Thursday, June 26, 2014

False Statements Crime Element of "Knowingly and Willfully" Requires Proving Knowledge that Making False Statement Is Illegal (6/26/14)

Since we have been spending so much time on the term "willfully," a chameleon of a word varying with context, I wanted to offer this development in the interpretation of the false statement statute, 18 USC 1001(a), which also has a "knowingly and willfully" requirement for the crime of making false statements to a Government agent.  This charge is often used in tax related contexts.

The DOJ is reported to have abandoned its prior interpretation that a false statement a prosecution and conviction could be made with proof only that the defendant knew the statement was false.  Rather,  the DOJ has indicated in some briefings that this the DOJ now interprets the provision in position Section 1001(a) to require that the defendant know that making the false statement was illegal.  See Tony Mauro, U.S. gives up a widely decried charging theory (American Lawyer 5/12/14), here.  This interpretation seems to bring this statute and related statutes in line with the tax crimes definition of willfulness and the FBAR crimes and civil penalty definition of willfulness.

In pertinent part, the article states that DOJ has now clarified that:
that to make the case that a defendant acted "willfully," the government must prove that he or she knew the statement was unlawful — not just that it was false. That requires a state-of-mind element that can be hard to nail down. Defendants often claim they were unaware that lying to the government was illegal, especially in casual conversations or when not under oath.
Further,
In making such an important shift in the interpretation of a law invoked hundreds of times a year, the department did not shout it from the rooftops. Solicitor General Donald Verrilli Jr. sprinkled mentions of the change into several largely unnoticed briefs filed in March in routine cases before the Supreme Court. Only one reference appears to be available online, on pages 11 and 12 of the government's brief opposing certiorari in Natale v. United States, in which a surgeon was convicted of making false statements in a matter that involved a health care benefits program. 
What's more, none of the cases in which Verrilli confessed error actually involved Section 1001, instead arising under Section 1035, a health care fraud provision that mimics the ­"knowingly and willfully" language of the false-­statements law. 
The Justice Department's change of mind is slowly being felt. On April 21, the Supreme Court sent two cases back to lower courts "for further consideration in light of the confession of error by the solicitor general." The court's orders will likely set in motion a lengthy reassessment of false-statement precedents in most circuit courts.
Hat tip to Lawrence S. Goldman, DOJ Narrows Basis for Section 1001 Prosecutions (White Collar Crime Prof Blog 6/19/14), here.

The DOJ CTM, here, now does not reflect this change in interpretation.  It provides:

24.08 WILLFULNESS 
 To establish a Section 1001 violation, the government must prove that the
defendant acted knowingly and willfully. E.g., United States v. Hildebrandt, 961 F.2d
116, 118 (8th Cir. 1992). As used in Section 1001, the term "willful" simply means that
the defendant did the forbidden act (e.g., made a false, fictitious, or fraudulent statement)
deliberately and with knowledge. Id. at 118 (citing United States v. Carrier, 654 F.2d
559, 561 (9th Cir. 1981)). The Second Circuit has recognized that “whether a defendant
has ‘knowingly and willfully . . . ma[de] any materially false, fictitious or fraudulent
statements or representations’ under § 1001 is governed by the same legal standards as
whether a defendant ‘willfully subscribes as true any material matter which he does not
believe to be true’ in violation of the perjury statute, 18 U.S.C. §1621.” United States v.
Triumph Capital Group, Inc
., 237 Fed.Appx. 625, 627-28 (2d Cir. 2007) (citing United
States v.
Mandanici, 729 F.2d 914, 921 (2d Cir. 1984); Bronston v. United States, 409
U.S. 352, 359-62 (1973)); United States v. Stewart, 433 F.3d 273, 319 (2d Cir. 2006). 
Presumably, the DOJ CTM will be changed to reflect the new interpretation.

For further background on the issue, I offer the following cut and paste from my Federal Tax Crimes Book (footnotes omitted) (I do not indent the quote):

c. Knowingly and Willfully.

