Thursday, June 19, 2014

The New Streamlined Processes' Requirement of Certifying Non-Willfulness (6/19/14; rev'd 6/21/14)

I am going to do a series of separate blogs on certain discrete facets of the IRS announcement on June 18.  See IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (Federal Tax Crimes Blog 6/18/14), here.  In this blog, I focus on the liberalized streamlined procedures' requirement that the offshore account conduct not be willful.  I think this requirement goes to the core of the penalty mitigation offered by the new processes.

In invoking either of the streamlined procedures, the U.S. person with an offshore account problem is required to certify that the "the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct."  I will refer to that U.S. person as the taxpayer.  The certification forms are for residents, here, and for nonresidents, here.  The key part of the certification form is:
My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.  
I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.  
When can the taxpayer make the certification that his conduct was not willful for income tax and FBAR purposes?

Obviously, the taxpayer must know what is meant by willful, so that he can assess whether his conduct was not willful (or "non-willful").  As courts have noted, the word "willful" is a "chameleon" which changes in tone and color according to the Code section involved and the circumstance.  See e.g., former Justice Souter's opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir. 2014), discussed in More On Willfulness (Federal Tax Crimes Blog 6/13/14), here.  But, I think it is clear that, in both the income tax context and the FBAR context, willful means "voluntary intentional violation of a known legal duty."  Readers will recognize this as the Cheek standard.

The IRS discussion of the new Streamlined Procedures approaches the issue from a different direction -- instead of starting with the definition of willfulness and moving to non-willfulness, it states what is non-willfulness without any predicate.  The explanation of non-willfulness is direct and somewhat cryptic:  "Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."  (See the certification forms linked above.)

The IRS does not get into the thorny issue of the role of willful blindness (or similar formulations, such as deliberate ignorance, etc.) and whether willful blindness permits an inference or requires a conclusion of willfulness.  Presumably, though, the definition of non-willfulness as quoted would exclude willful blindness.  Stated otherwise, if willful blindness were involved, the conduct would not be due to negligence, nor to inadvertence, nor to mistake nor to a good faith misunderstanding of the tax law.

I conceptualize the path between willfulness and non-willfulness as a continuum.  The facts of some cases will present themselves on either end of continuum and will be clearly recognized as willful or non-willful.  When the facts present themselves other than at the ends of the continuum, there is a problem.  OK, if they are close to either end, that may not be a big problem.  But how close do the facts need need to be to be at either end before one can comfortably make a decision?  Another metaphor is the gray area between the extremes.  What do you do when you are in the gray area -- in the shadings between white and black?

These are just concepts that describe the process that one must go through to be able to certify the conduct involved is non-willful.  Other than understanding the general process, it does not help make a decision as to how to characterize the conduct as being one or the other.

This is where the taxpayer needs to be very careful.  If the taxpayer certifies non-willfulness and makes a bad judgment call, there is a downside and it may not be pretty.  The most obvious problem is that, if the IRS challenges the certification, the taxpayer has not mitigated the problem he sought to solve by certifying non-willfulness.  He can be subject to the willful FBAR penalty and civil fraud penalty and open statutes of limitations for income tax purposes and will have foregone the opportunity to mitigate those risks by joining OVDP without opting out.  Even worse, he has given up the criminal prosecution protection for past conduct that he could have obtained by joining OVDP.  And, still another bad consequence could be that the act of making the certification could be considered an independent criminal act -- perhaps a tax obstruction crime or false statement crime -- and, moreover, could be an act that refreshes the statute of limitations with respect to previous criminal conduct.

Of course, a taxpayer who recognized that his conduct was willful will -- certainly should -- not attempt the streamlined process to mitigate his costs and should join OVDP and not opt out.

The net effect of this taxpayer certification process is that the IRS has essentially substituted a process of uncertainty for the process of uncertainty -- when to opt out of OVDI/P and the predicate decision of when to join OVDI/P -- that drew so much criticism in OVDI/P.  When can the taxpayer make the certification required and how is that really different from opting out (except that, in opting out, the taxpayer makes no false certification but may come close to similar in the opt out penalty mitigation statement submitted in the process)?

