The IRS recently released frequently asked questions for the Delinquent International Information Return Submission Procedures (available here).
The IRS now states that these procedures are available to taxpayers even if they have unreported income. See below quote:
The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. (emphasis added) Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).
In comparison, 2012 FAQ 18: (reads in part as follows):
“The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3520
if there are no under-reported tax liabilities and you have not previously been contacted
regarding an income tax examination or a request for delinquent returns.”
The above FAQ 18 assurances are not contained under the New Procedures for Delinquent Offshore International Returns. It is now more important than ever that a carefully drafted persuasive demonstration of reasonable cause be included with a taxpayer’s submission to avoid imposition of penalties.
The Internal Revenue Service’s collection efforts need to be improved to make sure that delinquent taxpayers residing in foreign countries comply with their U.S. tax obligations, according to a new government report. The report, from the Treasury Inspector General for Tax Administration (TIGTA), comes amid the implementation of many of the requirements of the Foreign Account Tax Compliance Act, or FATCA, which will require foreign financial institutions to begin reporting on the holdings of U.S. taxpayers to the IRS or else face stiff penalties of up to 30 percent on their income from U.S. sources.
TIGTA’s review found that ineffective management oversight has contributed to a number of control weaknesses in the IRS’s International Collection program. The review also discovered that the IRS does not have reliable statistics on the rate of noncompliance of taxpayers with their U.S. tax obligations.
In addition, there is no process to measure the value of the so-called “Customs Hold” as an enforcement tool against delinquent international taxpayers. International revenue officers at the IRS can request that a customs hold be input into the Treasury Enforcement Communication System for delinquent taxpayers, and the U.S. Department of Homeland Security will then notify the IRS whenever the taxpayer travels into the U.S. During TIGTA’s interviews with a sample of 15 international revenue officers and all five group managers, many identified the Customs Hold as one of the most effective enforcement tools available to them in dealing with delinquent international taxpayers. International revenue officers use information obtained through a Customs Hold to attempt to contact the taxpayers while they are in the U.S. or to locate the taxpayers’ assets.
In addition, there are over 78,000 global financial institutions that have entered into direct information exchange agreements with the IRS. These institutions will be issuing FATCA letters to U.S. taxpayers asking them to provide information required under FATCA. The failure to provide the information will result in the taxpayers being place on a FATCA “recalcitrant” list. The financial institutions will also withhold 30% of the U.S. taxpayers account earnings and remit those earning to the IRS.
Our firm expects that the Customs Hold will be used on a more now that the Swiss bank non-prosecution program participation deadline of September 15, 2014 has passed. U.S. taxpayers who have been placed on the “recalcitrant” list should expect tax audit letters and FBAR “willfulness” based assessments.
For those taxpayers who would like to come forward, the IRS has two solutions: First, for those taxpayers who qualify there are the Streamline Procedures (non-resident SFOP and domestic SDOP). For those taxpayers who do not meet the eligibility requirements of the Streamline Procedures there is the offshore voluntary disclosure program (OVDP 2014).
Our office has received many inquiries from taxpayers interested in the Streamlined Filing Compliance Procedures with the new lower penalty. However IRS guidance and instructions was unclear and ambiguous in certain areas. Last week, on October 9, 2014, the Internal Revenue Service published new additional guidance clarifying many details for participation in the Streamlined Filing Compliance Procedures.
Here are links to the new guidance published on the IRS website:
- New Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States (SFOP) Frequently Asked Questions and Answers (FAQs) here.
Our firm recently presented a informational webinar on the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program. Materials from the webinar can be downloaded here: Game Changer Streamline.
The IRS has simplified the process of entering the OVDP Program by issuing the following forms:
Form 14457 – Offshore Voluntary Disclosure Letter
Form 14454 – Offshore Voluntary Disclosure Program Letter Attachment
The new forms (the old forms were simple Word documents) will likely standardize the IRS’ review process for OVDP eligibility, guide the IRS examiner in OVDP “issue spotting”, and assist in the identification of offshore promoters or facilitators.
While process improvement is needed to improve the IRS’ processing of OVDP applications,
In spite of the standardization of the forms, careful drafting and legal advocacy of a taxpayer’s particular circumstances are still recommended for a favorable result.
What Is The Difference Between the SDOP and the Current OVDP program?
The Streamlined Offshore Procedures (SDOP and SFOP) liberalizes the old restrictions and rewards taxpayers that disclose their offshore assets with a lower penalty and a very low tax. Taxpayers will only have to file 3 years of amended income tax returns instead of the current OVDP program’s requirement of 8 years of amended income tax returns. They will be assessed a penalty of only 5% of the account with the highest balance instead of the OVDP program’s 27.5% penalty.
In addition, the SDOP radically expands the previous Streamlined Program for Non-US residents which was only for non-tax filers with under $1,500 of income that was unreported.