The false statement must be made knowingly and willfully.  As I noted earlier in the text, willfully is a word of many nuances.  Certainly, in a tax crimes context, willfully means at a minimum knowing that the conduct is illegal.  So, the question is which nuance applies to § 1001?  Does the speaker commit the crime by making a knowingly false statement to a federal agent or must the speaker also know that making a knowingly false statement to a federal agent is a crime?  The CTM says cryptically on this issue: “As used in Section 1001, the term "willful" simply means that the defendant did the forbidden act (e.g., made a false, fictitious, or fraudulent statement) deliberately and with knowledge.”  With knowledge of what – the falsity or the falsity and its criminality?  I think the CTM fairly read intends the former rather than the latter.

In a recent case [United States v. Moore, 612 F.3d 698 (D.C. Cir. 2010)], Judge Kavanaugh in a concurring opinion focused on this issue although siding with the majority because the defendant had not properly raised the issue at trial.  The facts, highly summarized, are that, incident to a drug investigation, the USPS intercepted a drug package addressed to “Karen White” and then, after substituting white powder for the drug, had a USPS employee deliver it to the address.  At the address, the USPS employee delivered the package to the defendant, a male, upon his representation that he was Karen White's boyfriend and upon his signing the receipt with a false name.  The defendant was thereafter first charged with drug crimes and the jury hung.  He was tried a second time for the same charges but with a false statement charge added for his conduct in accepting the package.  In the second trial, the jury hung again on the drug charges but convicted on the false statement charge.  On appeal, Moore urged that the falsity was not “materially false” (another element in § 1001).  The panel unanimously handily rejected that argument.  Speaking to the substantive issue of whether "knowingly and willfully" requires knowledge of criminality, Judge Kavanagh echoed the concerns of Judge Kozinski of the Ninth Circuit in dealing with the somewhat amorphous crime of the defraud conspiracy (the Klein conspiracy in tax context).  That is not surprising because, as Judge Kavanaugh cites,  Judge Kozinski has addressed this concern in the context of 18 USC § 1001.  I quote:
Proper application of statutory mens rea requirements and background mens rea principles can mitigate the risk of abuse and unfair lack of notice in prosecutions under § 1001 and other regulatory statutes. In § 1001 cases, that means proof that the defendant knew that making the false statement would be a crime. To be sure, “ignorance of law is no defense” is a hoary maxim. But it does not automatically apply to today's phalanx of federal regulatory crimes. See WAYNE R. LAFAVE, CRIMINAL LAW § 5.6, at 298-311 (5th ed.2010). For some regulatory offenses -- particularly statutes like § 1001 that proscribe only “willful” conduct -- the Supreme Court has recognized an ignorance-of-law or mistake-of-law defense, or has required affirmative proof of the defendant's knowledge that his or her conduct was unlawful. See Bryan v. United States, 524 U.S. 184 (1998); Ratzlaf v. United States, 510 U.S. 135, 141-49 (1994); Cheek v. United States, 498 U.S. 192, 199-201 (1991); Lambert v. California, 355 U.S. 225, 229-30 (1957);  cf. Liparota v. United States, 471 U.S. 419 (1985); Dan M. Kahan, Ignorance of Law Is an Excuse -- But Only for the Virtuous, 96 MICH. L. REV. 127, 150 (1997) (noting that “courts permit mistake of law as a defense [] selectively across malum prohibitum crimes”).  For criminal statutes prohibiting "willful" violators, those cases together require proof that the defendant was aware that the conduct was unlawful. 
In Bryan, the Supreme Court summarized the rule quite clearly: “[I]n order to establish a willful violation of a statute, the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” 524 U.S. at 191-92 (internal quotation marks omitted). Since Bryan, the Court has reiterated this formulation on several occasions. See also Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 n.9 (2007) (“we have consistently held that a defendant cannot harbor such criminal intent unless he acted  with knowledge that his conduct was unlawful”) (internal quotation marks omitted); Dixon v. United States, 548 U.S. 1, 5, 126 S. Ct. 2437, 165 L. Ed. 2d 299 (2006) (the term “willfully” “requires a defendant to have acted with knowledge that his conduct was unlawful”) (internal quotation marks omitted).*
  n* To say that the Government must prove the defendant knew the conduct was a crime is not necessarily to say that the Government must prove the defendant knew the specific code provision proscribing the conduct, except with respect to certain highly technical statutes. See Bryan, 524 U.S. at 194; cf. Ratzlaf, 510 U.S. at 141 (anti-structuring statute); Cheek, 498 U.S. at 200 (tax statute). 
It is true that our Court many years ago seemed to assume (in addressing a mens rea issue under a different statute) that proving the defendant's knowledge of the law may not be required in § 1001 cases. See United States v. Hsia, 176 F.3d 517, 522 n.3 (D.C. Cir. 1999). In so doing, Hsia referenced a 1994 Third Circuit opinion that pre-dated the Supreme Court's clarifying decisions in Bryan and later cases. That assumption may not endure in light of those subsequent Supreme Court precedents. In a future case, we therefore may need to consider the appropriate mens rea requirements and defenses for § 1001 prosecutions under those Supreme Court decisions. 
Here, however, there is no legal obstacle to our affirming Moore's § 1001 conviction: Moore did not contend that the term "willfully" in § 1001 requires proof of the defendant's knowledge of the law, and he did not challenge the jury instructions on that basis. But in a case where the issue is raised, the Supreme Court's precedents arguably require district courts in § 1001 cases to give a willfulness instruction that requires proof that the defendant knew his conduct was a crime. To be sure, in many false statements cases the Government will be able to easily prove that the defendant knew his conduct was unlawful. But in some cases, it will not be able to do so -- and those of course are precisely the cases where it would seem inappropriate and contrary to § 1001's statutory text to impose criminal punishment.
Notice that Judge Kavanaugh repeats in the footnote the notion that Bryan requires proof that the defendant knew of the specific Code provision he or she intended to violate.  Readers might review again, the discussion of this issue on page 11, above.  Setting that aside, it is clear that Cheek requires the element that the defendant knew the conduct was illegal and intended to do the illegal act.  That is the point to which Judge Kavanaugh focuses his fire.

