Monday, July 21, 2014

Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (7/21/14)

Readers are aware of the willful blindness concept.  (Willful blindness goes by various labels, such as willful ignorance, conscious avoidance, etc.)  For most tax crimes and the FBAR crimes, willfulness -- defined as specific intent to violate a known legal duty -- is required.  Ignorance is an excuse.  In the context of tax crimes requiring willfulness, the willful blindness construct says that, if a trier of fact is otherwise unable to find the requisite specific intent for willfulness, the trier may consider the fact that the defendant deliberately acted in a way to be – or appear to be – ignorant of the facts or the law applicable to the facts and treat that real or feigned ignorance as either (i) the equivalent of the specific intent required or (ii) an inference of the specific intent which, with the other evidence, will permit the trier to find the required specific intent beyond a reasonable doubt.  (As I note below, I think the second of these is the only legally permissible application of the concept; willful blindness is not the equivalent of specific intent.)  In either event, if permitted, it can lead to a conviction of a crime requiring specific intent where the evidence might otherwise be insufficient for the trier to find the requisite specific intent.  In the FBAR civil penalty context, the willful blindness concept can permit the application of the FBAR willful civil penalty.

I have discussed before how uncertain the application of the willful blindness concept is.  The uncertainty has presented itself again in the certification for Streamlined relief -- offshore with a 0% penalty and domestic with a 5% penalty.  In each case, the U.S. person must certify that he or she was not willful in failing to report income or failing to file FBARs.   The certification 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 will demonstrate in the remainder of this blog that this definition of nonwillfulness is incomplete unless it is meant to state a special definition of nonwillfulness for the program (which I doubt).

Let's start with a discussion of the conceptual problem with the concept.  If the concept means that, as to a crime or penalty requiring specific intent, anything less than specific intent can be willful, then it expands the scope of the criminal statute or civil penalty by judicial interpretation.  For this reason, if willful blindness is to be in the landscape for tax crimes or FBAR crimes and penalties, the better interpretation for its application is the second alternative noted above – it merely permits an inference of specific intent which, with the other evidence, will permit the trier to find the required specific intent to the required level -- beyond a reasonable doubt in criminal cases and either preponderance or clear and convincing in a civil case.  E.g., United States v. Stadtmauer, 629 F.3d 238 (3d Cir. 2010) (approving jury instruction that "A finding beyond a reasonable doubt of a conscious purpose by the defendant to avoid knowledge that the tax returns at issue were false or fraudulent as to a material matter would permit an inference that he had such knowledge.") In other words, a finding of willful blindness is not a substitute for statutorily required specific intent.  As the DOJ CTM 8.08[4], here, warns prosecutors regarding conscious avoidance (same as willful blindness)
Although Global-Tech Appliances [Global Tech Appliances, Inc. v. SEB, ___ U.S. ___, 131 S. Ct. 2060 (2011), here] has seemingly approved the use of the conscious avoidance [willful blindness] instructions, it is important to note that circuit courts have approved their use only under proper circumstances. Indeed, at least one court has said that the use of such an instruction is “rarely appropriate.” 
Accordingly, prosecutors should take care to ensure that a conscious avoidance instruction is given only when the facts warrant its use and that the court complies with the relevant rules of the circuit when giving such an instruction. A conscious avoidance instruction is appropriate only when the defendant purposely contrives to avoid learning all the facts, as when a drug courier avoids looking in a secret compartment he sees in the trunk of a car, because the courier knows full well that he is likely to find drugs there. 
Furthermore, in a tax case, the language of any conscious avoidance instruction must not conflict with the government’s obligation to prove the voluntary, intentional violation of a known legal duty. See § 8.08. Care must be taken to ensure that the conscious avoidance instruction applies only to the element of "knowledge," and does not extend to the government's obligation to prove a "voluntary, intentional violation." When a deliberate ignorance or conscious avoidance instruction is given, the jury should also be given a separate Good Faith instruction, which expressly directs the jury not to convict for negligence or mistake.
As indicated, the willful blindness concept is conveyed to the jury – the trier of fact in most criminal trials – by a willful blindness instruction.  Here is the form of willful blindness instruction – using the term deliberate ignorance – that DOJ Tax offers its prosecutors (although readers should be aware that a number of Circuits provide pattern jury instructions, including variations of a willful blindness instruction):

