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.
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.