So, I think I would just raise the caution for now the most basic issue of willful and non-willful that was at the core of whether the join OVDP and whether to opt out is still with us under this new iteration of the streamlined program, except that, for those who can get comfortable with their non-willfulness, the streamlined program is a good way to go because the penalty mitigation may be greater.  The nonresidents solve their tax and FBAR problems with three years of income tax and interest and six years of FBARs and the residents solve their income tax problems with three years of income tax and interest and six years of FBARs, coupled with a 5% offshore penalty on the foreign financial accounts.

Of course, for those U.S. resident taxpayers who have a really, really strong case for non-willfulness in which they are certain they will get no or minuscule FBAR non-willful penalty and no criminal or civil fraud consequences, even the new streamlined program may not be the way to go and they can have a separate traditional quiet disclosure alternative or even a go forward strategy in which their results on audit would be better.

These are just some preliminary thoughts.  I would appreciate hearing from readers.

This blog was revised on 6/21/14 to add links to the actual certification forms and to quote the key certifications in the form.

55 comments:

  1. Thanks,


    Good analysis. Nothing like crunching the numbers and considerable the possible / probably outcomes.


    Jack Townsend

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  2. Michael J. MillerJune 19, 2014 at 9:50 PM

    Anna, is there at least one year during the 3-year window in which she was outside the US for at least 330 days? If so, she may well qualify for the new-and-improved streamlined procedure.

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  3. I've lived and worked outside the US for more than two decades. For me, yesterday's announcement doesn't change a thing. I haven't filed since I left. My attitude I believe is similar to most long term ex-pats-- I don't live there or use US services so why should I have to pay accountants to file there for me and why should I pay taxes there? I have no plans to retire back to the US. I won't climb into the belly of the beast. Like many ex-pats, I'll remain out in the cold. The only game changer for me would be for the US to change to residence based taxes and to leave its ex-pats alone.

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  4. GlobalCapitalismJune 20, 2014 at 5:31 AM

    ...I might still have feared FBAR penalties of up to $300,000 ($10,000 * 5 *
    6), so living with a $82,500 penalty might well have been a reasonable
    way to go.....

    For readers here the above assumption is NOT VERY LIKELY ! In this case it is not the actuality or certainty that something will happen to any given taxpayer, but the possibility that it could. The more likely outcome assuming NW and full cooperation with the "SERVICE" would be $10,000 X 3 or $30,000.

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  5. Excellent comments, Just Me.

    You mentioned a prominent disclosure on form 1040. If you go to irs.gov and on the home page click on 1040 under Forms (near top left of page) see what comes up: not the first page of Form 1040 but a large notice in red letters about deducting hurricane contributions. Form 1040 could just as easily have a large notice on the first page.

    Form W-9 required by FATCA. How about a large notice on that form?

    I am not too enthusiastic about suggesting additional burdens on FATCA compliant institutions but how about requiring each of them to provide a notice to all its US customers, past and present, about the whole foreign reporting issue?

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  6. You've pointed out a HUGE issue. In the past as when the 5% penalty was instituted, people were given the opportunity to have their 906 modified. There is precedent for reopening a closing agreement.

    Let's hope that the IRS does the right thing.

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  7. The 50% penalty in cases involving financial institutions under investigation begins on August 4, so there is time for those who have not made a disclosure to come in before that date.
    Also, the 50% penalty applies to ALL foreign assets if even one of the banks used by the taxpayer is on the list (even if the account has long been closed) and not just to funds in banks on the list.

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  8. The Wall Street Journal on Tuesday June 16, 2014 had a front page article titled

    "Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules." The article also had a long discussion about the OVDI penalties in relation to unpaid taxes and quoted several people including JustMe. The article does not appear to be freely available on the web (maybe because it's so recent.)

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  9. The last page of the certification states includes the frightening language that if the IRS "receives or discovers evidence of wilfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation."