In response to this genre of criticism, DOJ is reported to have adopted the requirement that “knowingly and willfully” in this statute and related statutes requires both that the defendant knows the statement is false and knows that it is illegal to make a false statement to a Government agent.

Finally, as to the knowingly and willfully element, the CTM says that “several courts” permit the element to be met by proof of “willful blindness” or “conscious avoidance.”

37 comments:

  1. Jack wondering if you can response.In the streamline process can we fix erroneous expenses under streamline process? Or is it something that one can only do under ovdp?

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  2. You have to file a true and correct amended return fixing all errors, whether related to offshore financial accounts or otherwise.

    Keep in mind that you are certifiying that:

    My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct

    So you are certifying the "all income" underreported and "all tax" underpaid was non-willful. So the IRS should have no problem with correcting all of your non-willful issues. If you have any willful issues -- domestic or foreign -- you do not qualify for streamlined.

    Jack Townsend

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  3. Anonymous,

    That is how I understand it as well. Thanks for your comment.

    Jack Townsend

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  4. If you transition to the domestic streamlined, will the penalty still include the value of real estate? It sounds like the penalty under the streamlined is only based on financial assets.
    My penalty in the ovdp 2012 is including 2 million of real estate. I am close to getting my 906. If I transition will the value of the real estate drop off?

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  5. My understanding is that the transitioned penalty base will be the same as the streamlined - financial assets only.

    Keep in mind, though, that the certification of non-willfulness applies to all income and tax underreported.

    Jack

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  6. Thank you Jack, your blog has calmed many a sleepless night..you are usually way ahead of the curve with information and explain your opinions well. I noted in the Zwerner verdict the jury and judge used the June 30th account balances, which finally put to rest the date the must use for the willful fbar penalty, it seems odd that in the streamlined program they want you to use the dec 31 st account balance and not the highest balance during the tax year is that your understanding as well?

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  7. They use the highest aggregate balance during the period as the penalty base. The spreadsheet has the highest balances for each account for each year. They are then totaled by year (column). The year with the highest amount is the penalty base.

    The FBAR willful penalty is the amount on the date of violation -- June 30, even though the report is for the entire preceding year. The FBAR reports the highest balance in that account for the year and hence correlates to the amount included in the penalty base as noted in the first paragraph.

