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COL. COLUMNS I Tax Practice & Procedure

Preparing for Audits of Submissions under

the IRS’s Streamlined Filing Procedures

By Cassandra Vogel

he IRS’s streamlined filing procedures for offshore assets conduct was consistent with nonwillfulness. Second, if the sub-
were announced in 2012 for non-U.S. residents and extend- mission is audited, the certification is a critical component for the
Ted to U.S. residents in 2014. The streamlined procedures IRS in assessing the taxpayer’s willfulness. Finally, the taxpayer
are open to taxpayers whose failure to report foreign financial assets is required to sign the narrative under penalties of perjury, pro-
“did not result from willful conduct.” Under the streamlined pro- viding the IRS with an independent vehicle for attack against the
cedures, the taxpayer must submit three years of amended tax returns taxpayer if any of the information provided in the streamlined
and six years of Reports of Foreign Bank and Financial Accounts narrative is later proven to be false.
(FBAR), pay all of the tax and interest due, and, for U.S. residents, For all of these reasons, the determination to make a streamlined
pay a one-time miscellaneous offshore penalty in the amount of submission as opposed to proceeding through the OVDP should
5% of the highest year-end value of the assets subject to the penalty. be made with careful consideration of all of the relevant facts and
While submissions made under the streamlined procedures are not
subject to the same scrutiny as under the offshore voluntary dis-
closure program (OVDP), they are also not provided the same insu-
lation from criminal prosecution and willful penalties. The IRS has
informed taxpayers that submissions “may be selected for audit
under the existing audit processes applicable to any U.S. tax return,”
meaning that only some of the submissions will be audited.
Although the streamlined procedures have been in place for
years, audits of streamlined filings have only just begun. These
audits require careful preparation and sensitivity, given the fact
that criminal prosecution or willful penalties are not off the table
if the IRS determines that the taxpayer’s conduct was willful.

The Streamlined Filing Procedures and Pre-audit Considerations
Arguably, the most important aspect of the streamlined pro-
cedures is the narrative certifying the taxpayer’s nonwillfulness
in failing to previously report offshore assets. Whether a U.S.
resident submitting an IRS Form 14654, Certification of U.S.
Person Residing in the United States, or a nonresident submit-
ting an IRS Form 14653, Certification of U.S. Person Residing
Outside of the United States, the taxpayer is required to “pro- circumstances. For a full discussion of the various factors that a
vide specific reasons for [the taxpayer’s] failure to report all taxpayer and his advisors should take into consideration prior to
income, pay all tax, and submit all required information returns, making a streamlined submission, see the July 2017 installment
including FBARs.” The taxpayer must describe all of the facts of this column (Sharon L. McCarthy, “The Pitfalls of Streamlined
(favorable and unfavorable), give a description of his back- Foreign Account Disclosures,” http://bit.ly/2Lm4Xjr). The taxpayer
ground, lay out the source of the funds or assets, and describe and his advisors should be confident that the taxpayer can provide
contacts with the account or asset. a strong narrative statement that will stand up under audit.
Although preparation of the streamlined narrative occurs well
before the taxpayer knows whether the submission will be chosen Audit Initiation
for audit, the taxpayer and her advisors should draft the narrative A streamlined audit is initiated with a notice of examination,
with a potential audit in mind for several reasons. First, it may in the same way as any other audit. Experience indicates that
be that the taxpayer can avoid triggering an audit through the it will likely be years after the streamlined package is submitted
streamlined narrative by satisfying the reviewing agent that her before the IRS initiates an audit. Due to the passage of time,

JUNE 2018 / THE CPA JOURNAL 69