    Since the non-wilfulness that is being certified isn't defined except in the broadest terms, what does this all mean? I understand that there may be instances of fraud (for example someone claiming that he had never seen an FBAR when in fact he had signed it for his employer's accounts) but in other cases, is this an open ended door through which the IRS could make the assertion that wilfulness was present for other conduct such as having checked no on schedule B or having filed one FBAR twenty years ago? This seems like a sword of Damocles.

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  10. From an original reading of the transition rules, going direct to streamlined should be open, but then you would have to weigh that against the fact that others, including Jack, have said that filing a pre-clearance without filing the FAQ 24 might lead to an audit. Could one simply write the CI a letter saying, filed my preclearance but now that the new rules are out, I am going to use them, I would assume and hope so.

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  11. I have not yet signed a 906, but I wonder whether those who have recently signed one, which has not yet been also signed by the IRS, could withdraw their signature (just as an offer can be withdrawn prior to acceptance) if they plan to transition into the Streamlined program, just in case the IRS does not allow the reopening of signed 906s?

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  12. Hi Michael - only if she becomes a fiscal year taxpayer, which both the lawyer and accountant say is not an option. As a calendar year taxpayer, she was in the U.S. over 36 days each year for the last three years (2012 was a leap year). The IRS is providing more relief in this program for people who actually live in the U.S. and filed (incorrect) tax returns than people who never filed at all, but are only visitors to the U.S. for more than 35/36 days a year. This makes no sense.

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  13. I'm not sure where to post this, but if she were to do her five years of back taxes (in order to expatriate), and then complied going forward, if she was audited before the SOL expired, could she expatriate before a penalty was assessed?

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  14. I'm not Jack, but here is my initial interpretation. If you have only done a preclearance and have not yet sent in your OVDI letter and Attachments, you are not "currently participating in the OVDP." As a result, there is no need for you to "transition" to the new Streamline process. You can simply make your submissions under the streamline program. The difference between "transitioning" into the OVDP and simply submitting under the streamline procedures w/o having to "transition" is that the latter relieves you from having to pay tax-related penalties (e.g. accuracy-related penalty, etc.). The downside is that you are not in the OVDP and don't have a guarantee that you won't be criminally prosecuted, but you shouldn't be using the streamlined procedure unless you're already confident that you aren't at risk for criminal prosecution.

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  15. Michael J. MillerJune 20, 2014 at 5:21 PM

    I suspect that, absent some other bad facts (which I couldn't possibly know, so I can't say one way or another if such bad facts exist), if your relative filed late returns and FBARs with an explanation that the IRS wouldn't impose any penalties. This is a huge area of uncertainty, but that's my guess (and it is purely a guess).


    If nothing else I hope you and she understand that she has no legal obligation to enter OVDP. That's based purely on ones best guesstimate of the pros and cons of each approach. There are certainly US tax advisors out there who will tell you otherwise, but they're always long on vague allusions of ethical violations and short on specifics. But that's a matter for another day.

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  16. Michael J. MillerJune 20, 2014 at 5:31 PM

    No, US citizenship or long-term resident status turns one into a US tax resident (under the Internal Revenue Code). If it were just 2 months and a vacation home, there wouldn't be an issue.

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  17. And as has been said so many times, it's that uncertainty that is the problem. One thing that is obvious is that the U.S. can't collect what isn't on its soil (at least until the U.S. manages to strong arm its way with treaties/threats and foreign banks/govts cave as they did with FATCA), so the lawyer has been informed that the 27.5% penalty (she doesn't fit the 12% and 5% categories) under OVDP will not fly. Is there any reason then to even do a pre-clearance letter under OVDP if she doesn't plan to send 27.5% of her assets to the U.S.? Do people start OVDP with the intention to opt out on an examiner's recommendation (is that what the government wants people to do instead of the other non-sanctioned approaches?), and does one need to go through that if she knows she's going to opt out? Is the idea to go through OVDP and then have the determination be that they will not apply a penalty at all? She's one of those people who, upon finding out what she did incorrectly, is willing to fix it and pay taxes, interest, and the normal penalties based on tax deficiency. I don't know how anyone can suggest with a straight face that she then pay over a quarter of a life's worth of savings (probably $1.5M) that has been taxed overseas when she's post retirement age and doesn't even live in the U.S. While I know no lawyer would suggest that she not come into compliance even if the govt can't reach her money, I'm sure the question in people's minds is why even bother (as many commenters say they'll just tell the U.S. to stick it where the sun doesn't shine) - let's just say that for some people who reside elsewhere that there are advantages to doing so (although those advantages aren't worth 27.5%).

