Domestic Streamlined Disclosure for Taxpayers Living in the U.S.
For decades, many wealthy Americans utilized an array of offshore tax methods to conceal income and assets and reduce their tax burden. These practices were, for a time, successful for many people. However, around the time of the 2007 financial collapse and the ensuing concerns regarding federal budget shortfalls Congress began to look for ways to close the tax revenue gap. One of the methods Congress settled upon was a drastic overhaul of the American and, by extension, worldwide banking system. Under the new system, an array of foreign account and asset disclosure laws were enacted or strengthened that require Americans to make annual disclosures provided that there foreign assets exceed certain thresholds.
However, the limits set by Congress were extremely low and resulted in an obligation to file FBAR or FATCA for millions of Americans including individuals who are doing well, but do not consider themselves wealthy. An array of people living in the United States have an obligation to disclose. Individuals more likely to have foreign accounts requiring such disclosures may include:
- Frequent business travelers who keep foreign accounts and assets for convenience.
- Recent immigrants to the United States who have maintained foreign bank accounts.
- Americans with family members in foreign nations to whom they send remittances.
- Investors seeking a diverse portfolio insulated from domestic volatility.
Unfortunately, penalties for failure to disclose are harsh. However, many individuals never intended to break the law and only failed to disclose due to a lack of knowledge regarding the obligation or a misunderstanding of covered accounts and assets. However, for taxpayers without willfulness concerns, streamlined disclosure can provide a means to achieve compliance while avoiding the majority of offshore penalties imposed under standard OVDP.
What is Meant by Willful vs. Non-Willful Violations?
If you knew about your FBAR of FATCA reporting requirements and chose not to report anyway, that would be considered a willful violation of the law. However, some violations are non-willful, and if your actions were non-willful, you can face only civil, rather than criminal, charges. Non-willfulness occurs when one is genuinely unaware of these requirements and only failed to make the required reports because of this ignorance or some sort of mathematical or reporting error. It does not apply if you knew about the reporting requirements and deliberately ignored them. In many cases, it will also not apply if you show “willful ignorance” by not consulting with a tax professional or conducting due diligence on the IRS requirements for those with assets in foreign accounts. Consult with a veteran dual licensed International Tax Attorney & CPA like those at the Tax Law Offices of David W. Klasing if you are uncertain whether your conduct was willful or not.
False Certifications of Non-Willfulness Will Lead to Prosecutions
As discussed elsewhere in the article, streamlined disclosure is only permitted for those whose behavior was non-willful. Those who committed willful violations of the law have a separate process called voluntary disclosure that they can go through to avoid criminal penalties, but the penalty fines and fees they pay will be significantly higher. Using FBAR as an example, for a willful violation submitted through the voluntary disclosure program, the penalty generally is 50% of the highest aggregate amount in the undisclosed offshore accounts (plus the value of any trained assets that went unreported for income tax purposes) over the six-year FBAR period covered by the disclosure. If the taxpayer submits amended returns and FBARs disclosing the foreign accounts under the domestic streamlined disclosure program, on the other hand, they will only have to pay a significantly lower civil penalty of 5% of the highest aggregate year-end balance of offshore accounts and tainted offshore assets (not reported for income tax purposes) that should have been reported over the six year disclosure period.
However, it is a terrible idea to try to pretend that your behavior was non-willful when it was in fact willful in order to avoid paying the higher penalties, because, as part of the streamlined disclosure procedure, you are required to sign a certification of non-willfulness by the taxpayer under the penalty of perjury. It is very important that you do not sign such a certification unless it is true that your FBAR reporting issues were unintentional. The IRS is very serious about looking into your conduct and determining whether it was in fact willful.
If the IRS conducts an audit or criminal investigation that turns up evidence that your conduct was in fact willful and intentional,, and you signed a certified statement of non-willfulness, you could face serious criminal charges for lying as part of the streamlined disclosure process in addition to once again facing the prospect of being charged criminally for willful tax evasion. Instead, consult with an experienced dual licensed International Tax Attorney & CPA like those at the Tax Law Offices of David W. Klasing before determining whether streamlined disclosure, voluntary disclosure, or some other route is the best, safest way of dealing with past failures to meet FBAR or FATCA reporting requirements.
What Are the Benefits of Streamlined Disclosure for U.S. Residents?
Taxpayers living in the U.S. including U.S. citizens, legal permanent residents, resident aliens and others who meet the requirements set forth in the substantial presence test can often make use of the benefits provided by Domestic Streamlined Disclosure. Whereas the offshore penalty paid as part of a standard OVDP disclosure can be assessed at either 27.5 or 50 percent, the offshore penalty paid in the Streamlined program is 5 percent of the highest aggregate balance. However, the reduced penalties are not limited to only the offshore penalty. These taxpayers can also avoid the penalties associated with:
- Accuracy of previous tax filings
- Information returns
It is important to note that while new penalties are not imposed, any already existing penalties will remain undisturbed. Other benefits presented by the Streamlined program are related to the amount of new or amended tax and FBAR filings required to be made. Under Streamlined procedures an individual is required to submit only 6 years of FBAR (OVDP requires eight years) and three years of income tax returns (OVDP requires eight years of tax returns).
Who Is Eligible to Correct Offshore Non-Compliance with Domestic Streamlined Procedures?
