If the taxpayer’s Forms 1040X or 1040, as the case may be, report tax owing, and the taxpayer is a resident of the United States, we consider making a submission for the taxpayer under the Internal Revenue Services’ Streamlined Offshore Compliance Procedures for Residents of the United States. Under the Streamlined Procedures for a resident of the U.S., the taxpayer—
- Files a U.S. income tax return or amended U.S. income tax return, as the case may be, for the three most recent years, on which the income tax assessment statute of limitations has not yet expired.
- Pays income tax due on the income tax returns or amended income tax returns, as the case may be, and interest due on the tax.
- Pays a “miscellaneous Title 26 offshore penalty” equal to five percent of the high aggregate year-end balance of foreign financial accounts beneficially owned by the taxpayer for the five most recent tax years.
- Files a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, (1) certifying the year-end balance of each of the foreign financial accounts beneficially owned by the taxpayer in each of the last six tax years, and (2) explaining that the taxpayer’s noncompliance was nonwillful.
“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.
The Streamlined Offshore Compliance Procedures for Residents 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. It is the policy of the IRS not to acknowledge a submission Streamlined Offshore Compliance Procedures for Resident 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 the IRS agrees with the taxpayer’s Miscellaneous Title 26 offshore penalty computation, it will send the taxpayer a Notice CP15, Notice of Penalty Charge, charging the taxpayer the penalty computed on the taxpayer’s Form 14654. 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.