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  18. To qualify that a bit, US citizenship or long-term resident (aka resident alien aka green card) turns one into a US TAXPAYER, not a tax resident, because then that US taxpayer can become a non-resident (as we see in the new streamlined rules) while still being a US taxpayer, so yes, moving to another country, paying taxes there, and then having the misfortune of vacationing for two months (as many Europeans do) back in the U.S. can now turn that non-resident into a resident for tax purposes (all while still being considered a resident in the country they actually reside and pay taxes in). So I guess the question is how two countries claim one person as a resident, when the U.S. sets residency at 35 days and the other sets it at where the person is domiciled. And why would the streamlined procedures use the 330 days from the foreign income tax exclusion rather than the substantial presence test used for determining who is a U.S. resident for income tax purposes. What's the chance they turn that 330 day rule into the substantial presence test? Are you reading, IRS?

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  19. Roy Berg, you wrote "only option is OVDP." Is that what you plan on suggesting to clients who fall into that gap?

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  20. The transitional rules seem to treat similarly situated people differently, and treat those who came forward earlier, worse than those who waited. People who were not candidates for the old streamlined program, who decided for whatever reason to go into the OVDP and opt out, now find that they may be entitled to the benefit of the 5% or 0% offshore penalty, but they are required to pay 8 years back taxes and 8 years interest instead of 3. The transitional relief needs to be expanded so that people who are already in the OVDP who qualify for the new streamlined programs are treated in the same fashion as those who are coming forward now.

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  21. Correct Jack has said that in the past that moving from CI Pre clearence to filing a return can result in an audit but that was before the domestic streamline came in no? I haven't seen jack make that comment recently.

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  22. My reply seems not to have posted - thankfully I remember the most important part. Is there any reason to go into OVDP if a person knows they're going to opt out (that they won't accept the 27.5% penalty and don't qualify for 12% or 5% and their money is in their own country anyway)? Is it so they can be somehow "protected" by making the noisy disclosure the IRS favors (I wonder if the IRS "frowns" on quiet disclosure because it makes their job of revenue raising via penalties harder, since being noisy does nothing to change the initial failure to comply) if during the process of coming forward the IRS gets their name from a bank or by chance initiates an audit?


    In case someone asks why bother even complying if the person lives abroad and has their money abroad (since some people have said that's their plan), let's just say there may be advantages to correcting past mistakes (the advantages aren't worth 27.5% of the high balance of the person's life savings, or even 12%, but if it's with simiilar results that a non-resident US taxpayer under the new streamlined procedures would have - which they be eligible for but for spending 12 days too many in the US - then it would be worth it).

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  23. GlobalCapitalismJune 21, 2014 at 5:19 AM

    ......... I use the phrase "TURKISH BAZAR" ! The quoted language contains a good definition of non-wilful conduct but not willful conduct, perhaps because the IRS assumes we all know what willful conduct is...lol

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  24. GlobalCapitalismJune 21, 2014 at 5:25 AM

    ....."I won't climb into the belly of the beast. Like many ex-pats, I'll
    remain out in the cold. The only game changer for me would be if the US
    to change to residence based taxes and decided to leave its ex-pats
    alone....."
    I second that - audemus jura nostra defendere

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  25. GlobalCapitalismJune 21, 2014 at 5:36 AM

    We all know that this is NOT the only option but good question - lets see what he responds ! With the IRS’s current lack of funding, the IRS will have to prioritize their expenditures and any stray from their initial mandate is difficult to justify.

    What do I say to all this? I think I’ll let Mary Howitt’s fable “The Spider and the Fly” say it for me :

    OVDP 2009

    “Will you step into my parlor?” said the spider to the fly;
    “’Tis the prettiest little parlor that ever you did spy.
    The way into my parlor is up a winding stair,
    And I have many pretty things to show when you are there.”
    “O no, no,” said the little fly, “to ask me is in vain,
    For who goes up your winding stair can ne’er come down again.”

