Non-willful conduct for making a voluntary disclosure of FBARs under the IRS’s streamlined filing compliance procedures is “negligence, inadvertence, or mistake, or conduct that results from a good faith misunderstanding of the requirements of the law.”
What does the non-willful standard mean in practice? How should you structure your voluntary disclosure under the streamlined filing compliance procedures to meet the standard? The experienced international tax lawyer at Porter Law Office, LLC represents U.S. taxpayers residing in the U.S. and abroad regarding the Internal Revenue Service’s (“IRS”) offshore voluntary disclosure procedures.
This article provides a guidance on the IRS’s interpretation of “non-willful” conduct when reporting income from foreign investments on previously un-filed FBARs under the IRS’s streamlined filing compliance program.
Changes to Streamlined Procedures and OVDP
The IRS recently announced an expansion of the Streamlined Filing Compliance Procedures and a modification to the Offshore Voluntary Disclosure Program (“OVDP”). The changes were made to encourage U.S. taxpayers to make a voluntary disclosure and report their foreign accounts and assets by filing U.S. tax returns and international filings, such as the FBAR and Form 8938.
Under the new streamlined procedures, U.S. taxpayers residing abroad will not be subject to any penalties (with exceptions, see practice pointer below) if they are eligible for the Streamlined Filing Compliance Procedures. If eligible, the taxpayers must file three year’s worth of original or amended federal income tax returns as well as international information returns, file FBARs for the previous six years of non-compliance, and submit the full amount of tax and interest associated with the returns. If taxpayers had U.S. source income, it will need to be reported as well. Finally, taxpayers must and certify that their reporting failures were due to “non-willful” conduct. See U.S. Taxpayers Residing Outside the United States.
Practice Pointer: If you have unreported domestic source income, the streamlined procedures do not limit the civil penalties associated with reporting it. Thus, you may be subject to penalties pursuant to an examination. Further, the streamlined procedures do not provide protection from a possible criminal prosecution referral. That being said, if you show a willingness to cooperate with the IRS, you make good faith arrangements to pay the tax, interest, and penalties, and you make a truthful, timely, and complete disclosure, the IRS may not recommend criminal prosecution. See the IRS Voluntary Disclosure Practice (IRM 9.5.11.9).
Contact Columbus tax lawyer for questions on making a domestic voluntary disclosure.
The streamlined filing compliance procedures also provide U.S. taxpayers residing in the U.S. a path to compliance. If eligible, these taxpayers must pay a 5% on the highest aggregate balance/value of their foreign financial assets. For more information, see U.S. Taxpayers Residing in the United States.
The changes to the streamlined procedures were designed to make the OVDP most useful for willful non-filers that used offshore investments as tax evasion devices. By agreeing that their conduct was willful and paying the unreported tax, interest, accuracy-related penalties, and a 27.5% or 50% offshore penalty on the highest aggregate balance of their assets, taxpayers under the OVDP generally escape a criminal investigation referral.
What is Non-Willful Conduct?
If you are eligible to make a voluntary disclosure under the streamlined procedures, you must certify under penalties of perjury that your conduct was “non-willful.” This certification requires you to provide specific reasons for your failure to file returns, including FBARs. If you relied on a tax advisor, the IRS will need the name, address, and phone number of the advisor and a summary of that advice. Joint filers with different reasons for not filing will each have to provide their own explanations.
The non-willful standard under the streamlined procedures appears simple on its face, but it is more complex in application. The standard is “negligence, inadvertence, or mistake, or conduct that results from a good faith misunderstanding of the requirements of the law.” Notice that the streamlined procedures do not reference the more culpable standards of willfulness—i.e., voluntary, intentional violation of a known legal duty, or willful blindness—i.e., a conscious effort to avoid learning about the reporting requirements.
Curiously, the IRS has recently used the higher standard of willful blindness against certain taxpayers attempting to use the transitional rules to transition from the OVDP to the streamlined procedures.
What is the Standard Under the Streamlined Procedures?
If you file originally under the streamlined filing compliance procedures, it is fairly clear that the standard is simply “non-willful” conduct. But, if you originally filed under the OVDP, and your case was eligible for transitional treatment, it is unclear what standard applies. These issues highlight the uncertainties in making a voluntary disclosure under the streamlined procedures. Accordingly, all the facts and circumstances in your situation must be developed and reviewed prior to making a voluntary disclosure.
Even if it is determined that your conduct was non-willful, you should be prepared to also explain why you did not exhibit willful blindness. The below section of the IRM provides a good summary of the standard:
Per IRM 4.26.16.4.5.3, “under the concept of willful blindness, willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provide further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file Form 90-22.1 (FBAR). These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms.”
The reason that proving non-willful conduct is so difficult in this environment is that there are many uncertainties with the concept. Proving a negative is also more difficult than proving affirmative acts. Further, your statements are very self-serving, and objective primary evidence may be hard to come by. More importantly, the government may have background information about you or your foreign investments that disproves your certification of non-willfulness.
Contact an Experienced Columbus Tax Lawyer
Voluntary Disclosure Representation
Columbus tax lawyer at Porter Law Office, LLC has in depth experience resolving difficult voluntary disclosures for reporting income from foreign investments and filing FBARs. By hiring Porter Law Office, LLC, you can learn about the seriousness of your situation and be guided to the best possible resolution at the least overall cost. Columbus tax lawyer Matthew R. Porter is an experienced international tax attorney who understands what it takes to overcome the legal hurdles associated with the concept of willfulness under the IRS offshore voluntary disclosure process and streamlined filing compliance procedures. Schedule a free consultation today to discuss your options.