Knowledge of Falsehood
(Deliberate Ignorance)
The government may prove that Defendant __________ acted “knowingly” by proving, beyond a reasonable doubt, that this defendant deliberately closed [his] [her] eyes to what would otherwise have been obvious to [him] [her]. No one can avoid responsibility for a crime by deliberately ignoring what is obvious. In order to infer knowledge, you must find that two things have been established:
First, that the defendant was aware of a high probability of [the fact in question].
Second, that the defendant consciously and deliberately took actions to avoid learning about the existence of that fact.
It is entirely up to you as to whether you find any deliberate ignorance or deliberate closing of the eyes and any inferences to be drawn from any such evidence.You may not conclude that the defendant had knowledge, however, from proof of a mistake, negligence, or carelessness. You may not conclude that defendant had knowledge if the defendant did not actually believe in the existence of that fact. There must be an awareness of a high probability of the existence of the fact and a deliberate effort to remain ignorant of the fact.
The foregoing is from the current version of the CTM, here. Note that there is no mention here of gross negligence.  However, tellingly, the earlier version of the CTM (the 2008 CTM version, with this instruction no longer on the web) provided.
Knowledge of Falsehood
(Deliberate Ignorance) 
The element of knowledge may be satisfied by inferences drawn from proof that a defendant deliberately closed his eyes to what would otherwise have been obvious to him.
A finding beyond a reasonable doubt of a conscious purpose to avoid enlightenment would permit an inference of knowledge. Stated another way, a defendant's knowledge of a fact may be inferred from willful blindness to the existence of the fact.
It is entirely up to you as to whether you find any deliberate closing of the eyes and the inferences to be drawn from any such evidence. Although knowledge may be inferred from the defendant's behavior, you must still find that he had actual knowledge. However, a showing of mistake, negligence, carelessness, recklessness, or even gross negligence is not sufficient to support a finding of either willfulness or knowledge.
Now, focus on DOJ Tax's definition of willfulness which I have bold-faced.  It seems to track the one in the nonwillful certification -- EXCEPT that the nonwillful certification does not alert taxpayers that gross negligence is not willfulness.  Willful ignorance still requires conduct that is willful or deliberate -- the conduct being the ignorance, and willful and deliberate is not the same as gross negligence.  (If I were the suspicious type, I would believe that DOJ Tax changed the instruction to obscure that which was plain in the prior instruction.)  I think that is a correct interpretation of the law.

Helpful in this regard is the following from the Supreme Court's Global Tech decision:
   While the Courts of Appeals articulate the doctrine of willful blindness in slightly different ways, all appear to agree on two basic requirements: (1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact. We think these requirements give willful blindness an appropriately limited scope that surpasses recklessness and negligence. Under this formulation, a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts. See G. Williams, Criminal Law § 57, p. 159 (2d ed. 1961) (“A court can properly find wilful blindness only where it can almost be said that the defendant actually knew”). By contrast, a reckless defendant is one who merely knows of a substantial and unjustified risk of such wrongdoing, see ALI, Model Penal Code § 2.02(2)(c) (1985), and a negligent defendant is one who should have known of a similar risk but, in fact, did not, see § 2.02(2)(d).
Certainly, recklessness is a concept similar to gross negligence and is not willful blindness which requires, not reckless, not negligent, even grossly negligent, but deliberate conduct at least to avoid -- or appear to avoid -- knowledge.

And, unless the IRS intended a special, more restrictive application of the term willfulness for the certification, it should not have omitted gross negligence.  Which would mean that gross negligence and related concepts such as recklessness is not willfulness.  With this background, readers can understand how limited the concept is and should be.  As noted by DOJ, Circuits approving the use of the concept are very careful to restrict its use.  See United States v. Threadgill, 172 F.3d 357, 368 (5th Cir. 1999), cert. denied, 528 U.S. 871 (1999); see also United States v. Kaplan, 490 F.3d 110, 127-128 (2d Cir. 2007) (giving the Second Circuit’s iteration of the predicates for the instruction); and United States v. Anthony, 545 F.3d 60, 64-66 (1st Cir. 2008) (giving the First Circuit’s iteration of the predicates for the instruction).  And, to evidence the seriousness of restricting the use, the Second Circuit has not only reiterated its holding, but held that “a conscious avoidance charge must communicate two points: (1) that a jury may infer knowledge of the existence of a particular fact if the defendant is aware of a high probability of its existence, (2) unless the defendant actually believes that it does not exist.”  To reinforce its insistence on these charges, the Second Circuit recently said (United States v. Kaiser, 609 F.3d 556, 566 (2d Cir. 2010)):
Indeed, we have repeatedly emphasized that the prosecutor should request that the “high probability” and “actual belief” language be incorporated into every conscious avoidance charge. We ordered that the opinion [so holding] be circulated to all Assistant United States Attorneys engaged in criminal prosecutions in the Circuit.
For similar cautions on the use of the conscious avoidance standard, see  see United States v. Skilling, 554 F.3d 529, 548-49 (5th Cir. 2009), vacated on other grounds, ___ U.S. ___, 130 S. Ct. 2896 (2010).

So, if a taxpayer reasonable believes that his conduct is gross negligence (or recklessness) -- but not willful blindness -- at worst, can he certify nonwillfulness?  I would think so -- at least until the IRS says that it adopts a special definition of nonwillfulness.  Now, you may ask, what is the difference between gross negligence (or recklessness) and willful blindness that proves specific intent?  I don't know that there is a litmus test, but clearly gross negligence (and recklessness) is not the same as specific intent or willful ignorance.  Stated another way, as noted above, willful blindness is not a proxy for specific intent; it just may be considered with all the evidence in finding specific intent.  Therefore, conduct showing only gross negligence (or recklessness) but not specific intent nor deliberate avoidance of specific intent will not establish willfulness or permit willfulness to be inferred.  There has to be some specific intent, even if it is just the specific intent to avoid the specific intent.