    Keep in mind that the offshore penalty (the 27 1/2% penalty) is not an FBAR penalty. It is a miscellaneous IRS penalty which in some ways may be viewed as a proxy for the FBAR penalty (if the FBAR penalty were the only other penalty that could have applied). And, being an IRS program, it can set the terms anyway it wants. I could have said that the penalty base is the average amount or the amount on 4/15 of the year or some other measure. If the taxpayer does not want the penalty so calculated, the taxpayer can opt out and take whatever penalties might apply in an audit.

    Jack Townsend

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  8. Thank you for your response, Jack.

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  9. Jack, here is hypothetical scenario: Taxpayer is US resident, currently in the OVDP, has received but not yet signed Closing Agreement Form 906 and would like to go into the streamlined transitional rules. Given the chamaleon nature of the "willful - non willful" spectrum you have described, what might be the outcome of the taxpayer making a certification stating all facts and circumstances as HE BEST RECOLLECTS . Also, the taxpayer would include in the statement that based on the facts and circumstances as he best recollects, he considers himself non-willfull yet would ultimately defer to the IRS to make that determination and that he would stay in the OVDP if the IRS disagrees with the certification of "non willful" as stated above. My two main considerations are: ONE: I have had to travel to my country of origin several times and talk to family, banks, old employers, etc. to piece together a life I have not been connected to for years. My memory is not infallible. I am not a young person any more. I have found family acounts with my signature authority I had no awareness and/or remembrance of during the trips. I own foreign real estate, a little condo, which I rented and declared and paid taxes to the foreign country, instead of the USA, based on my interpretation of a tax treaty. For the 8 years of the OVDP I checked NO on the preparer's organizer given that I felt it was not needed as I was reporting to the foreign country and doing it correctly in my belief. I do not think I ever discussed any of this with the tax preparers. But what if there is something I did not find out in my trips to the foreign country? What if there are notes by the tax preparers on the rental condo that I may not remember? Again, I do not think I ever discussed such matters with preparers for the reason explained above. TWO: If I make this kind of open ended certification as stated above and the IRS were to find something I cannot remember or have not discovered, or thru interviewing preparers, WOULD MY CERTIFICATION BE CONSIDERED UNTRUE? I am just scared of the nuances of the willful-nonwilfull spectrum and the actual reality of very foggy memory of some aspects of the 8 years I had to research for the OVDP. About 80% of my 27.5% computation is the value of the condo at the hight of the market in 2007.


    Thanks so much!

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  10. Does anyone know for sure what the latest possible filing date for the 2012 OVDP program is? In the transition FAQ it says:


    "Before July 1, 2014, he has mailed to IRS Criminal Investigation his OVDP voluntary disclosure letter and attachments as described in OVDP FAQ 24".



    Does that simply mean a June 30th mailing date for an application? What qualifies for a mailing date? Can one have a fedex shipment date from a location abroad of June 30th? Can one ship fedex overnight from a NYC location on June 30th? Or does it have to be USPS registered mail?


    If they actually need it delivered before july 1st, does anyone know if one can deliver it in person in Philly on monday June 30th and what hours?

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  11. I didn't have the stamina to continue the fight, after 30 months into OVDI (equals to 36 months of nightmare stress) and a huge amount of money spent for representation and professional consultations. It has been a painful decision not to opt out, taken based mainly on the uncertainty of what could happen outside OVDI: after 3 editions of the Form 906, I have reached the point where the worst case scenario penalty outside OVDI (according to the mitigation table for non-willful cases) could have been higher than the OVDI penalty.


    I won a fight related to foreign, non-Canadian pension funds (a subject for a separate thread), which within OVDI reduced my penalty to half. I even have prepared, based on the models published on your blog, the opt out letter where I was pleading for reasonable cause, but the last straw came when the agent, who otherwise very patient, lost the patience waiting for my answer to the last 906 and called with an ultimatum to decide, by the end of the day, if I opt out or not, else they will remove me from OVDI. That was a painful reminder of how pressure from IRS can feel. I decided to end the nightmare and pay the $26K penalty, thus depriving myself and others which are in similar situations of what could have been a successful opt out story.

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  12. Thank you for this great blog Jack, I don't see any other site out there with the same level of information and rapid updates. Not sure if anyone here has the time to look at my situation, but I'd appreciate any advice you may have. I have consulted my CPA on the matter and am waiting for their conclusion.


