You are trying to correct your wrongs, but what if it was just an honest mistake? In Part One we looked at the harsh civil and criminal penalties that you are open to by not filing FBARs on your foreign accounts. The Offshore Voluntary Disclosure program would allow you to come into compliance and provide civil and criminal protection from prosecution. But, the OVDP may be a move expensive undertaking from a preparation and penalty perspective than your case actually warrants.
Consider Streamlined Filing Compliance Procedures
A new option announced on June 18, 2014, provides Streamlined Procedures which are available to taxpayers that did not willfully file a timely FBAR. Two different sets of Streamlined Procedures exist, allowing U.S. taxpayers residing outside the United States and U.S. taxpayers residing inside the United States to follow tailored applications. Both sets require reporting failures to be due to non-willful conduct.
Are you “Non-Willful”?
The most important piece to consider when determining if you should use the Streamlined Filing Compliance Procedures is to determine if your conduct was non-willful. This means that your filing compliance error is due to negligence, an inadvertent mistake, or the result of a good faith misunderstanding of the requirements of the law. You may claim that you are non-willful, but the IRS may not agree if your conduct reveals differently. The IRS will look at any action that could contradict your non-willful status, such as making deposits and withdrawals from the account, the types of withdrawals, choosing not to disclose the account to a tax preparer, and communications with the foreign institution just to name a few. Be very cautious when certifying your non-willful status to the government, they will be checking each certification.
“Willful Blindness”is the legal concept of attributing willfulness to a person that has made a conscious effort to avoid learning about their legal duty. This concept of willful blindness with regard to FBARs is often discussed in relation to the person that did not check the box on Schedule B, Line 7a, regarding “whether at any time during the year did the taxpayer have a financial interest or signatory authority over a financial account located in a foreign country”or if a taxpayer did not fill out a tax organizer that the accountant provided correctly. The natural question, is whether this person should have questioned their obligations and investigated further beyond this schedule or the tax organizer that their accountant asked them to fill out? This is a critical question that the taxpayer should answer for him or herself in making the determination to go through this procedure.
Under this concept of willful blindness, the question that the government may seek to determine in their analysis of your certification is really whether the person made a conscious effort to avoid learning about the FBAR filing and reporting requirements? This is a confusing question for them to answer because it is they actually have the burden to prove this, however, is a critical consideration when making the determination if this option is appropriate for the taxpayer with this problem. As an criminal tax attorney, this answer really comes down to the facts and circumstances of an individual’s case.
Procedure 1 – Taxpayers Residing outside the United States
- File accurate Form 1040 if not filed previously along with required Forms 3520, 5471, 8938 for the previous three years. If U.S. tax return was already filed, complete an amended Form 1040X including Forms 3520, 5471, 8938. Label the top of each page in red writing as “Streamlined Foreign Offshore”
- Sign an original non-willful statement certifying that you are eligible for the Streamlined Procedures and that all FBARs have now been filed electronically.
- Submit tax payment for all tax due from the tax returns, along with statutory interest.
Procedure 2 – Taxpayers Residing in the United States
- File amended tax return for the previous three years with all required information. Label the top of each page in red writing as “Streamlined Domestic Offshore”
- Pay a Title 26 miscellaneous offshore penalty of 5% of the highest total value of the foreign assets at during the three year tax period.
- Sign an original non-willful statement certifying that you are eligible for the Streamlined Procedures, that all FBARs have now been filed electronically, and that the miscellaneous offshore penalty amount is accurate.
Should you take advantage of the Streamlined Procedures? It all comes down to qualifying and being non-willful, which should not be taken lightly. Discuss and analyze this and your other options with an experienced criminal tax lawyer that handles these matters.
About Freeman Tax Law
Freeman Tax Law is equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional staff have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA), Offshore Voluntary Disclosure Program (OVDP) and Streamlined Procedure. In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.
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