To be eligible to make use of the Domestic Streamlined Procedures and individual must be considered a U.S. resident for tax purposes. Typically, this means the individual has an abode in the United States. Alternatively, for certain individuals, they must satisfy the substantial presence test. The individual may also be required to have filed a tax return for each of the previous three years. Furthermore, they must have failed to report some portion of their gross income or failed to file required FBARs. Finally, the conduct that gave rise to the failure to file must have been non-willful. Non-willful conduct includes actions that are not taken voluntarily or intentionally to avoid or defeat a known legal duty.
This last requirement is particularly noteworthy because individuals who make use of the Streamlined disclosure procedures are required to certify under penalty of perjury that their non-compliance was the result of a good-faith misunderstanding of the law. Therefore, the filing should be reviewed or prepared by an experienced tax lawyer. Taking this step is prudent because filers who attempt to use Streamlined procedures when conduct was willful have perjured themselves compounding their potential liability. Furthermore, they have likely just disclosed information that may further a potential criminal tax prosecution without receiving the protection from criminal referral that comes with standard OVDP. The disclosure should only be reviewed by a lawyer because the attorney-client privilege can maintain the confidentiality of your disclosures should the or she identify an underlying criminal concern due to willfulness or other reasons.
Separated Spouses Previously Limited to OVDP Due to Joint Return Signature Problems Can Now Use Streamlined Procedures
Previously, spouses who had previously filed a joint tax return but were no longer able to secure the signature of their former partner were limited to the OVDP program. This is because amending a joint return requires the signature of both parties who originally signed it. While the use of a closing agreement in OVDP would allow a taxpayer to overcome this requirement, a similar procedure was not previously available in Streamlined Disclosures. Therefore, even when the taxpayer did not have concerns about potential criminality or willfulness, he or she was forced into OVDP where a 27.5 or 50 percent offshore penalty applied. However, recent guidance has altered this harsh result that is often outside of the control of the taxpayer.
Separated taxpayers residing in the United States can now refer to FAQ #14 of the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States Frequently Asked Questions and Answers for guidance as how to complete a Streamlined filing with only one signature. Provided that certain conditions are met, the taxpayer may submit a joint amended income tax return with only one signature. As part of the procedures, the taxpayer must provide a written explanation in the form of a narrative stating why they were unable to secure their former or separated spouse’s signature. Furthermore, the taxpayer should reference “SDO FAQ 14” in red ink where the other spouse would ordinarily sign. While routine processing will result in a request for the missing signature being made, the taxpayer should once again reference “SDO FAQ 14.”
What Steps Must I Take to File for Streamlined Disclosure if I Live in the U.S.?
It is prudent to hire a meticulous and experienced international tax lawyer to handle Streamlined filings. However, it is important for the taxpayer to understand the process of a Streamlined disclosure. Therefore, we will set forth the general steps that are required in making a filing of this type.
Generally, the start of the filing procedures begins with collecting the three most recently filed income tax returns. Under the domestic procedures, these returns must be updated with accurate and comprehensive amended returns making use of only IRS Form 1040X. Furthermore, these amended returns must be accompanied by relevant or required informational returns even if the return would otherwise ordinarily be filed separately. Each of the amended returns must be conspicuously marked that they are being submitted under the Streamlined Domestic Offshore procedures. The taxpayer must also submit any and all tax including offshore penalties that is due and owing.
Additionally, since the Streamlined program is only available to taxpayers who were not willful in their noncompliance, the taxpayer must certify that they were not willful. This certification is made under the penalty of perjury so it is essential that the taxpayer has been forthcoming regarding his or her behaviors and actions. Additional items also certified under penalty of perjury include:
- All delinquent and required FBARS are submitted
- The individual is eligible for Streamlined Domestic Offshore Procedures
- The calculation of the offshore penalty is accurate
This statement must be attached to all tax and information returns or the IRS will process the filings in the standard course and without the benefits of the Streamlined process.
Streamlined Domestic Offshore Procedures FAQ
What is IRS streamlined compliance?
The streamlined filing compliance procedures provides taxpayers with a streamlined process of filing and paying off tax obligations and delinquent returns.
What is the IRS’ criteria for eligibility of a streamlined domestic filing?
1. The taxpayer must certify that their actions were not intentional/non-willful.
2. The IRS has never performed a civil examination of the individual’s taxes.
3. The taxpayer must pay off any previous IRS penalties.
4. Taxpayer must have a valid Taxpayer Identification Number.
What happens if you file an FBAR late?
The IRS doesn’t assess a penalty for late FBAR filings, only for non-filings. The maximum penalty for a non-filed FBAR is 50% of the account value at the time it was due.
Working with a Tax Attorney Is Often Essential for Domestic Streamlined Filings
Individuals residing in the United States who are considering making a Streamlined Disclosure, should first consult with an experienced tax attorney. At the Tax Law Offices of David W. Klasing our legal team can provide insight and guidance into the process and the likely result of your action. We can review your past actions and filings for potential willfulness concerns since Streamlined procedures do not provide insulation from referral for criminal prosecution. Furthermore, since you are certifying your Streamlined filing under the penalty of perjury, accuracy is essential. However, despite these concerns, the significantly reduced penalties and fines taxpayers can benefit from make Streamlined Domestic Disclosure an extremely favorable means to achieve offshore compliance.
To schedule a confidential reduced-rate consultation with an experienced tax lawyer, call the Tax Law Offices of David W. Klasing at 800-681-1295 today or contact us online. We can provide the guidance you need to fix offshore disclosure mistakes so you can stop living in fear of the consequences of a potential tax audit.