    Our story: My wife of three years and I became aware of FBAR filing requirements about a month ago, which means we missed out on 2011 and 2012 filings. We checked the foreign bank account box on our jointly filed 1040's in 2011, 2012, and 2013, but did not file any FBARs. Investment losses combined with some bank account interest income was a net negative in 2011 and 2012, but a net positive in 2013, and that income was not reported on the already-filed 1040. Being that the FBAR for 2013 isn't due until the 30th, and that there was no unreported income in 2011/2012, would an amended 1040 for 2013 along with FBAR filings for those three years constitute a (looked down upon) quiet disclosure? Or would you consider that to be an appropriate form of disclosure based on the IRS' current guidelines?

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  13. Hi PC. Not sure if Jack intends his forum to be used for solicitation. However, there is always google.

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  14. 0% penalty. IRS says, come clean for last 3 years, and you're good, so long as you're not willfully disclosing completely (fraud). See here:

    "A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful."

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

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  15. a) returns: 2010, 2011, 2012 (these returns are the ones whose extended deadlines have past, so they are in SFOP & SDOP).

    b) fbars: 2007, 2009, 2009, 2010, 2011, & 2012 (last 6 years of FBARs, whose deadlines have past).

    see here, from the SFOP page, but it's the same for SDOP:

    "....and (2) for each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1)."

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

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  16. Wilfullness & Nonwillfulness is basically what you did on your ORIGINAL tax returns, and whether you had knowlege of the foreign income & asset disclsoure rules of the IRS. Willfullness in civil cases, is the "burden" of the IRS, meaning they have to PROVE it.


    By signing the statement in SDOP/SFOP, saying you did not know about the foreign disclosure/income rules, means you are asserting nonwillfulness. There is nothing you have to prove for nonwillfulness with SDOP or SFOP. In an opt out of an OVDI, you would have to make the case for why you were nonwillful, because the terms of the Opt out dictate you have a letter stating your reasonable causes for nonwillful. But again, in SDOP or SFOP, no need to prove nonwillfulness. However, if the IRS then determines that you were willfully not disclosing your foreign income & assets on your original returns, even though you went through the SDOP & SFOP, they could audit you for fraud. Risk of criminal prosecution for signing the SDOP or SFOP certification while knowing that you were willful on your original tax returns, is an answer answered above by Jack.

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  17. Mike, you are not delinquent on any FBAR for which you have unreported income (2013 is the first year you had income, so that FBAR is not due until Monday, June 30th). So long as you amend the 2013 return, and file the FBAR on time, you would be okay, presumably. Your 2013 return CANNOT fit into SDOP/SFOP (streamlined programs) because the extended due date for that has NOT passed (Oct. 15th). Therefore, you just have delinquent FBARs.


    FAQ 17 of the prior OVDI also has the answer to your question. However, that has been superseded with Section 3 of "Options Available For US Taxpayers with Undisclosed Foreign Assets." Link:: http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised

    Section 3 of Options Available For US Taxpayers with Undisclosed Foreign Assets."
    http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S--Taxpayers-with-Undisclosed-Foreign-Financial-Assets



    Hope this helps.

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  18. I think you meant to ask about the SDOP/SFOP (streamlined) programs, right? Your faq is from the transition FAQ number 2, which says states whether a participant is construed as being an OVDP participant.


    So if that's your question, that you want to be a part of SDOP/SFOP, then it's best you NOT be construed as part of the OVDP, because the ONLY mitigation for SDOP/SFOP is the 5% penalty, and you would still owe all the income taxes for all the years in the OVDP (assuming you have not received a closing 906 letter).


    If you want to be a participant in SDOP/SFOP, then it's BEST you DIRECTLY submit to the IRS, for consideration in the SDOP/SFOP program (whichever one you are, resident or nonresident), and go that rought because you only have to amend the last 3 years of returns (2010-2012) and FBARs for 2007-2012.


    If you wait till after October 15th, 2013, however, then SDOP/SFOP would roll forward to include just the returns for 2011, 2012, & 2013 (and FBARs for 2008-2013).