    OVDI 2011

    “I’m sure you must be weary, dear, with soaring up so high;
    Will you rest upon my little bed?” said the spider to the fly.
    “There are pretty curtains drawn around, the sheets are fine and thin,
    And if you like to rest awhile, I’ll snugly tuck you in.”
    “O no, no,” said the little fly, “for I’ve often heard it said,
    They never, never wake again, who sleep upon your bed.”

    OVDP 2012 (STREAMLINED)

    Said the cunning spider to the fly, “Dear friend, what shall I do,
    To prove the warm affection I’ve always felt for you?
    I have within my pantry good store of all that’s nice;
    I’m sure you’re very welcome; will you please to take a slice?”
    “O no, no,” said the little fly, “kind sir, that cannot be;
    I’ve heard what’s in your pantry, and I do not wish to see.”

    KOSKINEN’S OVDP 2014

    “Sweet creature!” said the spider, “You’re witty and you’re wise!
    How handsome are your gauzy wings, how brilliant are your eyes!
    I have a little looking-glass upon my parlor shelf,
    If you’ll step in one moment, dear, you shall behold yourself.”
    “I thank you, gentle sir,” she said, “for what you’re pleased to say,
    And bidding you good-morning now, I’ll call another day.”

    Will this be the fate of the little fly?

    The spider turned him round about, and went into his den,
    For well he knew the silly fly would soon be back again:
    So he wove a subtle web, in a little corner sly,
    And set his table ready to dine upon the fly.
    Then he came out to his door again, and merrily did sing
    “Come hither, hither, pretty fly, with the pearl and silver wing:
    Your robes are green and purple; there’s a crest upon your head;
    Your eyes are like the diamond bright, but mine are dull as lead.”

    Alas, alas! how very soon this silly little fly,
    Hearing his wily flattering words, came slowly flitting by.
    With buzzing wings she hung aloft, then near and nearer drew
    Thinking only of her brilliant eyes, and green and purple hue;
    Thinking only of her crested head — poor foolish thing! At last,
    Up jumped the cunning spider, and fiercely held her fast.
    He dragged her up his winding stair, into his dismal den,
    Within his little parlor; but she ne’er came out again!

    WARNING

    And now, dear little children, who may this story read,
    To idle, silly, flattering words, I pray you ne’er give heed;
    Unto an evil counselor close heart, and ear, and eye,
    And take a lesson from this tale of the Spider and the Fly.

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  26. GlobalCapitalismJune 21, 2014 at 5:37 AM

    Here’s a good article on the new program from Geneva Lunch. It is pointed out that there is only partial rejoicing as the IRS could go even farther and address the issue of retirement plans.
    http://genevalunch.com/2014/06/20/irs-lifts-us-tax-fines-many-americans-abroad/

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  27. Michael J. MillerJune 21, 2014 at 7:55 AM

    As a general rule, I think entering OVDP when you know you'll opt out is undesirable if the determination is made there there's no material criminal exposure. It guarantees substantial legal fees and an audit, which might not otherwise occur. If I feel confident that I'd demonstrate non-willfulness in an opt-out audit, I'd probably feel roughly as confident that I can demonstrate non-willfulness if I'm audited following a QD. Of course, it is possible that the IRS looks at you in a someone more favorable light if you join OVDP and opt out (who knows? We're talking psychology here), but in principle the IRS should consider all of the facts surrounding the noncompliance at the time of the noncompliance. Those facts are whatever they are, and shouldn't be affected by subsequent events, such as the choice to not join OVDP (which ought not be held against anyone, as there's no legal or moral obligation to do so).

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  28. You understand correctly. It is a 5% whacking. I don't know if other countries like to penalize like the USA does for non willful behavior, but it is part of our culture I think, like tipping. Just consider it a tip to the IRS for letting you come into compliance without criminal threat! You should be thankful for their service. :)


    PS, they did remove FAQ 52.2 and the 5% whacking for accidental Americans who did NOT know they were Americans under the old OVDP, and so someone has to take up that penalty loss.

