatment if they are comfortable and have sufficient factual basis to certify their “non-willful” status.
Non-resident taxpayers might be better positioned to achieve their goal of a non-willful, no penalty resolution under the streamlined procedures. Their “foreign” account is actually in their own neighborhood; it is only “foreign” in the sense that it is located outside the territorial boundaries of the United States. The existence of the account does not, by itself, somehow represent an acknowledgment of tax non-compliance by the non-resident taxpayer. The Streamlined Procedures seem to represent a significant attempt by the government to acknowledge that at some point, non-resident taxpayers become residents of their home state, emotionally even if perhaps not technically.
Those directly involved in creating and maintaining the foreign account and assets are the only ones capable of determining whether determining non-willful status. If such status is not supported by sufficient objective facts, consider other methods of coming into compliance, including the OVDP.
Taxpayers (and their return preparers) will sleep better if they get it right, somehow get into compliance and move on in life . . .
[i] IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance, IR-2014-73, June 18, 2014
[ii] Forms FinCEN Form 114- Report of Foreign Bank and Financial Accounts (formerly Forms-TD F 90.22.1–Report of Foreign Bank and Financial Accounts)
[ix] FBAR Willfulness Penalty – Willfulness IRM184.108.40.206.5.3 (07-01-2008)
[xiii] For 2013, Schedule B, Line 7a states “At any time during 2013, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions. . . . If ‘Yes,’ are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), formerly TD F 90-22.1, to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements.” Further, Schedule B, Line 7b states “If you are required to file FinCEN Form 114, enter the name of the foreign country where the financial account is located.”
[xiv] FBAR Willfulness Penalty – Willfulness IRM220.127.116.11.5.3 (07-01-2008)