The Pitfalls Of Streamlined Foreign Account Disclosures

COL. COLUMNS I tax practice & procedure
The Pitfalls of Streamlined Foreign
Tax professionals, and also the general public, well know by now that U.S. taxpayers are required to report foreign financial accounts to the government. Since 2009, the IRS has offered taxpayers opportunities to voluntarily disclose unreported foreign finan- cial accounts in exchange for reduced penalties. This article discusses the streamlined filing compliance procedures for taxpayers whose non- reporting was nonwillful. Unlike the offshore voluntary disclosure pro- gram (OVDP), under which the miscellaneous penalty is either 27.5% or 50% of the highest aggregate balance in the foreign accounts over the eight-year reporting period, the miscellaneous penalty under the streamlined procedures is either zero for nonresident taxpayers or 5% of the highest balance over the three-year reporting period for resident taxpayers. While many taxpayers may believe that their facts fit within the requirements of the streamlined procedures, it is the tax profes- sional’s obligation to caution them on the dangers of trying to shoehorn facts suggesting willfulness into a streamlined filing.
The Bank Secrecy Act of 1970 requires U.S. taxpayers to maintain foreign bank account records and report foreign accounts annually on Schedule B of Form 1040. In addition, taxpayers are required to report foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year on FinCen Form 114 (or FBAR, formerly TDF 90-22.1).
Background of the Offshore Disclosure Programs
In her keynote address at the American Bar Association’s 27th Annual Philadelphia Tax Conference last November, then–Principal Deputy Assistant Attorney General Caroline D. Ciraolo noted that since 2008, the Department of Justice (DOJ), working with IRS Criminal Investigation, has charged more than 160 U.S. account hold- ers with tax evasion and willful failure to report foreign accounts and more than 50 individuals who assisted in the criminal conduct (http://bit.ly/2qoSIZy). Under the OVDP, the first of which was announced in 2009, more than 55,000 taxpayers have come into com- pliance and paid close to $10 billion in tax, interest, and penalties. Ciraolo also noted that the filing of FBARs has increased from 332,000 reports for 2007 to more than 1 million reports for 2015.
Taxpayers submitting a streamlined filing, either through IRS Form 14653, Certification of U.S. Person Residing Outside of the United States, or IRS Form 14654, Certification of U.S. Person Residing in the United States, are required to certify that their “failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct.” Taxpayers must certify that they understand that “non-willful conduct is 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.” Furthermore, taxpayers are instructed to provide a narrative that explains their failure to report the financial account, including specific reasons for the failure to report all income, the source of funds in all foreign accounts or assets, and the name of any professional advisor involved. The clear purpose of these instructions is to allow the IRS to scrutinize the taxpayer’s sworn explanation of non-willfulness in
Under the current OVDP, taxpayers are required to file eight years of amended tax returns and delinquent FBARs. In addition to tax, interest, and penalties on the tax due, there is a miscellaneous penalty of 27.5% of the highest aggregate balance in the unreported foreign
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JULY 2017 / THE CPA JOURNAL
Account Disclosures
By Sharon L. McCarthy
accounts in that eight-year period. If any of the banks at issue in the voluntary disclosure are on the IRS’s frequently updated list of Foreign Financial Institutions or Facilitators (http://bit.ly/2qkXhpV), the mis- cellaneous penalty is increased to 50%. In exchange for taxpayers paying these penalties and providing truthful and complete informa- tion, the DOJ agrees not to criminally prosecute taxpayers for their years of tax noncompliance and evasion.
In 2012, the IRS announced streamlined procedures for individuals residing outside of the United States; in 2014, the streamlined pro- cedures were extended to taxpayers residing in the United States. Under the streamlined procedures, taxpayers are required to file three years of amended tax returns and six years of delinquent FBARs. No miscellaneous penalty is applied to eligible nonresident taxpayers, while resident taxpayers pay a 5% miscellaneous penalty. Unlike the OVDP, however, taxpayers who use the streamlined procedures do not receive protection from criminal prosecution, nor is there a pre- clearance procedure available through which the taxpayers can deter- mine if their disclosure is timely. As of January 2016, taxpayers using these procedures must submit “a narrative of specific facts which led to the failure to timely report all income, pay all tax and submit all required information,” including FBARs. Taxpayers must certify, under penalties of perjury, that the failure to report the foreign accounts was non-willful.
Streamlined Filing Compliance Procedures