Many of you may already be quite familiar with the Internal Revenue Service (IRS) “Streamlined” programs permitting far more practical methods of achieving tax compliance for US persons with regard to their offshore accounts or assets. While the relatively new “Streamlined” procedures may have sounded somewhat simple, I cautioned readers over a year ago to be very careful and to obtain sound advice with regard to using these “Streamlined” procedures.
In order to use the procedures, tax compliance failures must be the result of “non-willful” conduct and statements must be provided explaining the reasons for any compliance failures. You should look carefully at any and all factors that may influence such a finding. Examples would be as follows: did you seek professional tax advice? Did you reveal the foreign assets to your advisor? What did you write in any tax organizers or emails about your foreign assets? How did you answer the “tick-the-box” question on Part III of Schedule B asking if you had a foreign account? Had you previously been filing tax returns and/or FBARs while living overseas, but later become delinquent in filings? If so, what were the reasons?
Different Rules for Taxpayers Residing in the US and Offshore the US
For those taxpayers who are eligible for the program, only the past 3 years of income tax returns are required to be filed (e.g., delinquent years when no return was filed or years requiring amendments to the tax return) as well as 6 years of late FBARs. Taxes due and interest on the tax must be paid. Significantly, for taxpayers residing outside the US, all penalties will be waived (including, for example, the failure to file and/or failure to pay penalties, the accuracy-related penalty, FBAR penalties and other penalties for non-filing of information returns with regard to foreign assets).
For eligible taxpayers residing within the US, the only penalty that will be imposed is the so-called “miscellaneous offshore penalty”. Generally this is equal to 5% of the highest year-end value of the foreign financial assets that resulted in the tax noncompliance.
Folks, it doesn’t get any better than this!
Following below, are my views and takeaways for US taxpayers residing abroad and seeking to enter the Streamlined Foreign Offshore Program. More general information on the IRS Streamlined and Offshore Voluntary Disclosure Program (OVDP) can be found at my tax blog post here.
Is the Streamlined Procedures Program Ending Soon?
Recent comments by the Commissioner of the IRS have caused some practitioners to have concerns about the Streamlined Program being terminated. Let’s be clear that absolutely no one knows when the IRS will terminate the Streamlined Procedures, but clearly, taxpayers have had time to become compliant since the program was originally initiated in 2012 and later revised in June 2014 (the current updated version). The longer a taxpayer takes to correct his tax situation, the more difficult it becomes to contemplate the Streamlined option.
I believe it is significant that the Commissioner of IRS made a pointed comment on December 17, while presenting at the George Washington University Law conference on international taxation. IRS Commissioner John Koskinen said, “At some point, we will have assumed that people have had enough notice that they should have become voluntarily compliant,” “At that point—after some period of time and you’re not compliant—it will be assumed that logically you are purposely not compliant”.
Comments, quoted below, by the Department of Justice Tax Division echo the above sentiment. It is the collective grumbling sounds that taxpayers have now had sufficient time and opportunity to correct their tax transgressions and become tax compliant that tend to make me a bit nervous.
“U.S. taxpayers have been given ample opportunity to come forward, disclose their secret foreign accounts, and come into compliance,” said Acting Assistant Attorney General Ciraolo. “Those individuals and entities who rolled the dice in the hope of remaining anonymous are facing the consequences. The Tax Division remains committed to investigating and prosecuting individual taxpayers with undeclared foreign financial accounts, as well as the financial institutions, bankers, financial advisors and other professionals who facilitate the concealment of income and assets offshore.”
It seems that 2016 will be a year when enforcement may reach a peak as FATCA information comes in from foreign financial institutions and more and more information is obtained from the OVDP. The Department of Justice Tax Division had this to say:
“So what can you expect in 2016? Additional civil enforcement actions and ongoing and new criminal investigations and prosecutions. Taxpayers who have participated in the IRS voluntary disclosure programs may be contacted and interviewed by the IRS and the department as part of their ongoing cooperation. Taxpayers who filed returns and FBARs pursuant to the streamlined filing procedures or the Delinquent International Information Return or FBAR submission procedures should be very concerned if they falsely claimed to have engaged in non-willful conduct or acted with reasonable cause. And financial institutions and individuals who have facilitated the concealment of offshore accounts and the evasion of U.S. tax obligations would be well advised to anticipate an investigation and consider voluntarily disclosing any criminal activity to the department before they become the subject of an investigation.”
While personally I do not think the IRS will end the Streamlined program very soon, I know from seasoned experience that the longer unresolved tax matters drag on without affirmative action being taken by the taxpayer, the more difficult it becomes for a tax advisor to effectively handle the case. In addition, it is clear that the IRS is becoming more and more strict and demanding in its reviews of Streamlined cases. It is looking in depth at some submissions based on other information it has in its possession from OVDP data mining as well as the “Foreign Account Tax Compliance Act” (FATCA).
A More Exacting Review of “Foreign Residence” and Statements of “Nonwillfulness”
Very recent IRS actions support these observations. In January 2016, the IRS revised the Form 14653, Streamlined Certification of Nonwillfulness for taxpayers residing outside the US as well as the FAQ’s covering the Streamlined Programs.
Residence Outside the US
With regard to Form 14653, the IRS is now asking very precise questions about one’s physical presence outside the United States to ensure the taxpayer’s eligibility for the Streamlined Foreign Offshore Procedures. My guess is that some taxpayers may have tried to manipulate their residence to be offshore simply in order to qualify for the program. Here is an excerpt from the Form:
“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)” [A grid-chart follows the question for each year in the 3-year coverage period]…..”
A simple explanation of the tax term “abode” can be found at my tax blog post.
“Non-willfulness?” – Full Details Mandatory
The FAQs are also quite clearly more detailed as evidenced by the IRS revision to the FAQs on January 7, 2016. The IRS is now being far more specific in the facts it requires be stated for Streamlined submissions. See FAQ 6 which is copied below (underscoring, mine) In addition, the Form 14653 now reflects the mandate for this fact specificity.
Q. “What facts do I need to include in completing the narrative statement of facts portion of the Form 14653?”
A. “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.
The following points address common situations that may apply to you:
- We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation.
- We realize that some taxpayers that owned or controlled a foreign entity (e.g., corporation, trust, partnership, IBC, etc.) failed to properly report ownership of the entity or transactions with the foreign entity. If you (or your return preparer) inadvertently failed to report ownership or control of the foreign entity or transactions with the foreign entity, explain why and include your understanding of your reporting obligations to the IRS and to foreign jurisdictions.
- If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. Also provide background such as how you came into contact with the advisor and frequency of communication with the advisor.
If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.”
I have understood from one of the IRS agents in the Streamlined program that if there are numerous overseas assets (especially in various jurisdictions) and/or the dollar amounts are large, the explanation must be far more detailed. This makes sense. If significant offshore assets or huge amounts are involved, the taxpayer more likely sought professional advice, asset management or structuring from advisors that may have (should have?) raised the US tax implications.
In summary, the longer unresolved tax matters drag on without affirmative action being taken, the more difficult it becomes for your tax advisor to effectively handle your case. You only do yourself an injustice by procrastinating since an advisor cannot assist you in the best way possible when too much time has gone by. With all the publicity surrounding the IRS’ efforts in offshore tax evasion matters and the worldwide implementation of FATCA, time is clearly not on your side and simply weakens your assertion of “non-willfulness”.
Follow me on Twitter: @VLJeker