Navigating the Choppy Seas of the Streamlined Procedures

Major Changes
• On June 18, 2014, the IRS overhauled the Offshore
Voluntary Disclosure Program while expanding and
modifying the streamlined filing procedures in order to
accommodate a broader group of U.S. taxpayers.
• These changes amount to the IRS’s latest effort to
promote tax compliance and to crack down on offshore
tax evasion, which has been an agency priority for
years.
• Experts predict that these programs will ease the
financial and legal pain for almost six million expatriate
Americans who live and work abroad, many of whom
were utterly naïve about FBAR-reporting.

Major Changes
• Major changes to the streamlined procedures
include the following:
(1) expansion of eligibility to a wider
population of U.S. taxpayers, namely
those residing in the U.S.;
(2) elimination of the $ 1,500 tax
threshold; and
(3) elimination of the risk assessment process
associated with the 2012 streamlined filing
compliance procedures.

Fundamental Tenet of Streamlined
They relax the penalties that a taxpayer with an
overseas account might otherwise face for
failing to disclose a foreign account.

Two Types
(1) Streamlined Domestic Offshore Procedures
(2) Streamlined Foreign Offshore Procedures

Streamlined Foreign
• Overview
– U.S. taxpayers living abroad (or their estates) who
disclose their foreign accounts and settle their
U.S. tax bills under the Streamlined Foreign
Offshore Procedures won’t be charged any
penalties. Instead, they will simply owe back taxes
and interest.

Streamlined Foreign
– Right about now, you might be asking yourself the
question, “Did I hear you right? There is no
miscellaneous penalty under the Streamlined
Foreign Offshore Procedures? You must be pulling
my leg!” No, you heard right.
– Also eliminated was the requirement that the
unpaid tax be $ 1,500 or less a year – a low ceiling
that most people exceeded. There will now be no
limit.

Streamlined Domestic
• Overview:
– At the same time, the IRS extended an olive
branch to Americans living in the U.S. with
undisclosed foreign accounts (or their estates),
who previously were ineligible from participating
in the streamlined procedures.
– Such persons who come forward now will owe
back taxes, interest, and a reduced “miscellaneous
offshore penalty” equal to five percent of their
undisclosed foreign financial assets. Previously,
they would have faced a 27.5% penalty.

The Fine Print
• However, as with all programs overseen by the IRS,
there is always the fine print, the most important of
which is a certification by the taxpayer that his or her
failure to report all income, pay all tax, and submit all
required information returns was not willful.
• Those taxpayers who cannot certify that their conduct
was “nonwillful” are left with one option, albeit an
unpopular one, and that is applying to the Offshore
Voluntary Disclosure Program.

Traps for the Unwary
• Despite the seemingly taxpayer-friendly
incentives, the streamlined procedures – both
domestic and foreign – have many
shortcomings. Here are a few of its
shortcomings:

(1) They do not provide an ironclad guarantee of immunity from
prosecution.
(1) The question that I get asked most frequently is if there is any risk of
audit under the streamlined procedures. Returns submitted under either
the foreign or domestic offshore procedures are not automatically
selected for audit. Instead, they are subject to “verification.”
• Through verification, the examining agent can request account
statements and other relevant documents to verify the information
reported.
• However, this does not mean that an examination is impossible. On
the contrary, such returns may be selected for audit under the
existing audit selection processes applicable to any U.S. tax return
(see point (3)).

(3) A recent IRM Procedural Update dated August 13, 2014 sheds
some light on what type of submissions might be ripe for
examination under the streamlined procedures.
• If there are at least five foreign information returns in the
taxpayer’s streamlined submission (i.e., Forms 3520, 3520-A,
5471, 5472, 8938, 926, or 8621), then the agent must refer the
case to the Large Business and International division of the
Service (LB&I).
• The purpose of such a referral is not so the taxpayer can be
entered into a drawing for a three-day cruise aboard the Disney
“Magic.” Instead, it is quite the opposite. It likely means that
an examination is on the horizon, one that could lead to the
assertion of multiple willful or nonwillful FBAR penalties.

Beyond the FBAR – Everything You Never
Wanted to Know About All of the Other
International Reporting Forms (But Must)

Form 3520
(1) Form 3520, Annual Return to Report Transactions
With Foreign Trusts and Receipt of Certain Foreign
Gifts
– Under IRC § 6048, taxpayers must report various transactions
involving foreign trusts, including creation of a foreign trust by a
United States person, transfers of property from a United States
person to a foreign trust, and receipt of distributions from
foreign trusts.
– This return also reports the receipt of gifts from foreign entities
under IRC § 6039F.
– The penalty for returns reporting gifts is five percent of the gift
per month, up to a maximum penalty of 25 percent of the gift.

