As readers will remember, the linchpin of the Streamlined Procedure, whether foreign or domestic, is that the tax noncompliance must have been "nonwillful". Some fact patterns are very clear and a professional can quite rapidly find "nonwillfulness" (or not) thereby making the taxpayer a good candidate for the Streamlined process (or not). Fact patterns in other cases, however, are not as clear-cut. Some of the facts will support a finding of "nonwillfulness", but other facts may mitigate against it. In such cases it is difficult making a call whether the tax noncompliance falls on the "willful" or "non-willful" side of the line. Professionals struggle for guidance in such situations. For example, is "nonwillfulness" even possible in a case when a taxpayer has an established history of failing to timely file income tax and information returns? What about if the taxpayer had filed returns for some time while living abroad and then dropped out of the system, but now seeks to regain compliance through the Streamlined Foreign Offshore Initiative?
Many readers of my blog are likely familiar with Jack Townsend's highly informative Federal Tax Crimes Blog. Jack recently provided some good news about the Streamlined Procedure gleaned from his attendance at the ABA Tax Section Civil and Criminal Penalties Session held on May 9 and 10. Jack reported that at the ABA session in May there was discussion of potential criminal prosecution when a taxpayer presents a Streamlined Certification that IRS believes does not support treatment as "nonwillful". Jack writes: "It was generally agreed that a streamlined certification (Foreign or Domestic) which has a robust narrative of the material good and bad facts should not generate a criminal action for false certification even if the IRS disagrees with the taxpayer's conclusion that those facts support nonwillfulness. Where, however, the taxpayer fails to properly and fairly disclose the material facts- good and bad — the taxpayer may be at risk of prosecution."
If a taxpayer entering the Streamlined procedure has tax noncompliance that was the result of "willful" (as opposed to "nonwillful") conduct - what happens? The answer here depends on whether the "willfulness" fits within the meaning of the civil penalty definition, or the criminal penalty definition. Taxpayers with criminal issues lurking in their facts risk serious criminal penalties, including jail time. They should not be entering the Streamlined Procedure, which does not provide protection from criminal prosecution, but instead should be entering the "Offshore Voluntary Disclosure Program". If the taxpayer's conduct does not involve criminal issues, then the "willfulness" inquiry may involve exposure to possible civil penalties.
IRS has made it clear that it wants full disclosure of all the facts - both favorable and non-favorable to a taxpayer's case. The certification of nonwillfulness is set out in a detailed narrative signed by the taxpayer under penalties of perjury and made an integral part of the Streamlined submission. Taxpayers should obtain professional advice before entry into the Streamlined program to reduce the risk of choosing the wrong road.
Another important topic on which Jack reported from the ABA Tax Session involved exposure for tax noncompliance in earlier years not covered by the Streamlined filing. It will be recalled that the Streamlined Program requires the filing of three years of amended tax returns, or in the case of the Streamlined Foreign Offshore program, three years of delinquent returns. Six years of FBARs must also be filed. The question arose whether filing in the Streamlined program precludes a taxpayer's income tax exposure for any earlier tax years.
Earlier tax years typically remain open (and thus, subject to IRS adjustments, additional taxes etc.) due to statute of limitations issues. A tax statute of limitations prescribes the length of time permitted to the IRS to enforce the tax rules. If the time runs out for a certain tax year, the IRS cannot pursue its case.
If you never file a tax return for a particular tax year, the statute of limitations "clock" will never start to "tick" and the IRS can come after you "forever." Once you file your income tax return, there are several possibilities with regard to how the statute will operate. The general rule is that the IRS has three years after the later of the date the tax return was due or the date the return was filed, in order to assess tax. This rule applies if the tax return is timely filed or if it is filed late. However, the statute can be extended to six years if there is a "substantial understatement" of income. This means the taxpayer omitted from gross income an amount properly includible in his income and that amount is more than 25% of the amount of gross income stated in the tax return. Under special rules added to the tax laws in 2010 with implementation of the infamous FATCA, the statute can also be extended to six years if the taxpayer omits over $5,000 from gross income that is attributable to certain kinds of foreign financial assets; furthermore, the statute will remain open indefinitely if any information returns concerning foreign assets are not filed as required.
While the IRS has provided no assurance that entry into the Streamlined procedure will preclude an IRS action for earlier tax years that remain open under the statute of limitations, I have not heard of the IRS trying to reach further back in time for any taxpayers entering the Streamlined program. Jack Townsend states that "most practitioners have assumed that, given its design and the way voluntary disclosure programs have worked in the past, earlier years would not be subject to adjustment." Jack reported some good news on this issue from his attendance at the ABA session:
"John McDougal, an IRS attorney who has been a major player in the IRS's offshore initiatives since the inception, said that, while he could only speak for himself and not the IRS (the standard disclaimer), he thinks there is practical assurance because that is the design of the program and seems to be implicit. He said that, should the IRS choose to go after earlier years, that action would impede the effectiveness of the program that encourages people to get back into the system to the extent they have not in the past. Fewer people would join the program, and the IRS will have shot itself in the foot. While Mr. McDougal is a lone voice not speaking for the IRS, he is an authoritative voice whose comments need to be considered by taxpayers and practitioners."
You can access Jack Townsend's full blog post here.
If you have not been tax compliant, and you can meet the parameters of the Streamlined Foreign Offshore or Domestic procedures, it's the best thing out there. It won't get any better than this and we simply don't know how much longer IRS will carry on this initiative. 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, it will soon become highly skeptical when a taxpayer claims he "did not know" about his filing duties. Time is clearly not on your side and simply weakens your assertion of "non-willfulness".
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
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