SDOP Filing Risk Factors
It is extremely important that a taxpayer’s eligibility is carefully analyzed because once the SDOP is elected and the taxpayer claims the violations were non-willful, the taxpayer will not be eligible for the OVDP any longer. There are possible risk factors that need to be considered and analyzed such as the evidence of willfulness including intent of laws, knowledge and violations.
Although filing an SDOP does not automatically select the taxpayer for an IRS audit, the taxpayers is still subject to the possible normal audit selection. The taxpayer needs to be prepared to defend filing a SDOP and be able to demonstrate their non-willfulness and show there was no fraud.
In the streamlined procedures, taxpayers must certify that their failure to report foreign financial assets and pay all tax due was not the result of willful conduct (click here for further details). A taxpayer must complete and execute a certification form, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.
The most important first step in analyzing whether a taxpayer is eligible to participate in the streamlined procedures is to ascertain whether the taxpayer’s compliance failure, including the failure to file an FBAR, was actually non-willful. The IRS has defined “nonwillful conduct” 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.” This definition is a little different from other legal cases. For failure to file FBARs, the IRS must establish knowledge of the law and evaluating indicators of willfulness (Internal Revenue Manual (IRM) §4.26.7).
Willfulness in criminal tax cases generally means a voluntary, intentional violation of a known legal duty (Cheek, 498 U.S. 192 (1991)). The taxpayer does not have to have an improper motive or a bad purpose. All that is required is that the taxpayer knew of the duty and intended to violate it (Pomponio, 429 U.S. 10 (1976)).
Willfulness means not only knowing violations, but reckless ones as well. For example, “[a] responsible person is reckless if he knew or should have known of a risk that the taxes were not being paid, had a reasonable opportunity to discover and remedy the problem, and yet failed to undertake reasonable efforts to ensure payment” (Jenkins, 101 Fed. Cl. 122, 134 (2011), aff’d, No. 2012-5019 (Fed. Cir. 2012)). “[W]illfulness has been found where ‘the facts and circumstances of a particular case, taken as a whole, demonstrate’ that the taxpayer ‘knew or should have known that there was a risk [of noncompliance] and failed to take available corrective action,’ with the result being the violation of the law” (McBride, 908 F. Supp. 2d 1186, 1209 (D. Utah 2012).
Whether a taxpayer’s conduct is non-willful is a critical question of fact and law, based largely on the taxpayer’s particular facts and circumstances. Taxpayers with foreign accounts would be wise to retain tax legal counsel, to better analyze the taxpayers’ position.
The IRS has just recently updated the Streamlined Procedure forms for both its “foreign” (SFOP) and “domestic” (SDOP) procedures. All of the information can now be typed directly into the fields. The statement of facts can be cut and pasted directly onto the Form, which should help simplify the process.
The forms can be found by clicking on the links below:
- Form 14653–Certification by U.S. Persons Residing Outside of the United States for Streamlined Foreign Offshore Procedures
- Form 14654–Certification by U.S. Persons Residing in the United States for Streamlined Domestic Offshore Procedures.
The streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States.
In order to enter the streamlined offshore procedures, the taxpayer must officially certify that their failure to report all income, pay all tax, and file all required information was due to non-willful conduct. The IRS’ two new forms simplify this certification process, Forms 14653 and 14654. Form 14653 is to be filed by U.S. persons residing outside of the United States, while Form 14654 is to be filed by U.S. persons residing within the United States.
In conjunction with filing the appropriate certification form, a taxpayer entering the streamline program must submit delinquent and/or amended tax returns for each of the most recent three tax years. Delinquent FBARs for the prior six tax years must also be filed. These returns must be complete and accurate, and accompanied by full payment of taxes, interest, and applicable penalties.
The new forms (the old forms were basic PDF text documents) will likely standardize the IRS’ review process for Streamline program eligibility and guide the IRS examiner in spotting issues.
In spite of the standardization of the forms, very careful drafting and persuasive legal advocacy of a taxpayer’s particular circumstances are still recommended for a clear demonstration of non-willfulness.
Many clients are asking our office about the new compliance solutions to clean up past errors in disclosing foreign assets.
In June 2014, the IRS announced major changes to its offshore voluntary compliance programs, providing new options to help taxpayers residing both overseas and in the United States. The changes are intended to give thousands of people a new avenue to comply with their U.S. tax obligations (IR-2014-73). Modifications were made in response to public comments that the existing program lacked a path to compliance for individuals whose failure to report offshore accounts was not willful.
Because taxpayers’ non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations:
- The Offshore Voluntary Disclosure Program (OVDP); Taxpayers whose conduct was likely willful are directed to the OVDP—where they pay a much higher 27.5% miscellaneous offshore penalty;
- A new non-willful certification program, referred to as the IRS Streamlined filing compliance procedures (SDOP and SFOP); Under this program, taxpayers residing in the United States whose failure to report foreign financial assets and pay all tax due on those assets was not the result of willful conduct are subject to only a 5% miscellaneous offshore penalty (non-residents pay no penalty); (click here for further details); and
- Delinquent Report of Foreign Bank and Financial Accounts (FBAR) and delinquent international information return submission procedures.