Form 926
(2) Form 926, Return by a U.S. Transferor of
Property to a Foreign Corporation
– Under IRC § 6038B, taxpayers must report transfers of
property to foreign corporations and other
information.
– The penalty for failing to file each one of these
information returns is ten percent of the value of the
property transferred, up to a maximum of $100,000
per return, with no limit if the failure to report the
transfer was intentional.

Form 3520-A
(3) Form 3520-A, Information Return of Foreign
Trust With a U.S. Owner
– Under IRC § 6048(b), taxpayers must report their
interests in foreign trusts, by United States persons
with various interests in and powers over those trusts.
– The penalty for failing to file each one of these
information returns or for filing an incomplete return,
is the greater of $10,000 or 5 percent of the gross
value of trust assets determined to be owned by the
United States person.

Form 5471
(4) Form 5471, Information Return of U.S. Persons
with Respect to Certain Foreign Corporations
– Under IRC §§ 6035, 6038 and 6046, certain United States
persons who are officers, directors or shareholders in
certain foreign corporations (including International
Business Corporations) must report information.
– The penalty for failing to file each one of these information
returns is $10,000, with an additional $10,000 added for
each month the failure continues beginning 90 days after
the taxpayer is notified of the delinquency, up to a
maximum of $50,000 per return.

Form 5472
(5) Form 5472, Information Return of a 25% Foreign-
Owned U.S. Corporation or a Foreign Corporation
Engaged in a U.S. Trade or Business
– Under IRC §§ 6038A and 6038C, taxpayers may be required to
report transactions between a 25 percent foreign-owned
domestic corporation or a foreign corporation engaged in a
trade or business in the United States and a related party.
– The penalty for failing to file each one of these information
returns, or to keep certain records regarding reportable
transactions, is $10,000, with an additional $10,000 added for
each month the failure continues beginning 90 days after the
taxpayer is notified of the delinquency.

Form 8865
(6) Form 8865, Return of U.S. Persons With Respect to
Certain Foreign Partnerships
– Under IRC §§ 6038, 6038B, and 6046A, United States persons with
certain interests in foreign partnerships must report interests in and
transactions of these foreign partnerships, transfers of property to
these foreign partnerships, and acquisitions, dispositions and
changes in foreign partnership interests.
– Penalties include $10,000 for failure to file each return, with an
additional $10,000 added for each month the failure continues
beginning 90 days after the taxpayer is notified of the delinquency.
– The penalty is capped at $50,000 per return, and ten percent of the
value of any transferred property that is not reported, subject to a
$100,000 limit.

(4) Taxpayers who are eligible to use the streamlined
procedures and who follow all of the instructions
are not subject to failure-to-file and failure-to-pay
penalties, accuracy-related penalties, information
return penalties, or FBAR penalties, even if their
returns are subsequently selected for audit.
However, immunity from penalties comes with a
few caveats:

(a) First, any previously assessed penalties
relating to the years that are selected for
audit will not be abated.
(b) Second, to the extent that the IRS determines
an additional tax deficiency for a return
submitted under these procedures, it can
assert additional tax and penalties relating to
that additional deficiency.
(c) Finally, the IRS will unleash the full arsenal of
penalties if it determines that the original tax
noncompliance was due to fraud and/or that
the FBAR violation was willful.

(5) Tax returns will be processed no different
than any other returns submitted to the
IRS. Reading between the lines, what the
IRS seems to suggest is not to expect
confirmation for receipt of the returns.
Even more important, unlike OVDP, the
streamlined filing process will not
culminate in the signing of a closing
agreement with the IRS.

(6) Taxpayers who think that they can
outsmart the fox by seeking shelter in the
OVDP bunker in the event that the IRS
rejects their non-willful certification are
sadly mistaken. Why? Once a taxpayer
makes a submission under the
streamlined procedures, it is too late to
apply to its sister program, the Offshore
Voluntary Disclosure Program.

– In other words, it’s “either or.” Attempting to
“sneak” into the streamlined compliance
program through the “back door” when a
taxpayer cannot legitimately certify non-
willfulness is like cutting off one’s nose to spite
his face.
– When the smoke clears, such a taxpayer may
end up paying a far steeper price than the
miscellaneous penalty that he sought to avoid
in the first place by rejecting the Offshore
Voluntary Disclosure Program as an option.

– The only remaining option for a taxpayer whose
streamlined submission has been rejected to
come into compliance with his U.S. tax obligations
is to file amended 1040s and delinquent
international returns in what is known as a “quiet
disclosure.”

– Taxpayers who find themselves caught in the
struggle of choosing between streamlined and
OVDP might look to the eminent archaeologist,
Indiana Jones for some practical and sound advice.
In the same way that “Indie” had to choose
between the “real” Holy Grail and the “fake” Holy
Grail with the latter resulting in a gruesome death
(i.e., decaying into dust) and the former resulting in
eternal life, you must choose “wisely.”

