Page 2 - The Pitfalls Of Streamlined Foreign Account Disclosures

order to ensure that those taking advantage of the streamlined pro- cedures are, in fact, proper candidates for the program.
n The taxpayer met with a representative of the foreign bank in the United States.
n Bank records show that the taxpayer requested the bank not to dis- close the account to the IRS.
DOJ attorneys have been warning taxpayers since the streamlined program was first announced that it is “a very dangerous approach” to make a streamlined filing “while ignoring facts that might suggest willfulness to the government” (Jaime Arora, “Don’t Hastily Join Streamlined Compliance Program, Keneally Says,” Tax Notes Today, June 25, 2014, http://bit.ly/2ra74j7). Indeed, in her November 2016 remarks discussed above, Ciraolo noted that “Tax Division prosecutors are reviewing certain streamlined filings, and will investigate and prosecute taxpayers who willfully submit false statements in an effort to obstruct and impede the IRS and evade the payment of tax due.”
n When completing the accountant’s annual questionnaire, the tax- payer answered “no” to the question “Do you have a financial interest in a foreign bank account?”
Facts May Not Support a Streamlined Filing
It is not uncommon for taxpayers with unreported foreign accounts to have preconceived notions of the options available to them and try to shoehorn their facts into a non-willful statement in order to receive the benefit of the lower penalty scheme. It is therefore vital that tax advisors—both lawyers and accountants—fully appreciate the risks attendant to using the streamlined procedures and satisfy themselves that the taxpayer’s conduct is in fact non-willful before submitting a streamlined filing. Indeed, a tax advisor who prepares a streamlined filing for a taxpayer also is required to sign Form 14653 or Form 14654.
In addition, the IRS may be suspicious of a streamlined filing if the account held a significant sum of money, since a large account is hard to “forget” when giving details to one’s tax return preparer. In such a case, the IRS may initiate an audit of the tax years at issue in the streamlined filing and may conclude that the taxpayer’s failure to report the account was in fact willful. Should the IRS so conclude, the taxpayer at best would be subject to fraud penalties; at worst, the taxpayer may face criminal prosecution related not only to the failure to report, but also to the statements made in the streamlined filing.
The most typical set of facts involves a taxpayer who inherited a foreign bank account or whose family members in a foreign country set up a bank account on his behalf, often when the client was a child. The client’s tax return preparer may not have asked about a foreign account, and the client may have had no knowledge that the account needed to be reported. In such a scenario, it is likely that the client will be able to provide credible facts supporting his non-willfulness.
The best way for a tax advisor to protect a taxpayer from making an ill-considered streamlined filing is to inform her of the breadth of information that has been and continues to be gathered by the IRS and the DOJ relating to noncompliant U.S. taxpayers with foreign accounts. In the author’s experience, bankers tend to be fastidious and regularly keep notes of phone calls and meetings with clients or their advisors. If the government conducts an investigation of an indi- vidual’s foreign account holdings, that evidence certainly will be dis- covered. In short, there is no such thing as a secret account.
Things start to get more complicated when other facts exist that tend to demonstrate that the taxpayer took specific steps to maintain the secrecy of the foreign account. Some common facts that demon- strate willfulness include, but are not limited to, the following:
n The account was held in the name of an offshore entity, such as a Panamanian or British Virgin Islands corporation, trust, or foundation. n The account was identified solely by a code name, nickname, or number.
n The taxpayer instructed the foreign bank to hold all mail related to the account so that it would not be sent to the taxpayer in the United States.
n The taxpayer moved the money from one foreign account to another, particularly if such movement occurred after July 1, 2008.
n The taxpayer withdrew all funds from the account in cash. n After withdrawing the funds from the account in cash, the tax- payer took steps to have the money brought into the United States and falsely reported on a tax return the source of the cash.
n There were repeated cash deposits into or cash withdrawals out of the foreign account.
In addition, the bank records, including account-opening documents and signature cards, will need to be requested from the foreign bank in order to complete the streamlined filing. Those records often speak volumes and may tell a story very different from the taxpayer’s version of the facts. If the records reflect conduct that suggests willfulness, the taxpayer will need to have a credible explanation for that conduct. Taxpayers likewise will need to explain credibly why they failed to disclose the foreign accounts, and why they did not make a voluntary disclosure under the OVDP.
Taxpayers must understand that a streamlined filing that omits important facts may be caught by the government, result- ing in the taxpayer being subject to criminal prosecution—not only for failure to report the foreign account, but also for false statements in the streamlined filing. Tax advisors should take the taxpayer’s version of the facts with a grain of salt and cau- tion that if the records tell a different story, the streamlined procedures may not be available. In such a situation, taxpayers would be well advised to enter the OVDP and pay the higher miscellaneous penalty. The silver lining in that more financially painful scenario is the certainty that—if the disclosure is timely, truthful, and complete—the government will agree not to crim- inally prosecute. The peace of mind that comes with that cer- tainty is priceless. q
Sharon L. McCarthy, JD, is a partner at Kostelanetz & Fink LLP, New York, N.Y.
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