Are Streamlined Audits Becoming More Common? The Streamlined Submission that went Belly-Up (Part II)

Are “Streamlined” audits on the rise?  It appears so. In 2016, two years after the Streamlined Procedures were put into place, then-Acting Assistant Attorney General Caroline Ciraolo (Dept. of Justice) had this to say in an interview:

“After seven years of voluntary disclosure programs, nearly 200 criminal prosecutions, and the increased assessment and suits to collect FBAR penalties, a taxpayer’s claims of ignorance or lack of willfulness in failing to comply with disclosure and reporting obligations are not well-received. Similarly, we are very interested in taxpayers who filed tax returns and FBARs pursuant to the Streamlined filing procedures, or the Delinquent International Information Return or FBAR submission procedures, who falsely claimed either to have engaged in non-willful conduct or to have acted with reasonable cause.”

Fast forward to today; Streamlined procedures have been around now for 8 years.  The Internal Revenue Service (IRS) appears to be actively policing “Streamlined” submissions and in certain cases, denying them the favorable treatment for “non-willful” tax noncompliance.  What is meant by “non-willful” in this area of tax law has evolved over time, and the evolution has not favored the taxpayer.

Part I of this blog post here, discusses how the erosion of the “non-willful” concept is causing more and more taxpayers to fail to meet the standard, thus subjecting them to civil “willful” FBAR penalties and rendering them ineligible for Streamlined relief.  It walks through the details of the Streamlined procedures and explains what can happen if a streamlined submission is rejected by the IRS.

Today’s post looks at a recent Streamlined case that went belly-up. Rather sad facts. The IRS is being ruthless, but a good advisor can help take steps to avert disaster. Let’s have a look.

The case, STEPHANIE L. FLINT AND DAVID J. JONES, AS EXECUTORS OF THE ESTATE OF MARGARET J. JONES, No. 21-1202T Filed: August 23, 2022, involved a dual national couple who were quite elderly, Mr. Jones was born in 1919 and was deceased at the time his widow, Mrs. Jones (born in 1928), attempted to rectify their tax issues using SDOP. IRS flagged their submission for audit and did not accept the Streamlined submission, hitting them with a “willful” penalty for not filing FBARs.  Meanwhile now Mrs. Jones has passed away and her estate is in this terrible mess.  The opinion of the United States Court of Federal Claims is here.  (Scroll to page 12 for the factual background submitted by Mrs. Jones to the SDOP on her submission Form 14654).   The Flint case gives a peek at what can go wrong if a streamlined submission goes belly up, and it can happen even when the taxpayer has “good” facts.  I have summarized some salient facts in Flint below – let it serve as a reminder that “streamlined” may not be the panacea it once was.

The Flint Facts… Benign Actors?

Mr. and Mrs. Jones had been married for many years. Mr. Jones was a dual national taxpayer, born in New Zealand; Mrs. Jones was also a dual national, born in Canada.  They became naturalized US citizens in 1969. Neither had a college education or any experience in US taxation or accounting matters.  They had a total of 11 offshore accounts in Canada and New Zealand, the countries of their original citizenships.  Some were held jointly, but some were held individually by each spouse.  The couple filed joint income tax returns but failed to report significant amounts of income related to the foreign accounts; Schedules B checked the “no” box indicating that they did not have any interests in foreign accounts; of course, the couple failed to file FBARs.  The couple never used any funds in these accounts.  They believed that so long as the accounts remained offshore the US and income earned from them was taxable in the jurisdictions where the accounts were located (i.e., NZ and Canada), they did not have US tax obligations associated with the account. I have heard many taxpayers say this, so it came as no surprise to me when I read it in the Flint case.

The couple used a CPA to prepare their tax returns but this individual did not have experience in preparing FBARs.  He did not ask whether the couple had any offshore accounts. Upon the passing of Mr. Jones at age 93 in 2013, Mrs. Jones hired attorneys to assist her in her role as estate executor.  It was only after Mr. Jones’ passing that she learned that her late husband had separate accounts in New Zealand.  Based on legal advice, Mrs. Jones filed a timely FBAR for 2012 and filed amended tax returns for 2011 and 2012, reporting all unreported foreign income from the accounts.  Two years later, Mrs. Jones also filed an SDOP with (1) amended 2011 and 2012 joint income tax returns; an original income tax return for 2013; (2) FBARs for 2008 through 2013; (3) a detailed statement explaining why the tax noncompliance was non-willful executed under penalties of perjury; and (4) payment of the miscellaneous Title 26 penalty close to US$157K. The Title 26 penalty was computed solely with respect to Mrs. Jones individual offshore accounts and her joint accounts with Mr. Jones.  She did not list or include in the penalty computation, Mr. Jones’ separately owned New Zealand accounts. This was simply because at that time there was no guidance as to the process for submitting a streamlined submission for a deceased taxpayer and the IRS recognized this fact. Sadly for one reason or another, the relevant IRS agent did not help Mrs. Jones and did not follow up and clearly advise her that she could resubmit the Streamlined submission including Mr. Jones’ separate accounts and recalculating the miscellaneous Title 26 penalty to include the decedent’s accounts. Instead, this 91 year old widow was advised that the IRS sought to impose willful FBAR penalties (it appears based on the theory of “willful blindness”) against both spouses in an amount over $1.5 million.

A very sad case, but Flint provides a valuable lesson!  It seems to me the Jones’ were benign actors – at their age and the fact that the accounts were in the countries where they held their second citizenships attained at birth, along with other facts such as Mrs. Jones attempt to rectify the tax noncompliance, an ill-equipped CPA unfamiliar with FBAR filings, all painted that picture for me.  Compare the cases of really “bad actors” who tried to use the “Streamlined” procedures despite underying criminal issues.  These cases include former CPA Brian Booker – clearly a “bad” actor as well as the case of Mr. Rahman Azizur (Department of Justice news release here).

How to Prepare the Streamlined Statement

Given the IRS increased scrutiny of Streamlined submissions, be careful out there. Your tax advisor should be exercising extreme caution in recommending and/or submitting a Streamlined application. Here’s my take on how Streamlined cases should be undertaken with an emphasis on how the Statement should be prepared.  I have worked on Streamlined matters since the program was started and have followed the IRS developments and shifts in attitude.  Experience is extremely important when it comes to a successful Streamlined submission.

A fresh and independent review of the Statement prepared by your advisor should absolutely be done.

I am happy to assist with all of your Streamlined issues.

Posted September 29, 2022

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