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  29. It is 5% only if you join the Resident Streamlined procedure. And, then, if you are non-willful and willing to live with the risk of an audit, you may not be subject to any penalty. Say you have reasonable cause -- reliance on an attorney that was reasonable for the lay taxpayer at the time. Paying even 5% is not appropriate. Hence, do nothing and await the audit when and if the IRS chooses to audit.


    And, there are other fact patterns imaginable where, if the taxpayer is not willful, even the maximum non-willful FBAR penalty for 5 or 6 open years (more likely less in the case of audit) would be less than even the 5% Streamlined Penalty.


    The analyses and options could probably be mapped out in some sort of decision tree. That is not my forte' but I suspect among the readers of this blog there are some with those skills and interest and would encourage them to attempt such a graphic analysis.


    Jack Townsend

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  30. Thanks, Michael.

    I agree with your analysis.

    I think a big issue is the one to which you ask "Who knows?") That is the possibility that in the opt out audit the IRS would feel more warm and fuzzy -- aka lenient -- toward the taxpayer who came in via OVDP with out out than the IRS would with the taxpayer who was picked up in a regular audit. That is an imponderable, except that the IRS has not announced that it will behave in that way. What the IRS has announced is that it will apply the audit results in both cases without even hinting that the results in out out audits will be better than in regular audits.

    As I have said before, if I were the IRS, I would have announced more favorable results in the opt out audit (say 50% of the regular audit result) in order to encourage taxpayers to out themselves rather than wait for the audit that may or may not come.

    In a way, that is kind of what the new Streamlined processes do by short-circuiting the need to join OVDP and opting out.

    Thanks for all your comments. I think they are very helpuf to readers generally and to me.

    Jack Townsend

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  31. GlobalCapitalism,

    I don't understand your latin maxim, which I understand means something like "We dare to defend our rights."

    As the law is now, you have no right not to pay tax.
    So by intentionally avoiding that obligation, you are not defending your rights. You may be making some form of protest or just cheating on your taxes (which is the goal of most tax protestors, but wrapped in the rhetoric of tax protest). But you are not defending your rights.

    Jack Townsend

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  32. The course of action I recommend is always dependent on the totality of the taxpayer's facts.

    Fortunately I have it on good authority that the the Snowbird Trap ("Snowbird Skeet Shoot" is probably a more apropos description) was unintended and will likely be clarified soon. We all hope.

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  33. Just_Me , Let me thank you for effort and time which is indirectly helping lot of people.

    Majority of Immigrants never knew about global taxation and FBAR. Especially immigrant people from countries like INDIA who came to work in US for few years on H Visa and L Visa. Now the sword is hanging on these innocent people. Do they really deserve 5% penalty while most of these people are non-citizen and temporarily living in US to work and earn some money and go back to their home country. IRS should not set the wrong precedence and should be forgiving. Should not try to interpret willful and non willful based on
    defined set of findings when they clearly know that non compliance is due to not knowing the obligation.

    Just Me , You good work is highly appreciated Let me mention a quote here ...

    “No one who does good work will ever come to a bad end, either here or in the world to come”

    People don't live hundred years , What remains is good work like you do.

    Thanks Again ...

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  34. Michael J. MillerJune 21, 2014 at 3:09 PM

    Thanks Jack, that's very kind. I've had more than a few discussions with tax advisors who feel the heavens will come crashing down if one is audited following a QD, so it's nice to hear another sane voice.

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  35. I too thank you, Just_Me_Also. Your expertise and experience has been helpful to a lot of taxpayers and tax professionals as well.


    Jack Townsend

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  36. You echo my thoughts sks..


    It's few people like Just_Me and Jack (who should be named GodSend for minnow immigrants) that make the world worth living for.

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  37. Haha, good one! It's a Snowbird Hunt. Thank you for adding what you've heard. That would be a relief. It was weird that the options were 1. streamlined for non-willful person in the U.S. more than 35/36 days who filed returns, 2. streamlined for non-willfull person out of the U.S. 330 days or more who didn't file anything, and 3. OVDP for non-willful person who is domiciled out of the country and didn't do any filings for the same reasons as person 2, which means they didn't file incorrect returns like person 1, but visited the U.S. for too long (yet wouldn't qualify under the substantial presence test as a U.S. resident except for their green card).