Tax professionals must be familiar with each of these options to effectively advise taxpayers of the compliance solution that best fits the particular facts and circumstances of the case.
OVDP and/or the SDOP allow no u-turn. Once a taxpayer makes a submission under the streamlined program, the taxpayer may not participate in the OVDP. A taxpayer who submits an OVDP voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined program. To avoid creating a bigger problem, taxpayers should very carefully choose their compliance solution with the advice of competent experienced tax legal counsel.
Federal prosecutors charged six men Tuesday with running a complicated offshore scheme that allegedly enabled clients to manipulate stocks, avoid U.S. taxes and launder hundreds of millions of dollars. An indictment unsealed in federal court in Brooklyn alleged the men laundered some $500 million in proceeds from fraudulent securities transactions for more than 100 U.S. citizens and helped commit tax fraud.
The FBI issued a statement announcing the indictment. U.S. authorities claim, between January 2009 and September 2014, the men masqueraded as financial professionals and developed three interrelated schemes on behalf of themselves and their clients. Authorities claim they:
- Defrauded legitimate investors in several U.S. stocks by manipulating prices.
- Helped their own corrupt clients to evade paying U.S. taxes on those bogus profits.
- Laundered approximately $500 million US in criminal proceeds.
“The investigation of offshore tax evasion and money laundering are top priorities for IRS-Criminal Investigation, and we are committed to using all of our enforcement tools to stop this abuse. The enactment of the Foreign Account Tax Compliance Act (FATCA) is yet another example of how it is becoming more and more risky for U.S. taxpayers to hide their money globally. Moreover, this partnership of IRS-CI, the FBI, HSI, and the U.S. Attorney’s Office demonstrates the government’s resolve to combat international crime,” stated IRS Acting Special Agent-in-Charge Shantelle P. Kitchen.
The indictment is the first time a FATCA violation has been charged as an “overt act” in furtherance of a tax conspiracy and securities fraud and strikes a cautionary note for financial institutions and financial service providers that may be used as instrumentalities of crime. The indictment alleges that the defendants, operating in Belize and Panama, engaged in a conspiracy to: (1) defraud investors in US publicly traded companies by manipulating the price of microcap or “penny” stocks, (2) help their clients avoid US taxation, including by completing false Forms W-8BEN, and (3) launder the proceeds of the fraudulent securities transactions.
The scheme in the Bandfield indictment follows the same path of prior offshore financial frauds, but the prosecutors’ focus on the defendants’ alleged attempt to avoid FATCA compliance, coming only two months after the complex statute’s implementation and a full six months before the initial FATCA reporting deadline, sends a strong message of aggressive FATCA global enforcement. Over 100 countries have now signed or consented to sign FATCA compliance agreements and thousands of foreign banks have registered under FATCA. FATCA violations may now be used as indicia of fraud. The indictment confirms the coordinated and aggressive tactics US law enforcement is now employing to investigate and prosecute offshore financial fraud. This may the first time in history that a FATCA violation is be used to prosecute an individual. More are expected.
Numerous foreign banks are sending letters to their customers demanding personal information to ascertain whether the customer is a U.S. citizen or a U.S. resident. The foreign banks typically state they are required to obtain such personal information pursuant to the U.S. Foreign Account Tax Compliance Act (“FATCA”)
FATCA requires that foreign banks submit information to the United States government on all U.S. customers. Banks that do not cooperate are penalized with a 30 percent withholding tax. FATCA applies to nearly every foreign bank and nearly all foreign banks have already registered the United States government to share their U.S. customer. Some examples of foreign banks’ FATCA compliance include: Scotia Bank, Deutsche Bank, Bank of China, and thousands of other banks abroad.
The bank letters generally inform the customer that the account information may be disclosed to the IRS as necessary under FATCA and advising the customer to discuss their situation with a U.S. tax professional to ensure they are compliant with U.S. reporting obligations related to the foreign account.
All account holders should beware these new bank letters. The letters are a warning that U.S. persons are required to report all their foreign income and foreign bank accounts and assets (via the FBAR form). This letter may be your only warning before an IRS investigation takes place. Once the U.S government starts an investigation, the U.S. taxpayer will blocked from existing compliance programs and may have to pay a large penalty or face criminal prosecution.
We often recommend that U.S. taxpayers with undisclosed overseas accounts enter into the IRS’s new Streamlined Program (SDOP or SFOP) or Offshore Voluntary Disclosure program (OVDP). If a person has an undeclared overseas account at a foreign bank and has received a letter from their foreign bank they should retain a qualified tax attorney and come into tax compliance immediately.