(7) Assuming a taxpayer’s streamlined submission is
rejected, the only remaining option for coming into
compliance with one’s U.S. tax obligations is to file
amended 1040s and delinquent international
returns in what is known as a “quiet disclosure.”

– This poses a number of risks, including an
examination that has the potential to be just as
painful as a root canal in the sense that the IRS
could assert multiple FBAR penalties that catapult a
taxpayer’s penalties into the stratosphere to the
possibility of a referral to the Criminal Investigation
(CI) division of the IRS.
– CI, in turn, could refer the case to the Department
of Justice – Tax, with a recommendation for
prosecution.

(8) The nonwillful certification – including all
statements made in the streamlined
submission (even those relating to the non-
residency requirement for streamlined
foreign) – must be signed under penalties of
perjury.
• Why is this significant?

– It means that the IRS could reject a taxpayer’s
streamlined submission not only if it obtains
evidence that directly contradicts a taxpayer’s
certification that he was not willful, but also if it
obtains evidence that directly contradicts the
taxpayer’s representation that he satisfies the
non- residency requirement of the streamlined
foreign procedures for the years in question.
– As if that was not bad enough, the IRS could
refer the matter to the Department of Justice
with a recommendation that the taxpayer be
prosecuted for perjury.

(9) With respect to the Streamlined Domestic
Offshore Procedures, the five-percent
miscellaneous penalty is imposed on a
broader base of foreign assets – not just
those relating to FBAR reporting.

Who Is Eligible for the Streamlined
Procedures
• The streamlined filing compliance procedures
are designed only for individual taxpayers,
including estates of individual taxpayers.
• They are available to both U.S. individual
taxpayers residing outside the United States
and U.S. individual taxpayers residing in the
United States.

Who Is Ineligible?
1. Those taxpayers who cannot certify that their
failure to report all income, pay all tax, and
submit all required information returns was due
to nonwillful conduct.
1. Those taxpayers who are under criminal
investigation by IRS Criminal Investigation.
1. Those taxpayers who are undergoing a civil
examination, regardless of whether that
examination relates to unreported foreign
assets.

Getting to Know the Streamlined
Procedures
Now we’ll do a “deep dive” into the specific
requirements of each program.

Getting to Know Streamlined Foreign
• U.S. taxpayers (or estates of individual U.S. taxpayers)
seeking to use the streamlined foreign offshore
procedures must satisfy the following requirements:
1. The applicable non-residency requirement (for joint
return filers, both spouses must satisfy the non-residency
requirement); and
1. Have failed to file an FBAR with respect to a foreign
financial account; and
1. The failure to file an FBAR must have resulted from non-
willful conduct.

• Who is a U.S. Taxpayer?
1. U.S. citizens;
1. Lawful permanent residents;
1. Those satisfying the substantial presence test of
IRC section 7701(b)(3).

• Non-residency Requirement
– While the concept of “residency” might appear to
be straightforward, the streamlined procedures
have contorted the definition of this four-syllable
word to such an extent that it requires scribes to
decipher its true meaning.

– The source of this confusion lies in the fact that
the definition of “residency” under the
streamlined procedures is radically different than
the general definition of “residency” in the
Internal Revenue Code.

– The non-residency requirement has two strands:
1. First, the taxpayer must have a non-U.S.
abode.
1. Second, the taxpayer must have lived outside
of the U.S. for 330 full days or more in at least
one of the most recent three years for which
the U.S. tax return due date (or properly
applied for extended due date) has passed.

– After being translated from “Parseltongue” into
English, the latter requirement means that the
taxpayer could not have spent more than 35 days
in the U.S. in any one of the three years covered
by the streamlined procedures.

– Not unlike other key terms in the Internal Revenue
Code, “U.S. abode” and “330 day physical
presence” are legal terms of art that have precise
meanings.
– Therefore, it is important to take the time to
define them and understand how they have been
interpreted by the courts.

1. Non-U.S. Abode
– According to information published by the IRS, IRC Section 911 and its
regulations are the benchmark for determining whether the taxpayer
has a non-U.S. abode.
– For purposes of IRC section 911, “tax home” has the same definition
as it does under IRC section 162(a)(2) (relating to traveling expenses
while away from home). Under Treas. Reg. § 1.911-2(b), an
individual’s tax home is considered to be located either:
• At his regular or principal (if more than one regular) place of
business, or
• If the individual has no regular or principal place of business due
to the nature of the business, then at his regular place of abode in
a real and substantial sense.

2. Taxpayer Must Have Physically Resided Outside
of the U.S. For 330 Full Days Or More In At Least
One Year of The Look-back Period
– Practically speaking, a taxpayer can spend more than
35 days in the U.S. in two of the three years of the
look-back period and still satisfy the non-residency
requirement of the streamlined foreign procedures so
long as he spent 330 full days or more outside of the
U.S. in just one of those years.
– Two extreme examples in order to drive home the
picayune nuances of this petulant rule.

