Saturday, March 7, 2015

Certifying Non-Willflness for Streamlined - The Risk (3/7/15)

Tax Notes Today has an article summarizing some events at the Federal Bar Association annual conference.  Nathan J. Richman,  Tax Division Official Offers Insight Into Non-willfulness, 2015 TNT 45-17 (3/9/15) (no link available).  The parts I found relevant for my readers are was a quote from Caroline Ciraolo (now acting Assistant Attorney General pending approval of the nomination of Cono Namororato to be AAG):
We are taking particular interest if we find evidence of an account holder claiming non-willful conduct in a streamlined compliance filing or delinquent submission only to find that evidence produced by the Category 2 banks suggests otherwise. We are using information gleaned from the program to open new investigations, pursue new targets around the globe, and we will continue to do so as the information is developed.
For previous blogs on the certification process:

  • IRS and Practitioner Comments on the Streamlined NonWillful Certification (Federal Tax Crimes Blog 11/1/14), here.
  • It's So Easy to Say No -- The IRS Often Gets to No for Streamlined Transition Relief in OVDP (Federal Tax Crimes Blog 8/7/14; 8/11/14), here.
  • Article on Risks of Certifying NonWillfulness (Federal Tax Crimes Blog 7/26/14), here.
JAT Comments:
  1. In certifying nonwillfulness in streamlined (not the streamlined transition in OVDP), the risk that will linger until all statutes of limitation run out is that the IRS will contest the certification.  Nothing happens in completing the streamlined submission to tell the taxpayer that the IRS disagrees.  If upon reviewing of the certification and the narrative, the IRS can determine to audit the certification.  The taxpayer may not know of that for a couple of years.  By putting the certification in play, the IRS can then put willfulness in play and the potential for civil fraud with respect to the income tax (potentially resulting in open statutes of limitation and the civil fraud penalty).
  2. Inside OVDP, the same certification is made to get the streamlined transition relief.  The taxpayer does get a closing agreement if the streamlined certification is accepted.  The closing agreement states that it is "final and conclusive" except, in pertinent part, "the matter it relates to may be reopened in the event of fraud, malfeasance or misrepresentation of a material fact."  I think this is broad enough to re-open if the taxpayer is subsequently found to have committed fraud in the original events (the years during which there was offshore tax and FBAR noncompliance) or if there were fraud in the certification of nonwillfulness as to income tax and FBAR noncompliance.
  3. As to the certification of nonwillfulness in either straight streamlined or transition streamlined in OVDP, I think of the certification as a spectrum with willfulness at one end and nonwillfulness at the other.  That spectrum has three principal shades with blendings.  At the left is the dark red shade of willfulness, at the right is the dark green shade of nonwillfulness, and in the middle is yellow, so that the left blends into the yellow and the right blends into the yellow.  Experienced practitioners should be able to determine in most cases, on a relative scale  (which is what this spectrum represents) and in broad strokes which quartile in the spectrum the taxpayer's fact pattern best fits.  If in the left-most quartile, the taxpayer is probably willful or at high risk of being determined to be willfull.  In the right-most quartile, the taxpayer is probably nonwillful and at extremely low (probably negligible) risk of determining to be willful.  It is those taxpayers in the middle quartiles that require the most focus and potential risk.  Now to continue this imperfect analogy, it seems to be that taxpayers in the middle quartiles who certify are at risk at best of having their certification denied, not necessarily because they are willful but because the facts are not clear enough to establish that they are nonwillful.  Then they would be subject to audit or, if the certification were made in OVDP, they would have the choice of completing OVDP or opting out.  But those taxpayers probably would not be criminally prosecuted for a false certification.  I suspect that those who will be prosecuted are those who certified who fall into the far left quartile -- those who were clearly willful and made a false certification of nonwillfulness.  Keep in mind that, since the taxpayer has to offer a narrative supporting the certification of nonwillfulness, the narrative for the willful taxpayer falsely certifying nonwillfulness will probably contain some false or misleading representations in the narrative in support of the certification of nonwillfulnes.

11 comments:

  1. Any additional discussion on how non-wilfulness is interpreted, how it is distinguished from reasonable cause and/or wilfulness in the post-Mcbride/Williams era.

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  2. No,

    However, I can say that I believe a taxpayer with reasonable cause or even reasonably arguable reasonable cause is unlikely to have acted willfully.

    So far as I am aware, there are no material developments on the issues that concern taxpayers and practitioners in the Williams / MicBride cases.

    Jack Townsend

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  3. Jack again nice hyperbole on who potentially could be prosecuted. You are wasting a lot of breath on the bottom 1%. I am willing to make a bet here that within the next 2 years you will read about only a handful of those "certified NW" cases which got prosecuted.

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  4. Such continuing risk is one reason why we often suggest that taxpayers pursue OVDP rather than Streamlined. Most clients - especially those who are nonwillful - are wracked with worry and just want to be able to sleep at night. The posted statement suggests that the IRS could receive "something" from the foreign bank 5 years and 6 months in the future, and then decide to audit the taxpayer's 6 years of FBARs filed with the Streamlined submission. This is why we have submitted only a small handful of Streamlined submissions - those that are in the "green" rather than the "yellow." It is disconcerting that the IRS is implementing yet another "carrot" program while punishing many of those who actually and legitimately take the bait. Having pursued the "carrot" Streamlined program, and having a subjective review of willfulness result in rejection of the Streamlined application, a taxpayer is left with few remaining options to come into compliance, which is the ultimate goal here. The OVDP is still the best (and only) option to give clients the peace of mind they seek.