    The IRS also considers POSTMARK date. So long as you deliver something POSTMARKED by June 30th, you get credit for mailing it on June 30th, regardless of when it gets there. But again, if you want to have to report less years, then you should NOT go into OVDP.


    But, just my opinion, and of course I don't know your case anymore than what you describe here.

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  19. I believe, the SDOP/SFOP, a financial asset is ONLY that which is supposed to have been reported on the FBAR, so PRESUMABLY, the real estate would NOT be included in the penalty base for NEW participants into SDOP & SFOP. However, the transition faqs for OVDP participants, may allude otherwise. See here:

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

    "A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year."

    However, transition FAQ # 9:
    "9.If I seek and receive transitional treatment, how will the other aspects of my OVDP case be affected?


    All other terms of the OVDP in which the taxpayer is currently participating will continue to apply, including, but not limited to, the following:

    the OVDP disclosure period remains the same;

    execution of a Form 906 Closing Agreement is required;

    payment of accuracy-related, failure-to-file, and/or failure-to-pay penalties, if applicable, are required; and

    the alternative MTM PFIC resolution will continue to be available."



    So perhaps, your penalty base WOULD include the real estate in the penalty base due to you being in the OVDP and due to the terms of the transition NOT being limited to just those items mentioned in FAQ 9. Show it to your OVDI Examiner. See what she/he says. I am keen to know as well.

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  20. if there was rental real estate that earned income that was not reported, it is your understanding that it is not included in the tax base?

    Also the form 8938 is effective since 2011, in determining the base do you include the assets that should of been reported in form 8938 prior to its existence? i would think not.

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  21. That is my understanding in the streamlined program. Keep in mind that the streamlined is a surrogate for opting out and, on opt out (as for FBAR generally) only financial accounts are subject to the FBAR penalty.

    Jack Townsend

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  22. Thank you, both for myself and the other readers. You offer good comments.

    Jack Townsend

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  23. I would also like to thank Jack and the community for helping to foster such a constructive dialogue around a very emotional and complex topic. Like most everyone here I just recently (3 days ago) heard the word 'FBAR' for the first time. You can imagine the size of the stroke I am still recovering from. Here is my story - if anyone has a similar experience and has gone through the process please share - I need all the help I can get:


    Background:
    *Moved to US from Canada on H1-B visa status in late 2010
    *Filed taxes with Non-Resident Status (1040NR) for 2010
    *Like a complete moron did not realize that as my status would change so would my reporting and never even knew FBAR existed. Have continued to work in US as an employee till present day and slept many a great night until this week, not knowing I had major us tax obligations looming over my head.


    Today I have the following overdue:
    -2011 Income Tax
    -2011 FBAR
    -2012 Income Tax
    -2012 FBAR



    I still haven't filed anything for 2013 either, and here is why: I spoke with 3 tax attorneys, two suggested that I'm an excellent candidate for the Streamlined Offshore Disclosure program and should just go that route and file all 3 years together any pay the 5% (and why should I? I earned this money through blood, sweat and sacrifice on Canadian soil and already paid the Canadian tax man, if this isn't the most unjust of unjust penalties, I don't know what is, Uncle Sam has no rights to this wealth). For some reason I was also told that filing my 2013 FBAR on time could somehow complicate the streamlined process, and that I should reconsider, how could that be?? To me it seems logical that being 2 years overdue is better then 3 and shows a good hearted attempt to do the right thing asap. Only one tax attorney implied that I could go either quiet disclosure or streamlined and didn't see any major risk.


    For full 'disclosure' (starting to hate that word), the aggregate high balance value of my foreign bank account is ~$230K. I also had interest in a foreign corporation since 2010 with signing authority. Anyways I think you get the picture, I would love for any of the budding litigators and experienced mavens to take a crack at analyzing my case and discussing pros & cons.


    Thank you in advance!

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  24. But the Government has won cases where willfulness has been alleged and won on the basis of Schedule B question being answered incorrectly. Of course, there were other bad facts in the cases as well, but I think the holdings were pretty broad. And in the streamlined procedures, the IRS is not specifically going to court, they just need to think they can prevail if they go to court.