– Example # 1: A taxpayer who spends 365 days in
the U.S. in year one, 365 days in the U.S. in year
two, and 35 days in the U.S. in year three satisfies
the non-residency requirement of foreign
streamlined, albeit “by the hair of his chinny chin
chin” thanks to year three.
– Point: A taxpayer can flunk the non-residency
requirement – with flying colors – by spending as
many as 365 days in the United States in two of
the three years of the look-back period but still
pass it so long as he spent at least 330 full days
abroad in just one of the three years.

– A helpful formula that illustrates the extreme scenario:
Up to 365 days in the U.S. in year one (or any
other year of the look-back period)
(+) Up to 365 days in the U.S. in year two (or any
other year of the look-back period)
(+) At least 330 days (or more) outside of the U.S. in
year three (or any year of the look-back period)
Satisfaction of non-residency requirement.

– Which year the taxpayer satisfies (or
surpasses) the threshold of 330 full days
outside of the U.S. is meaningless so long
as it happens during one of these three
years.

– Example # 2: A taxpayer who spends 36 days in the
U.S. in year one, 36 days in the U.S. in year two, and
36 days in the U.S. in year three fails the non-
residency requirement.
– Why? Because there are 365 days in a year and in no
year could he have spent at least 330 days outside of
the United States. Instead, the maximum number of
days that he spent outside of the U.S. in each year was
329 days, one day shy of the 330-day threshold.
– As you can see, the rigid requirements of the non-
residency requirement can play the role of “spoiler” –
not unlike the “Mean One Mr. Grinch” – to well-
intentioned taxpayers wanting to “get right” with the
IRS.

– Interesting question to ponder: Is the taxpayer in
example 2 who is deemed ineligible for
streamlined foreign eligible for streamlined
domestic?
– Only if he has filed his U.S. tax returns for each of
the most recent three years for which the U.S. tax
return due date – or extended due date – has
passed (a key requirement for streamlined
domestic)

– If the taxpayer in example 2 filed U.S. tax returns
in two of the most recent three years for which
the U.S. tax return due date has passed, but
neglected to do so in just one year, not only would
he be ineligible for streamlined foreign but he
would also be ineligible for streamlined domestic!

– What this means is that to the extent that the
taxpayer still wants to “come clean” through the IRS’s
amnesty program, he has only one remaining option:
apply to the OVDP, where he must pay a penalty of at
least 27.5% on the highest maximum aggregate
balance of his offshore accounts over an eight-year
look-back period.
– This quagmire tends to disproportionately affect a
class of people commonly referred to as, “Canadian
snow birds,” – those who migrate south of the border
for what might seem like an insignificant period of
time during the unbearably cold months of winter to
lie on a sun-drenched beach in Florida.

– The issue was best framed by Paul Barba in his
blog, Updated IRS Streamlined Filing Program:
Snowbirds Beware:
– “Does physical presence exceeding 35 days every
year justify the disqualification of non-compliant
taxpayers who have spent relatively small
amounts of time in the United States every year
from streamlined … and the imposition of a 27.5%
(or 50%) penalty under OVDP?”

Remaining Requirements
1. U.S. taxpayer must file delinquent or amended
tax returns, together with all required
information returns (e.g, Forms 3520, 5471, and
8938) for each of the most recent three years for
which the U.S. tax return due date – or extended
due date – has passed; and
2. File any delinquent FBARs for each of the most
recent six years for which the FBAR due date has
passed.

Getting to Know Streamlined Domestic
– The Requirements
• U.S. taxpayers (or estates of individual U.S. taxpayers) seeking to use the Streamlined
Domestic Offshore Procedures must satisfy the following requirements:
1. Fail to meet the non-residency requirement (for joint return filers, one or both
spouses must fail to meet the non-residency requirement);
1. Have previously filed a U.S. tax return (if required) for each of the most recent three
years for which the U.S. tax return due date – or extended due date – has passed;
2. Have failed to report gross income from a foreign financial asset and pay tax as
required by law. Even if the taxpayer reported gross income from the foreign asset
and paid all taxes relating to that asset, this element is satisfied if the taxpayer failed
to file an FBAR (FinCEN Form 114) and/or one or more international information
returns with respect to the foreign financial asset. By information returns, the IRS is
referring to Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621); and
3. The failures listed in number three must have resulted from non-willful conduct.

– With respect to the second requirement, if you
take a quick glance at it, you may overlook a
subtle yet critical point, one that has a rippling
effect on the eligibility requirements for
streamlined domestic.
– Very simply, a taxpayer who has not filed a U.S. tax
return in one or more of the last three years – and
who has not filed a timely request for an
extension to do so – is ineligible to make a
streamlined domestic submission.