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  38. On a side note, I want to address the criticism people who say they'll renounce their U.S. citizenship due to the difficulties posed by citizenship-based taxation. People call them unpatriotic, say to them good riddance, but I've never heard anyone put themselves in that other person's shoes and imagine what it would be like. I'm also a dual citizen by birth (and parentage), but I've always lived in the U.S. It's challenging enough to get my taxes done here every year that it would be awful If all my working and retired life I had to then do a second set of returns and calculations and pay tax in a country I don't live in. I'd be the first to renounce. So if anyone hears or reads a criticism of those renouncing, tell them take a minute and think what it would be like if every year they had to hire (and pay) a foreign accountant to do a second set of returns (and all the record keeping that entails). Would they really be so angry at people giving up their citizenship then? I wonder if Chuck Schumer and his co-sponsors ever considered this when they spent however many taxpayer dollars putting the Ex-PATRIOT Act through just to punish a tiny fraction of taxpayers.

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  39. Thank you Michael. Jack has already responded with my thoughts. While the IRS hasn't said one will be treated more favorably than the others, they have indicated they're on the lookout for those doing QD (and this was when there was really no option for non-willful except the draconian OVDI/P), so that alone sounds like they would be less lenient.

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  40. It definitely is quite a whacking. When we figured out that our relative would not meet the requirements for non-resident streamlined, we thought she'd participate under the resident streamlined (which she doesn't), and realized that her staying in the country for two weeks more than allowed for non-resident streamlined was going to be the most expensive vacation to the U.S. she ever could have imagined, on par with Beyonce and Jay Z spending a week on one of those mega yachts in San Tropez. So for the total of six extra weeks over three years, she'd be penalized more than twice the amount of the yearly average U.S. income, about $16,000 per week she was in the country too long to qualify for non-resident streamlined. Crazy.

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  41. Hope it isn't something like a 2.5% whack for daring to take a long vacation in the U.S. Even foreign visitors with a visa get 3 months.

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  42. I found this on the the-tax-wars.net blog: "IRS has instructed its auditors to be harsh with quiet disclosers." so I guess the IRS did expect people to go through the whole rigamarole of OVDP and then opt out (incurring legal expenses along the way), and they probably consder that now there is a way for everyone (well, almost everyone due to the unfortunate gap non-residents who spent more than 5 weeks a year in the U.S. while still less than the substantial presence test, fall into) to have an appropriate method by which to VD - either OVDP for willful or streamlined for non-willful.

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  43. In my book, for normal individuals (wage earners), any filing requirements that are so complicated that you need the help of a "practitioner" are an outrage. As I see it, money you must pay to a practitioner is the same as a tax. (It's different if you engage the practitioner out of laziness.)


    Filing requirements and instructions for the streamlined procedure need to be easy and understandable enough that you can do it yourself.

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  44. Michael J. MillerJune 22, 2014 at 8:55 AM

    Anna,


    I don't doubt that you read that on a blog, but maybe it's true and maybe it isn't. The IRS has a responsibility to fairly determine the willfulness, or non-willfulness of a taxpayer as of the time of the violation. If the IRS is instructing its auditors to be "harsh" with quiet disclosures, that sounds to me like it's instructing them to be dishonest in making that determination. I do not lightly assume that the IRS would act dishonestly (although, with current events in the news, that may be naive on my part), so I am skeptical as to whether this truly reflects IRS policy.

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  45. Jack, as much as I think that GC's rhetoric on this is a bit hyperbolic, I think your above comment is a bit harsh. There is nothing wrong with the claim that CBT is unfair/unjust or that for an expat whose whole financial life is outside the US, the fbar and fatca reporting regimes are an intrusive and unnecessary requirement and indeed, a violation of basic privacy rights. I don't think it is fair to compare those claims with the silliness of people who say, I don't have to pay tax because I don't want to.

