The Streamlined Procedure allows certain participating taxpayers to disclose their foreign accounts and assets and avoid criminal prosecution. Some of the latest news about this Program is that as of June 2014, the IRS has made it easier for people to participate in it.
One of the main benefits of the Streamlined Procedure is that it permits low penalties of either a 0% or a 5% FBAR penalty for failing to previously disclose one’s assets. Compared to prior versions of the Offshore Voluntary Disclosure programs, these penalties may seem a small price to come “clean” with one’s tax reporting.
A. Certification of Non-Willfulness
However, the main drawback with this Program is that taxpayers must sign a certification (i.e. under the penalty of perjury) that one’s failure to report all his income, pay all his tax, and submit all his required FBARs was due to his “non-willful conduct.”
This is known as a taxpayer’s “non-willful certification” and it has caused quite a stir within the tax community, effecting how tax attorneys advise their client. This certification is quite significant because the threshold for when conduct rises to the level of being “willful” is set lower than one would initially think.
Practically speaking, the bottom line is this: If you certify (as you must under the Streamlined Program) that your reason for failing to report your foreign accounts and income from them was due to conduct that is non-willful, then there is corresponding risk that you may face severe penalties and criminal prosecution if the IRS disagrees with your self-assessment regarding your intent. This point is worth repeating: The certification of non-willfulness can actually increase your risk of criminal prosecution by the IRS.
B. Willful and Non-willful Conduct
But this raises the important question: When is conduct deemed “willful”? Ultimately, the IRS explains that this is a “fact and circumstances” test, although some guidelines can be stated.
For example, if you have “emotional reasons” for not declaring your foreign account, or that your relative expressly instructed you to keep it secret, then you will be deemed to act willfully—and could be recommended to the IRS’s criminal tax division for prosecution.
The IRS will look for certain indicia of willfulness. Such indicia, for example, can include having an asset in a foreign account with bank secrecy laws (e.g. Switzerland); placing the account in a foreign trust, or other entity that conceals the taxpayer’s ownership; coaching one’s bank to deliver account statements to a non-U.S. residence; or having secret meetings with bank representatives.
The IRS tends to be more inclined to go after the “big fish” accounts. Related, willful conduct may arguably be inferred from the size of the account. Someone with $10 million offshore is going to have a harder time explaining that he did not act willfully in failing to report his foreign account than the person with only $10,000.
There are also some guidelines concerning what may constitute “non-willful” behavior. For example, evidence of non-willful behavior might include having a small amount in one’s foreign account relative to one’s total assets. Similarly, if there is no tax owed on the foreign account, or no withdrawals were made—that would constitute evidence in favor that one acted non-willfully.
C. “Willfulness” Illustrated in Two Recent Cases
Two recent cases illustrate how a taxpayer can be found to have acted “willfully” subjecting himself to criminal tax liability.
1. United States vs. J. Bryan Williams (4th Cir. 2012)
In 1937, Aldous Huxley wrote a little read book titled Ends and Means. In it he discussed many things, but one of them related to the relationship between the human will and our willful ignorance of things. He wrote, “Most ignorance is vincible ignorance. We don’t know because we don’t want to know. It is our will that decides how and upon what subjects we shall use our intelligence” (p.270-272). Huxley’s point has relevance to taxpayers who turn a blind eye to their duty to disclose their foreign accounts; and his point is well-illustrated in the United States vs. J. Bryan Williams case.
In United States vs. J. Bryan Williams, 2012 WL 2948569 (4th Cir. 2012), the Fourth Circuit held that a person cannot avoid criminal prosecution when he or she willfully fails to be unaware of his FBAR reporting requirements. By way of background, U.S. citizens and residents must annually report their direct or indirect financial interest in a financial account located in another country if the value in that account (or the aggregate value of all foreign accounts) exceeded, at some point, $10,000 during the year. The form used to report this is the FBAR Form.
Mr. Williams made a “conscious effort to avoid learning about reporting requirements,” and made false answers on his tax returns. This constituted evidence that he was trying to “conceal or mislead sources of income or other financial information.” The court explained, “it is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms,” and when one conceals income and other financial information “combined with [his] failure to pursue knowledge of further reporting requirements as suggested [in the tax forms],” it provides a “sufficient basis to establish [his] willfulness.” Thus, the court was able to find that the taxpayer acted “willfully” and thus upheld a criminal conviction. The take away here is that one cannot remain “intentionally ignorant” of his FBAR reporting requirement, otherwise the IRS will have good reason to asset that one has acted criminally. Stated otherwise, taxpayers act willfully when they remain intentionally ignorant. You can read more about this case here:
2. United States v. Zwerner, S.D. Fla. (May 28, 2014)
In United States v. Zwerner, S.D. Fla. (May 28, 2014), a jury found that Mr. Carl Zwerner willfully failed to file his FBARs disclosing his foreign bank accounts. Apparently, he did not disclose the existence of his foreign accounts to his tax preparer, even though the questionnaire asked whether he possessed such accounts; nor did he report the income earned from these accounts. The jury found that Mr. Zwerner acted “willfully,” thus making him liable for an FBAR penalty equivalent to 50% of the high balance in his foreign bank account for three out of the four years, for a total of The $3,488,609.33 (!).
Mr. Zwerner signed a statement that (arguably) admitted that he intentionally did not file or disclose his accounts—although he contends that the statement does not make such an admission, and that the statement was prepared by the IRS agent and signed by Mr. Zwerner on the false promise that it was needed to obtain a reduced penalty. In the end, Mr. Zwerner was exposed to a 50% penalty on the highest balance on each of his accounts for each year he violated his reporting duties.
D. An Alternative? Yes!
Fortunately, other ways than participation in the Streamlined Program continue exist to address one’s past noncompliance. In particular, there is also the option to participate in the Offshore Voluntary Disclosure Program of 2014 or “2014 OVDP.” This alternative program is beneficial in part because it functions as an amnesty program—meaning, there may be protection from being referred to the Criminal Investigation Division (a criminal conviction could lead to jail time and fines in excess of one’s account balances). Admittedly, 2014 OVDP participants will be charged with a 27.5 percent penalty (one time only) based on the high watermark (highest offshore balances at any one moment in time) for the 8 year 2014 OVDP period. But the difference between the penalties one pays under the Streamlined Program (0% or 5%, for example, if the conduct is non-willful) and those under the 2014 OVDP might be viewed as “insurance” against the possibility of criminal prosecution.
E. 2014 OVDP vs. the Streamlined Procedure (as revised in 2014)
To be clear, a taxpayer must choose between these two programs. Either they may participate in the 2014 OVDP or the 2014 Streamlined Procedure. But, if a taxpayer is rejected from the latter, he or she is no longer eligible to enter the 2014 OVDP. Moreover, unlike the 2014 OVDP, the Streamlined Program does not carry with it the guarantee that the IRS will not recommend the case to the Criminal Investigation Division if a taxpayer were rejected from it. Accordingly, these reasons count in favor of the 2014 OVDP. We advise you to speak with an experienced international criminal tax defense attorney regarding which of these programs to enter into prior to participating in them. For more, please read here.