• What must I submit?
1. For each of the most recent three years for which the U.S. tax return
due date – or extended due date – has passed (the “covered tax
return period”), file amended tax returns, together with all required
information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938,
926, and 8621);
2. For each of the most recent six years for which the FBAR due date
has passed (the “covered FBAR period”), file any delinquent FBARs;
and
3. Pay a miscellaneous offshore penalty. The full amount of the tax,
interest, and miscellaneous offshore penalty should be submitted
with the amended tax returns.

Miscellaneous Offshore Penalty For
1. How is the miscellaneous offshore penalty calculated?
– It is equal to 5 percent of the highest aggregate balance of
the taxpayer’s foreign financial assets that are subject to
the penalty during the years in the covered tax return
period and the covered FBAR period.
2. How is the highest aggregate balance determined?
– By tallying the year-end account balances and year-end
asset values of all the foreign financial assets subject to
the penalty for each year in the covered tax return period
and the covered FBAR period and selecting the highest
aggregate balance from among those years.

3. When is a foreign financial asset subject to
the 5-percent miscellaneous penalty?
– When the asset should have been, but was not,
reported on a Form 8938 for that year; and/or
– The asset was properly reported for that year, but
gross income from the asset was not reported in
that year.

– Deconstructing these two conditions leads to the
inescapable conclusion that compliance is required
not just on the asset disclosure front but also on the
failure to report income front – even when the asset is
properly reported – in order to avoid the 5% penalty.
– Example: If a foreign bank account is properly
disclosed on an FBAR and Form 8938, but the
associated interest income from the account is not
included on the Form 1040 for the year, then the
value of that bank account for the applicable year
must be included in the 5% penalty base.

4. What does the term, “foreign financial assets”
include?
– Financial accounts held at foreign financial institutions;
– Financial accounts held at a foreign branch of a U.S.
financial institution;
– Foreign stock or securities not held in a financial account;
– Foreign mutual funds; and
– Foreign hedge funds and foreign private equity funds.

5. Is the miscellaneous offshore penalty
under streamlined domestic in lieu of
accuracy-related penalties, information
return penalties, and FBAR penalties? Yes.

Frequently Asked Questions Pertaining
to the Miscellaneous Penalty
1. Is the 5-percent penalty intended to reach
foreign financial assets in which the taxpayer
has no personal financial interest or only a
partial interest?
– A: No. The penalty is not intended to reach assets in
which the taxpayer had no financial interest, such as
an employer’s account over which the taxpayer had
only signature authority, or portions of assets in which
the taxpayer had no personal financial interest.

2. I am a U.S. resident making a streamlined
domestic submission. In addition to foreign
financial accounts and assets, I own an
income producing rental property in a foreign
country that is not reportable on my FBAR or
Form 8938. Must I include the real estate in
the streamlined domestic offshore penalty
base?

– NOTE: This question assumes that the rental
property is not held through a foreign entity, such
as a corporation. Thus, this question applies only
to those situations in which the taxpayer holds the
rental property directly.
– A: No. Any asset that is not the kind of asset
reportable on either an FBAR or Form 8938 need
not be included in the penalty base for the
streamlined domestic offshore procedures.

3. The taxpayer is the sole owner of an
incorporated business that owns various
assets, including foreign financial accounts.
Does the 5-percent penalty base include the
stock in the corporation or just the underlying
financial accounts?

– The penalty base includes the stock in the
corporation – and not the underlying financial
accounts – unless the corporation is a disregarded
entity.
– What is a disregarded entity? A disregarded
entity is a business entity that is separate from its
owner but which elects to be disregarded as
separate from the business owner for federal tax
purposes (example: a single-member LLC).

4. The streamlined domestic offshore procedures
provide that foreign financial assets subject to
the 5-percent penalty include assets that should
have been, but were not, reported on Form
8938. The instructions for Form 8938 provide
that any assets reported on timely filed Forms
3520 or 5471 need not be reported on Form
8938 for the same tax year. Are assets I report
on delinquent Forms 3520 or 5471 excluded
from the 5-percent penalty base?

– A: No. All assets that meet the definition of
“foreign financial asset” in the instructions for
Form 8938 and not reported on that form should
be included in the 5-percent penalty base, unless
the taxpayer reported them on timely filed Forms
3520 or 5471.

5. How should I value stock in a foreign
corporation that is included in the 5-percent
penalty base for Streamlined Domestic
Offshore filers?

– A: Any reasonable method for valuing the stock,
such as using the balance sheet on Form 5471, for
purposes of calculating the 5-percent penalty. No
valuation discounts may be taken on foreign
financial assets subject to the 5-percent penalty.

6. Can the taxpayer account for “double-
counting” when determining the aggregate
maximum balances during the disclosure
period?
– In other words, must assets in an account that
was closed and transferred to another account be
double-counted – once in the old account and
then again in the new account?