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  46. Mr. Miller

    Given that the DOJ has managed to win court cases implying that checking 'No' on the Schedule B question indicates willfulness (or willful blindness), could it even be considered out of line if IRS auditors were to use that question (maybe a 'no' for several years, not just one) as a sign of willfulness ? IRS lawyers can always say they have court backing for this (at least for US residents).

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  47. If someone had checked the "yes" box on Schedule B and then failed to file FBAR for some reason will that be a "willful" or just gross negilgence?

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  48. Michael, I was thinking perhaps the note about the IRS being harsh with QDers was paraphrasing what we've heard about the IRS being on the lookout for GF or QD reporting, but then it mentions auditors, which I read as referring to examiners. Or maybe it refers just to whoever it is who decides what and what not to audit in which case it's just consistent with their seeking out QDers.


    However, even if they have a mandate to treat QD harshly, they can still be honest in determining willfulness or non-willfulness, but maybe it's in the application of discretion that they get harsh. Don't they have discretion in a non-willful case to accept the reasonable cause excuse or not, and to mitigate penalties? I think that discretion is where things can get ugly on the part of the govt. giving QDers "special treatment" over those who opted out of OVDI.

    For example, if I understand correctly, they can choose to NOT to stick someone with multiple $10000 penalties (I just imagine them going after someone non-willful who has some 30 accounts containing mostly small balances from rolling over CDs or chasing down promotional interest rates who decided OVDI wasn't meant for them and didn't know they had to file for five years and sticking them with 30 x 5 x $10000, which would be $1,500,000) and instead apply one $10000 penalty for each year of non-filing (how they can justify a penalty per account when there can only be one violation of not filing an FBAR per year is beyond my comprehension, and sounds de facto punitive, rather than a penalty, for a form violation), or even just one $10000 penalty per taxpayer acting non-willfully, or perhaps even NO penalty for someone acting non-willfully. Am I incorrect in understanding that there is that discretion?

    Thank you for your voice of reason amongst all those pushing OVDP as the only option.

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  49. Not everyone "waited." Many only just found out about this FBAR requirement. I can tell you that pretty much every domestic U.S. taxpayer I know has still never even heard of this. And not everyone fills out a Schedule B. If the foreign reporting was so important to the US, you would think they would put it front and center on form 1040 (for those who know they have to file something), so that people would know they have a form they need to look out for. Hiding a question on a schedule many don't fill out isn't exactly honest on their part. Actually, I think it's a sign of willfulness on their part that they were attempting to trap people. I think it really stinks for those who have already closed and I hope the U.S. does right by the ones who would have qualified for the new streamlined, but the one benefit all those who paid the *cough* extortion tax, I mean penalty, is that they can have peace of mind that the US will no longer come after them for those years and that they aren't sitting around waiting for the ax to fall with multiple and higher penalties.

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  50. Michael J. MillerJune 22, 2014 at 5:01 PM

    Asknot,


    The language of those cases is, indeed, very broad. However, I have heard people from the IRS say -- and I believe -- that they do not consider the checking of the "no" box, by itself, to demonstrate willfulness. Having said that, if there is some other meaningful sign of willfulness, the IRS might well decide the the no box, along with the other factors, is sufficient to demonstrate willfulness.

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  51. Also, Michael, almost every successful opt out that I have heard of (including for my own clients) have answered no to the question. This is consistent with John McDougal's indication that a no answer is, by itself, not proof of willfulness. There must be more and that more must be damaging.


    Jack Townsend

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  52. Thanks for your comment.

    Jack Townsend

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  53. Thanks Michael.

    I think that is the right answer. I have not heard that the IRS is treating QD's more harshly. I have heard that the IRS would prefer some disclosure strategy (OVDP with opt out if necessary) over QD, but I haven't heard that the IRS is punishing quiet disclosures by more onerous audit treatment.

    Jack Townsend

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  54. I would have thought that would be a better fact pattern than checking "no". It would show that there is no "intent" to hide the account (not that "intent to hide" is the relevant legal standard, just that one would hope the IRS would take it into account)

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  55. Agreed. However, with over 600 million pages of Code, your vision is idealistic.

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