    The other question is, what evidence could the foreign bank possibly produce pursuant to FATCA (or even John Doe Summons) that would show willfulness? I can envision only situations where a taxpayer lies in the nonwillfulness certification (e.g., false bank account balances or other facts relating to the account). It is unlikely that the bank would retain any correspondence discussing the taxpayer's intention to avoid paying U.S. taxes, which, in any event, is not produced under FATCA.

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  5. Sorry Sandra but you are incorrect when you claim that the IRS will be able to audit 6 years of FBARs filed from your clients SFCP......as you put it....5 years and 6 month into the future when potentially something damaging were to be received from a foreign bank.

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  6. I have seen some damaging materials in bank documents that were delivered to the IRS as well as to the taxpayer/depositor. For the latter, OVDP without opt out is the way to go.

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  7. I also don't understand the point about the audit timing. Let's assume a taxpayer files streamlined in 2015, which means tax years going back for 2013, 12 and 11 as well as FBARs for 2013, 2012, 2011, 2010, 2009 and 2008. Assume also that taxpayer is compliant going forward on FBARs and returns. So, per the point above, are you saying that if in 2020, the IRS would receive "something" and then could use that to audit 2008 - 2013, even though the SOL should have expired for all but the 2013 FBAR? What extends the SOL? The potentially false certification? If so, what do the IRS have to prove about the certification to extend the SOL? Finally, to be honest, if you, as your post above implies, are advising taxpayers whom you consider to be nonwilful (or whom you think the IRS would consider nonwilful) to enter into the OVDP, well, for the sake of being polite, I will only say that the phrase, FBAR ambulance chaser comes to mind.

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  8. I think your reply was meant for Sandra M but I was thinking the same thing with regards to FBAR ambulance chaser.

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  9. There is an established concept that, for tax criminal conduct, acts subsequent to the filing of the return can "refresh" -- start anew the criminal statute of limitations. So, a false certification could and probably would "refresh" the statute of limitations for all years (even those earlier than the 3-year window in streamlined). So that is a major potential downside but the IRS's enthusiasm or budget may prevent it from taking the concept to the limit in most cases.

    And, beyond refreshing earlier statutes of limitation, a false certification is itself a criminal act which has a five-year statute of limitations. And, further, if the IRS were to audit the certification and the taxpayer made false statements in support of the certification, that could refresh the original statute upon filing the certification and constitute new criminal conduct starting a new statute of limitations (5 years for the false statements).

    Now, on the civil side, the IRS reserves the right to audit those doing straight streamlined (not the OVDP streamlined). The IRS can audit any open year. Any year in which there was fraud on any return the taxpayer filed has a statute of limitations that is open forever. So, if the IRS gets information that gives it incentive to audit, the taxpayer doing streamlined and making the certification can be subject to taxes on long ago years, 75% penalty and interest. Whether the IRS would do that and, if so, how many years it would chase after is not know. But it is possible.

    Jack Townsend

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  10. Jack,


    Thanks for the response. I appreciate you taking the time. Some additional questions if I may:
    - Does that established concept applies to Title 31 FBAR as well as Title 26 violations, ie, as for sentencing guidelines, FBAR is effectively considered a tax violation?
    - In the criminal case, you are effectively referring to someone with a not insignificant risk of criminal prosecution, and as you rightfully point out here and elsewhere, the OVDP really is the best place for those people (streamlined would certainly seem inappropriate)
    - for people with purely civil risk (ie, those in the yellow and/or green of your spectrum) would that same principle apply or does the civil SOL indeed remain the same (so that by 2020 in my example, only the 2013 FBAR would be open). If not, the concern about ongoing liability for all FBAR years (which, for many in the offshore world is probably more terrifying than the actual tax-related penalties) would most likely be misplaced (unless they were indeed making a false certification, which probably means they were in the red area but thought they were in the yellow and /or green anyway).


    Thanks again

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  11. gottaloveUStax1:

    I have numbered your paragraphs to make clear the questions my answers are responding to:

    (1) The refreshing of the statute of limitations concept does not apply (or at least I have not seen it apply or anyone claim that it applies) to Title 31 violations. It applies to tax crimes because, in the case of evasion, although the evasion is attempted often by the false return, there are events that happen after the return is filed that further the evasion and thus are affirmative acts (a requirement for tax evasion). In the case of the FBAR violation, that occurs at the moment June 30 turns into July 1 and nothing that occurs after that refreshes the statute. Of course, any conduct after the key date could be an independent law violation -- e.g., a false statement under 18 USC 1001.
    (2) Correct.
    (3) In your example, as I understand it, only the 2013 FBAR will be open.

    In short, those with the good conduct and the right risk profile can just wait out the statute of limitations and it all goes away after 6 years (both the civil FBAR years and the nonfraud maximum income tax years) and the matter will be over and past.

    Jack Townsend

    ReplyDelete

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