– A: Yes. However, the taxpayer carries the burden
of establishing double counting.
– NOTE well: To the extent that the highest balance
in the receiving account was not reached until
some point after the closing balance was
transferred from the old account, then the money
transferred from the old account must actually
have contributed to the highest balance in the
receiving account before any duplication can be
removed!

– What evidence can the taxpayer rely upon to meet
his burden? Account statements

Pivotal Question
• Can the streamlined procedures be used to
correct defective returns that go back beyond
the most recent three years?
– Scenario: John filed compliant tax returns and
FBARs for the most recent three years for which
tax returns were due: 2012, 2013, and 2014.
However, he failed to properly report a foreign
financial asset in tax years 2009, 2010, and 2011
and did not make a voluntary disclosure. May he
make a streamlined submission?

Pivotal Question
– A: Yes.
• Assuming John makes a streamlined
domestic submission, how is his 5 percent
penalty calculated?
– A: Because the most recent three years are fully
compliant, there will be no assets in the penalty
base for those years.
– For the three years prior to that, he must
calculate the aggregate year-end account
balances and year-end asset values. The penalty
is 5% of the highest aggregate amount.

Pivotal Question
• When making his submission, what
procedures should John follow?
– He should attach the certification to a Form 1040X
for only the most recent tax year for which he filed
an income tax return showing a zero change in
tax.
– He should write in red ink, “Streamlined Domestic
Offshore” at the top of the Form 1040X.

Background
• Of the recent changes made to the streamlined
procedures, none have received as much
attention – or stirred up as much debate – as the
new rule requiring certification of non-willfulness
as a condition for gaining entry.
• This section focuses on the requirement of the
streamlined procedures that the failure to report
income from a foreign financial asset not be
willful.
• This requirement cuts to the heart of penalty
mitigation offered by the new procedures.

Background
• In order to qualify for the streamlined
compliance procedures, U.S. taxpayers must
certify that “the failure to file tax returns,
report all income, pay all tax, and submit all
required information returns, including FBARs,
resulted from non-willful conduct.”

Pivotal Question
• Under what circumstances can a taxpayer
certify that his failure to report foreign
financial assets and pay all taxes due with
respect to those assets was not willful?

Muddying The Waters
• As a preliminary matter, a taxpayer will only
be able to determine whether his conduct is
non-willful if he knows how the IRS interprets
the term, “willful.”

Muddying The Waters
• The problem lies in the fact that instead of starting out
with a baseline definition of the term “willfulness” and
proceeding to “non-willfulness,” as is the logical
progression, the IRS defines it in the negative,
completely disregarding the predicate term.
• Taxpayers are left to discern the meaning of such
adjectives as “negligence,” “inadvertence,” “fraud,” and
“mistake” – which the IRS uses generously to define
non-willfulness – without anything more than a
Webster pocket dictionary.
• The danger this poses is that these are legal terms of
art that cannot be interpreted according to their
common, ordinary, and everyday meanings.

Muddying The Waters
• Willfulness is an elusive term.
• While it may be easy to define, it is not easy to
apply when it comes to the myriad of
circumstances that exist in the offshore arena.
• Courts have compared willfulness to a
“chameleon” that changes in tone and color
according to the Code section involved and
the circumstances.

Certifying Non-willfulness
Certifying non-willfulness for Purposes
of the Streamlined Procedures
• The best way I’ve seen the concept of
willfulness explained is by Jack
Townsend, author of “Tax Crimes.”

• Professor Townsend views the path between
willfulness and non-willfulness as lying on a
continuum, with “non-willfulness” at one end
and “willfulness” at the other.
• Visualize an electromagnet spectrum, with
short-wavelength radiation (gamma) at one
extreme pole and long-wavelength radiation
(radio waves) at the opposite pole.

• Focusing on these extreme poles, substitute
“Not willful” for the “short-wavelength” pole
and “Definite willfulness” for the “long-
wavelength” pole.

• As Professor Townsend so eloquently explains,
the facts of some cases will present
themselves so far in the direction of one of
the extreme poles that determining whether
the conduct is willful or non-willful will be as
easy as finding a free drink in Las Vegas.

• These are what might be considered “slam dunk”
cases for a specific type of disclosure.
• Example: A taxpayer who falls on the “Definite
willfulness” end of the spectrum should not think
twice about applying to the Offshore Voluntary
Disclosure Program. On the other hand, a
taxpayer who falls on the “Not willful” end of the
spectrum might be able to avail himself of a
number of different options, from making a
“quiet disclosure” to making a streamlined
submission.

• Determining willfulness is not always so black
and white
• According to Professor Townsend, this is
analogous to when the facts of a particular
case lie at points other than at the extreme
poles of the spectrum, such as when they lie
in the middle.
• These cases present a real challenge.

• Indeed, when the needle of the spectrum vacillates
in the middle, questions abound. For example, how
close must the facts be to either end before one can
confidently make a decision?
• In these cases, assessing willfulness becomes
exceedingly difficult, requiring a careful balancing of
the facts both for and against it. Needless to say, it
should be left to the professionals.

