The IRS Streamlined Procedure, whether the Streamlined Foreign Offshore Procedure (SFOP) or the Streamlined Domestic Offshore Procedure (SDOP) of 2014 is still available for taxpayers, but the Internal Revenue Service (IRS) is apparently closely policing those who enter the program. The IRS is now very carefully vetting the cases coming in. A hallmark of the Procedure is that the tax compliance failures must be the result of “non-willful” conduct and very detailed factual statements (see FAQ 6) must be provided under penalty of perjury explaining the reasons for any compliance failures.
With the consistent erosion of the type of activity that fits within the meaning of “non-willful”, it’s getting harder and harder to pass the Streamlined entry bar. Practitioners and taxpayers still believe “Streamlined” is easy to enter…. Not so any longer. The program has been around since 2014 and many taxpayers have corrected their situation with fewer and fewer needing to join Streamlined. This means the IRS has more time to review submissions. Given the passage of time (now 8 years), public knowledge has increased dramatically with IRS making copious amounts of information readily available on its website. As such, it becomes far more difficult for taxpayers to believably claim they did not hear of FATCA, FBARs and foreign information reporting. Return preparers are more knowledgeable too and are asking their clients to complete organizers that pointedly ask about offshore accounts or assets. In other words, the noose is tightening.
The Streamlined procedure is generally, a friendlier and far less costly approach to bring non-compliant Americans (whether living overseas or living in the USA) back into the tax filing system. It is understandable that a taxpayer would want to use this program to regain US income tax and FBAR compliance, but not everyone will slip in under the wire. Generally, the “Streamlined” programs permit taxpayers with delinquent tax returns or returns missing income that involve foreign financial assets, as well as missing FBARs or other foreign information returns, to enter the program.
Taxpayers will be required to file only 3 years of back tax returns and 6 years of FBARs, and if IRS agrees that the taxpayer is eligible for the Streamlined Procedure, no penalties will be assessed for the late or corrected tax filings if the taxpayer meets the definition of being a non-US resident for SFOP. The lucky taxpayer will not be liable for any failure-to-file or failure-to-pay penalties, accuracy-related penalties, information return penalties (e.g., Form 5471, Form 3520, Form 8938 etc.), or FBAR penalties! It’s a dream come true. US residents using SDOP will pay only a 5% Title 26 miscellaneous offshore penalty generally equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the relevant years. Further detail on this penalty calculation can be found in the IRS SDOP FAQs.
The Failed Streamlined Submission
The Streamlined procedure will not provide protection from possible civil penalties if IRS considers such penalties should apply. This is a very significant point. First, the Streamlined very generous 3 year look-back period for income tax returns will not apply. What this means is that the look-back period for assessing unpaid income tax and asserting penalties can be greatly extended (even unlimited) depending on the facts and the applicable statute of limitations. Details on this issue are here and here. As a result, unpaid income tax and the amount of tax penalties can be much higher if more distant tax years are pulled in. Second, in addition to the tax penalties and any foreign information return penalties, FBAR civil “willful” penalties can sky-rocket. Third, if the Streamlined submission goes belly-up, there is no protection from possible criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant it. See for example the case of Mr. Rahman Azizur (Department of Justice news release here).
The trend clearly shows that over time, IRS is becoming more and more aggressive in asserting FBAR penalties and the courts are making it easier and easier for the IRS to succeed on a “willful” argument. According to the IRS Streamlined information, “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”. The trend in the cases examining “willfulness” in the FBAR context have shown that willful violations can be caused by “willful blindness”, and by “reckless” disregard as well.
In a nutshell, “willfulness” in the context of a FBAR violation does not require any type of bad intent on the part of the taxpayer, nor does it require actual knowledge of the duty to report an interest in a foreign account. The IRS has been very aggressive with its view of “willfulness” and cases show how far the IRS tries to go in saying a taxpayer willfully violated the FBAR rules. If the taxpayer merely signs his tax return and Schedule B is part of the return, is the act of signing the return along with the Schedule B sufficient to charge the taxpayer with knowledge of the FBAR reporting requirement? According to the IRS, the answer to that question is “yes”. The IRS has made this argument before (see here and here).
Part II of this blog post will examine what appears to be the latest trends in Streamlined – more audits, a harsher take on what it means to meet the “non-willful” standard and a recent case that proves the trend. Next week’s post takes a deep dive into the failed “Streamlined” / FBAR “willful” case of an elderly dual national couple with a benign fact pattern that I and many other tax pro’s have heard time and time again. The times they are a’changin…… Stay tuned.
Posted September 22, 2022
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