    Now I don't think the IRS is going to asset willfulness based purely on that one issue, but I think it would be a factor given some weight when processing SFOP applications -- for US residents applying for SFOP anyway who have been filling out Schedule Bs and aren't (say) recent immigrants or expats who recently returned to the US. Certainly in recent years, tax planners and even software programs have been more careful when asking about foreign accounts. And in recent years, Schedule B has a question requiring an answer even if the account size is < $10000 (i.e. you don't have a FBAR filing requirements). TurboTax since 2010 at least makes answering the foreign account question -- mandatory. In previous years, that was not so.

    The bottom line though is that the assertion of non-willfulness has to be truthful. And I think you have to be ready to make a case for why your actions were not willful, even though the large majority of SFOP cases will likely not be asked for an explanation.

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  25. Excellent comment, but as you note the cases have more bad facts than answering no to the Schedule B foreign account question.

    In this regard, the streamlined with certification is a proxy for getting into OVDP and opting out to obtain a nonwillful result. In virtually every case I am aware of where a successful result was achieved on opt out the Schedule B foreign account question was answered no.

    Jack Townsend

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  26. Bellepogue,

    I understand your plight. However, the Streamlined Program offers you an out for just the back tax and interest that you owe and would pay if you did QD. That is except for the 5% offshore penalty. That is the marginal cost of the past noncompliance. In your case, with the indicated high balance of -230K (which I assume is just less than $230K, your 5% penalty would be less than $11,000. That is not an insignificant amount of money, but the truth is that should you go QD or QF and get audited, your representation costs may be more.

    And, at your level, I suspect you could with only the help of a return preparer go through the Streamlined Program with relative small costs -- just the preparation of 3 years returns and 6 years FBARs. And you would be done with it and not have to worry about the past (at least as respect tax and FBAR).

    Or alternatively, you could go into OVDP and opt out and likely get a better result than the $11,000 FBAR penalty. But that process is time consuming, costly to prepare the larger package required, and uncertain.

    Jack Townsend

    ReplyDelete
  27. Milan,


    Thank you very much for your help, I can't tell you how grateful I am.

    ReplyDelete
  28. My personal belief is that criminal protection within the streamlined program does not apply, because you are signing a certification statement stating nonwillfulness, even though the only mitigation for OVDP participants is the 5% penalty for domestic residents and 0% for offshore residents. Those OVDP participants who just entered the OVDP, but may have received a pre-clearance letter, or not, can submit in writing before July 1st, a letter stating they want to withdraw from the program. Jack asked this question to Jenifer Best, senior adviser, IRS LB&I, in a webinear last week, and she stated the same. So just because you sent in the intake letter and may or may not have received the pre-clearance for OVDP, does not mean you can't still exit it. You're very early on in the program, you have not submitted returns or FBARs, and so the IRS is giving you a reprieve to leave the OVDP (without Opting Out), and without thus being governed by the Transition FAQs. But once you are in OVDP and transitioning to the SDOP & SFOP penalty, or entering SDOP/SFOP directly (without you being in OVDP), you are asserting nonwillfulness and the IRS can still audit you later if they feel you were deceitful in signing the SDOP/SFOP nonwillfulness certification or if you were indeed willful with your original returns.

    Jack's original post:

    I asked that question of the Hotline person who said it could be done. I then asked the question of Jennifer Best who was the IRS representative at an ABA webinar. Ms. Best answered the question that it was permissible to withdraw before 7/1/14 and proceed only under the new streamlined program. She suggested that we write a letter prior to 7/1/14 notifying the IRS of the withdrawal and not to expect the complete package.

    If it helps, here is a recording of the Q&A which I just made from the recording on the ABA web site (hope I am not violating the law):

    https://drive.google.com/file/d/0B0SLTNWD-Z3YSnZ1eTNMcm9LMjQ/edit?usp=sharing

    Here is the link to the description of the program:

    http://apps.americanbar.org/cle/programs/nosearch/tgtemo.html

    I think that Ms. Best's answer is the most authoritative on the issue.

    By the way, the other person on the panel is Scott Michel.