• In dealing with these gray areas, one should
never forget that there will always be risk – it is
inherent in a willfulness assessment. Indeed, “a
taxpayer not at material risk for prosecution is
not the same as a taxpayer at ‘no risk’ of
prosecution.”
• This implies that a person must be willing to
assume at least some risk.
• Those who are risk-averse should seek shelter in
the OVDP bunker, and put themselves out of their
misery, rather than subjecting themselves to any
further agony.

Overcoming the Pitfalls of Certifying
Non-willfulness
The following is some practical advice
on how to prepare your explanation of
non-willful conduct.

Non-willfulness
1. First, you must tell your “story,” which must
consist of more than just blanket denials.
– For example, you can shout from the rooftop
that you were “non-willful” from now until
eternity, and even shed a tear along the way.
But unless you explain why your conduct did
not run afoul of willful blindness, the IRS is
likely to view this as nothing more than self-
serving.

Non-willfulness
2. Second, your certification should include
“objective supporting evidence.”
– In a Forbes article entitled, “Am I Non-willful
Under The Streamlined Procedures,” Charles
Rettig, an expert in the field of foreign asset
reporting wrote, “What objective evidence
might exist to appropriately demonstrate a
lack of personal knowledge by the taxpayer
about their foreign reporting requirements?”

Non-willfulness
3. Third, you must directly confront the
presumption, as unfair as it might seem, that the
IRS will impute a sinister motive to your failure to
report your foreign bank account(s): namely, that
you were willfully blind.

Non-willfulness
• If there is any doubt in your mind, look no
further than the comments of Caroline Ciraolo
(acting Assistant Attorney General pending
approval of the nomination of Cono
Namororato to be AAG) at the Federal Bar
Association Annual Conference:

Non-willfulness
“We are taking particular interest if we find
evidence of an account holder claiming non-
willful conduct in a streamlined compliance filing
or delinquent submission only to find that
evidence produced by the Category 2 banks
suggests otherwise. We are using information
gleaned from the program to open new
investigations, pursue new targets around the
globe, and we will continue to do so as the
information is developed.”

Non-willfulness
• Refresher on willful blindness:
– Willfulness may be attributed to a person who has
made a conscious effort to avoid learning about the
FBAR reporting and record keeping requirements.
– Example: The failure to learn of the filing
requirements coupled with other factors – such as
efforts taken to conceal the existence of the accounts
and the amounts involved – may lead to a conclusion
that the violation was due to willful blindness.

Non-willfulness
• According to Mr. Rettig, the most critical questions that must
be answered in order to rebut the presumption that a
taxpayer made “a conscious effort to avoid learning about
the FBAR reporting and record keeping requirements” are
the following:
1. “Should the taxpayer have inquired of their return
preparer about the need to report an interest in a
foreign financial account?”
2. “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?”

Non-willfulness
• Fourth, explain why you didn’t “intentionally violate a known legal
duty,” citing supporting facts.
• Remember: Blanket denials will not suffice!
• Fifth, sift through all of the “bad” facts that the IRS may lump into
the willful blindness category to see if you can either neutralize
these pestilent facts or turn them into “good” facts.
• By anticipating what facts are likely to raise red flags, you
will be able to draft s thoughtful explanation to rebut
allegations of a sinister or deceitful motive. This is the best
antidote for avoiding ambush.

Non-willfulness
Consequences of Making A ‘Bad’ Choice
• You must thoroughly invest in due diligence to avoid
the IRS’s punishments, which have been known to
drive many a sane taxpayer to the brink of insanity.
• Do not take the streamlined procedures lightly! To
the extent that your non-willful certification turns
out to be a bad judgment call on your part, all that
you will have succeeded in doing is making a bad –
but otherwise, manageable – situation that much
worse.

Parade of Horribles
• How so? If your non-willful certification is rejected, not only
will you become ineligible for the streamlined procedures, but
you could be subject to any one of the following “parade of
horribles”:
– You will be ineligible for OVDP (once you make a
streamlined submission, it is too late to apply to OVDP).
Your only remedy for coming into compliance with your
U.S. tax obligations would be to file amended 1040s and
delinquent foreign information returns in what is
otherwise known as a “quiet disclosure.”

Parade of Horribles
– You are but a heartbeat away from an
examination that has the potential to be more
intrusive than a rectal examination. Keep in
mind that the IRS could assert multiple willful or
non-willful FBAR penalties and that these
penalties can be aggregated – one on top of the
other – until they reach the stratosphere.

Parade of Horribles
– Your case could be referred to
the Criminal Investigation (CI)
division of the IRS for
investigation. CI, in turn, could
refer your case to the
Department of Justice – Tax,
with a recommendation for
prosecution.

