Once the taxpayer’s delinquent FBARs have been filed, we have Forms 1040X, Amended U.S. Individual Income Tax Return, or Forms 1040, U.S. Individual Income Tax Return, as appropriate, prepared for the taxpayer. If the tax returns report tax owing, and the taxpayer is not a resident of the U.S., then we consider filing the tax returns in the context of a submission under the IRS’ Streamlined Offshore Compliance Procedures for Nonresidents of the United States. Such a submission includes a Form 14563, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, signed by taxpayer under oath certifying how the taxpayer’s noncompliance was nonwillful.
A taxpayer is a “nonresident of the U.S.” for this purpose—
- The taxpayer was physically outside of the United States for at least 330 full days in any one of the three most recent taxable years for which the filing deadline (as properly extended) has passed; and
- The taxpayer does not have an abode in the United States. “Abode,” or “tax home,” is similar in meaning to the legal term “domicile.” It is where a taxpayer resides and has principal social contacts, and intends to return if away for a time.
“Willfulness” is, essentially, noncompliance with specific intent to evade U.S. income tax. The classic willfulness profile is a taxpayer who transfers a large sum of money—$1 million or more—to a foreign country for the purpose of evading U.S. income tax on income produced by the funds. Typically the foreign country is one with bank secrecy laws. The taxpayer invests the funds in the foreign country, and then fails to report income from the foreign investments on his or her U.S. income tax return.
U.S. taxpayers are subject to U.S. income tax on their worldwide income, though they can avail of the U.S. foreign tax credit for income tax which they incur to foreign countries. Schedule B, Interest and Ordinary Dividends, to a U.S. income tax return asks, on Line 7a, whether the taxpayer had a financial interest in, or signature authority over, one or more foreign financial accounts during the tax year and, if so, whether the taxpayer is required to file an FBAR for the year. Falsely checking “No” to these questions can be evidence of willfulness, though this can be explained. An accountant may have prepared the tax return. The accountant may have checked “No” to the boxes on Schedule B, Line 7a without asking the taxpayer about foreign financial accounts. The taxpayer may have signed the tax return without reviewing it in detail.
Willfulness is difficult to prove. The government has the burden of proving willfulness, by clear and convincing evidence—higher than the usual civil standard of a preponderance of evidence. The IRS promulgated the Streamlined Procedures to ameliorate the harshness of its Offshore Voluntary Disclosure Program; the Streamlined Procedures should be liberally construed to accomplish their ameliorative purpose. The OVDP is reserved for taxpayers whose noncompliance was truly willful. A taxpayer should never be presumed to have been willful.
In a submission under the Streamlined Offshore Compliance Procedures for Nonresidents of the United States, the taxpayer submits an amended U.S. income tax return as needed for the years on which the assessment statute of limitations has not expired, and pays the tax owing thereon, and interest on the tax. The taxpayer incurs no penalty in a Streamlined Procedures submission for a nonresident of the U.S.
The Streamlined Offshore Compliance Procedures for Nonresidents of the United States are not available to a taxpayer who is under civil examination or criminal investigation by the IRS.
We use a delivery service such as UPS to make a Streamlined Procedures submission, receiving a signed delivery receipt therefor. The IRS generally does not acknowledge a submission Streamlined Offshore Compliance Procedures for Nonresident of the U.S. However, if the IRS finds a problem with the taxpayer’s Streamlined Procedures, it will bring it to the taxpayer’s attention, and request that it be corrected. If there is a balance due from the taxpayer or a refund due to the taxpayer with respect to a tax return submitted in a Streamlined Procedures case, the IRS will send the taxpayer a notice of the balance due from the taxpayer or the refund due to the taxpayer.