    Best,

    Jack Townsend

    ReplyDelete
  29. Well, how about a 3800 letter (warning letter)? With the taxpayer providing proper reasonable cause & good faith arguments, the examiner has discretion, to NOT assess the $10,000 penalties. How about the taxpayer who has $50,000, but five fixed deposits (aka, certificates of deposit accounts)opened up in one year alone, and he this was the case for 6 years. So that's, 5 accounts, for 6 years, = 30. 30 x $10,000 = $300,000 penalty for $50,000 balance? This is not reasonable to assess this level of penalty for a middle class taxpayer who was not aware of the FBAR rules, and who might be an immigrant (h1b work visa) in the last 6 years. Again, lots of moving parts, and variables.

    ReplyDelete
  30. Thank you Milan. The person is a first time filer and wants to disclose completly (didn't know had any obligations of reporting or taxes to US for 20 years). What is his situation about the taxes of that earned money, which the person would report in its 2011, 2012 and 2013 US personal returns, 5471s, etc, under SOFP. He firmly thinks he has nothing criminal for an OVD.


    Is the person released only from the penalties, or does he have to pay US taxes for the money (earned before 2011)? His savings are declared in his CFC as a loan he made to his own CFC before 2011 under a tax amnesty in his country. It looks like it could bring subpart F, but again is in the accounting books and annual reports since 2011. He is awaiting the right moment to collect his money from his own CFC. What do you think? Opinions appreciated Thanks again.

    ReplyDelete
  31. The person meets the non presence test for 3 years and has never worked in US. His CFC has never done business with US or any other foreign entity (foreign to his CFC country).

    ReplyDelete
  32. I have filed the 2013 taxes and also the 2013 FBAR this time and it includes the income earned and the foreign account details respectively. I came to know about this whole foreign account reporting only during mid of March 2014 and so when I did the filing, I included the foreign income and also filed FBAR. I was trying to collect data for prior years and was trying to figure out what could be the best process for me to get the prior years corrected. In the mean time, IRS announced this SDOP. But now since I have filed 2013 in the right way, should I be filing amended returns for 2012, 2011 and 2012 (or) just 2012, 2011 since the return dates for both tax/fbar has passed for 2014? Also FBAR from 2007 till 2012 (or) 2008 till 2012? Please let me know.

    ReplyDelete
  33. I have filed the 2013 taxes and also the 2013 FBAR this time and it
    includes the income earned and the foreign account details respectively.
    I came to know about this whole foreign account reporting only during
    mid of March 2014 and so when I did the filing, I included the foreign
    income and also filed FBAR. I was trying to collect data for prior years
    and was trying to figure out what could be the best process for me to
    get the prior years corrected. In the mean time, IRS announced this
    SDOP. But now since I have filed 2013 in the right way, should I be
    filing amended returns for 2012, 2011 and 2012 (or) just 2012, 2011
    since the return dates for both tax/fbar has passed for 2014? Also FBAR
    from 2007 till 2012 (or) 2008 till 2012? Please let me know.

    ReplyDelete
  34. In light of all the above, and enough interpretation of 1001 by cases like Bryan, I still do not understand why the IRS scares OVDP participants and taxpayers that willful conduct is akin to not marking the bottom of Schedule B or not having reported foreign income, & FBARs. WIth Ratzlaf, specific provisions of the Code or law are not required for mens rea, but then again, how many taxpayers in the US population are truly aware of the FBAR, 8938 form, or the IRS's citizenship tax-based system in general, in the first place? My understanding is that then, assuming that a taxpayer is clearly not willful, even if the IRS says that someone might be, then that taxpayer should NOT be in OVDP, simply do a quiet disclosure, risk the FBAR penalties, and if assessed, appeal to IRS Appeals Division, and if necessary, fight their case all the way to court. Because in a court setting, if the IRS only has missing FBARs and missing foreign income components as the only elements to apply "conscious avoidance or "willful blindness," then that can't be enough to simply apply willfulness to the taxpayer. Legal expenses would be a tax deduction, assuming it's worth, economically, to fight it.


    Jack, can you comment and explain the definition of "willful blindness" & "conscious avoidance?" Or can you point us to somewhere else on your blog post where you have discussed that?


    Thank you.

    ReplyDelete
  35. I have a conscious avoidance keyword link:

    http://federaltaxcrimes.blogspot.com/search/label/Conscious%20Avoidance

    Conscious avoidance is one of the terms for willful blindness, willful ignorance, etc.

    ReplyDelete

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