– To the extent that the IRS obtains evidence
that directly contradicts your certification of
non-willfulness, it could refer your case to the
Department of Justice with a
recommendation that you be prosecuted for
perjury.
• Remember that the non-willful certification –
including all statements made in the
streamlined submission (i.e., particularly
those relating to the non-residency
requirement for streamlined foreign) – must
be signed under penalties of perjury.

Practical & Sound Advice
• Do not overlook the environment that we now live
in: The U.S. government’s aggressive pursuit of
taxpayers with unreported offshore accounts.
• Be honest with yourself. To the extent that your
conduct might be deemed let us say, “less than
non-willful” (to put it mildly), you must swallow
your pride and make the obvious choice – apply to
OVDP. To quote a cliché, “an ounce of prevention is
worth a pound of cure.”

• Thinking that you can somehow “sneak” into
the streamlined program without being
detected is as foolish as a man who robs a
convenience store in a ski mask at midnight
but forgets to remove his work uniform with
his named stitched across the front.

• Regardless of which program you choose –
streamlined or OVDP – keep in mind that your
disclosure must be made before the IRS or DOJ
is in hot pursuit.
• This is the very essence of voluntary
disclosure.

• The metaphor that I like to use here is the hunting of
a fox by a thirsty bloodhound. If the bloodhound has
already detected the scent of the fox and is hot on
his trail, then the fox is “squat.” Indeed, no amount
of pleading with the bloodhound is going to save the
fox from the sharp and carnivorous teeth of the
salivating bloodhound.

• Don’t go it alone! Talk to a tax attorney.
– A tax attorney will be able to provide practical and sound
advice on what may be the most important decision that you
ever make – whether your certification fully substantiates
your claim of non-willfulness and whether it can be
submitted in good faith.
– He or she can check the consistency of your explanation and
ensure that it is supported by ironclad evidence, such as tax
and information returns. Having the “right” documents to
prove your story will assuage the IRS agent and ease the
tension.

Quiet Disclosure
Under what circumstances is making a quiet
disclosure in today’s environment a smart choice
for a taxpayer with an undisclosed foreign bank
account?

Quiet Disclosure
• “One size does not fit all.” Indeed, certain cases
are ripe for quiet disclosure, while others aren’t.
• Before throwing out the idea of making a “quiet
disclosure” with the bathwater, consider this: A
quiet disclosure furthers the IRS’s mission of
encouraging voluntary compliance and self-
policing by allowing taxpayers to self-correct.
• Thus, by overlooking the delinquent FBAR
submission procedures, you might be making a
huge mistake.

Quiet Disclosure
• The IRS recently published a bulletin entitled,
“Options Available to Help Taxpayers With
Offshore Interests” back on January 13, 2015.
• The bulletin consists of a chart whereby a
situation is posited in the left-hand column
and the corresponding recommended
compliance option is listed adjacent to the
situation in the right-hand column.

Quiet Disclosure
Situation Compliance Option
Taxpayers who have properly
reported all taxable income but
recently learned that he/she
should have been filing FBARs
in prior years to report a
personal foreign bank account
or to report signature authority
over bank accounts owned by
an employer.
Taxpayers who reported, and paid tax
on, all their taxable income for prior
years but did not file FBARs, should
file the delinquent FBAR reports
according to the instructions (send to
Department of Treasury, Post Office
Box 32621, Detroit, MI 48232-0621)
and attach a statement explaining
why the reports are filed late.
No penalty will be imposed for the failure
to file the delinquent FBARs if there are
no underreported tax liabilities and you
have not previously been contacted
regarding an income tax examination or a
request for delinquent returns.

Quiet Disclosure
Taxpayers who only have certain
delinquent information returns, but no
tax due.
A taxpayer who has failed to file tax
information returns, such as Form 5471
for controlled foreign corporations (CFCs)
or Form 3520 for foreign trusts but who
has reported, and paid tax on, all their
taxable income with respect to all
transactions related to the CFCs or
foreign trusts, should file delinquent
information returns with the appropriate
service center according to the
instructions for the form and attach a
statement explaining why the
information returns are filed late.
No penalty for the failure to file the delinquent
Forms 5471 and 3250 if there are no
underreported tax liabilities and you have not
previously been contacted regarding an
income tax examination or a request for

Quiet Disclosure
Non-resident U.S. taxpayers
with delinquent returns with
low risk factors (including tax
owed less than $1,500/year).
Filing Compliance Procedures for
Non-Resident U.S. Taxpayers
Non-resident U.S. taxpayers should
file delinquent tax returns, including
delinquent information returns, for
the past three years; delinquent
FBARs for the past six years; and
additional required information
regarding compliance risk. Payment
of any federal tax and interest due
must accompany the submission.

Tel. 973.783.7000
MJDeBlis@DeBlisLaw.com
www.DeBlisLaw.com

Navigating the Choppy Seas of the Streamlined Procedures

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