Based on the foregoing, if I had a client faced with a court willing to give a willful blindness instruction, I would ask that the instruction include something like the following (expanding on the instruction above):
You may not conclude that the defendant had knowledge, however, from proof of a mistake, carelessness, negligence, gross negligence or recklessness.


  1. Jack

    In the Williams case, the appellate court said that

    Thus, we are convinced that, at a minimum, Williams’s undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314. Safeco Ins., 551 U.S. at 57.
    Accordingly, we conclude that the district court clearly erred in finding that willfulness had not been established.

    And that came after the Global Tech SC decision. So at least in the 4th Circuit, case law seems to be that recklessness suffices to indicate willfulness in the FBAR penalty contest.

  2. oopsla,

    You are correct, of course. I am going to do a follow through blog entry to tie the discussion into the decided cases on FBAR, including Williams.

    Thanks for pointing that out.

    Jack Townsend

  3. The short answer is that for any foreign asset for which income was not originally declared, the foreign asset is subject to the miscellaneous penalty within the OVDI. I am not sure if that is mentioned in the FAQ, but this is the answer I have gotten from examiners.

  4. Going to OPT OUT, I belive is in an OVDP setting, where a person is unhappy with the Title 26 (miscellaneous penalty) in lieu of the FBAR penalty. The income tax, accuracy related penalties, failure to file & failure to pay penalties are going to be the same whether one is in the OVDP or Opts Out. Transitioning to Streamline domestic program (SDOP), means, ostensibly the same thing, because the only mitigation is the 5% penalty on the dec. 31st balances. SFOP has no penalties of ANY kind, whether on assets or income, whatsoever, even if transitioning from OVDP. Therefore, amending state returns, to report income which one would be reporting in OVDP, Opt Out, or the SDOP/SFOP, is required because the state returns are reporting the SAME income which an Opt Out, SDOP/SFOP, or an OVDP participant would be reporting. If one decides to amend only a limited number of years outside of a standard SDOP/SFOP procedure (where a person is not transitioning to SDOP/SFOP), then , yes, the taxpayer will want to figure out how many years of federal returns he/she is amending. So to be sure about how many years of federal returns one is amending, under which program he or she is submitting them under (QD, included), is key to know which years of state returns to then amend.

  5. answering your questions, point by point:

    1)Do you think there will updated guidelines or FAQ for SDOP?.

    -- Probably. But not sure. The SDOP& SFOP programs are NOT akin to the OVDP programs, with no 906, and no examiner. So not sure there would be any FAQs. But I am confident there would be some more clarification to the program, especially with regards to the signatory accounts being (or not being) subject to the 5% penalty in SDOP.

    2) Also we are required to amend only 3 years tax return for SDOP

    -- Yes, you must amend the 3 years for which your personal due dates of passed, and for which you have already submitted original returns. SDOP does NOT cover years in which you never submitted original returns.

    3) Do we required to change content of certification to reflect that since In really we are paying all the tax for properly for 3 years.

    -- Your question is really confusing. The certification is ONLY for the last 3 years in SDOP you are submitting. That could be 2010-2012 or 2011-2013. If you decide to also amend and submit earlier year returns, you could do so, but they would NOT be a part of the SDOP program, and you could be subject to accuracy related penalties, on those other years. The certification verbage on the second to last page on the NW form, does NOT have to refer to any years outside of the SDOP. It's your choice to include reference to those other years, but I do not think it's necessary.

    4) Or they consider the certification for only for those 3 years in terms of accuracy of tax?. What is your opinion on this?.

    -- Certification is ONLY for 3 years in SDOP (or SFOP), whichever you are doing. The other years are OUTSIDE of the SDOP/SFOP, and those assets for which you are declaring foreign income would not be subject to the 5% asset penalty in SDOP.

    Personally, after seeing Jack's opinion on amending prior years, outside of SDOP, and by knowing the Statue of limitations (civil) for missing foreign income, I think, barring willful considerations (which most people don't have ) about taxpayers' missing foreign income on original returns, it is most probably a GOOD idea to amend prior years, such that the prior 6 years of returns are amended and submitted (or originally submitted if one has not filed any returns). Good faith is a substantial part of the reasonable conduct & good faith portions of the IRM for mitigating penalties, if they were to be assessed in an audit. The short the gap between cognition and execution of good faith efforts, lessens the impact of sustainability of heavy nonwillful penalties (FBAR) and accuracy related penalties (or other income tax penalties).
    Furthermore, considering FATCA, I do not know how many prior years of information of a green card holder or a US citizen's bank or financial account information those foreign banks would be reporting, if any at all. So this is a concern as well. No one on this blog has ever directly mentioned PRIOR year disclosure of a US person's financial accounts, especially with respect to the decision to amend multiple years versus a few, but I think it might be a very valid thing to think about.

  6. Hi Daily Kumquat,

    Let me start by saying, that I have never had a kumquat, but they look quite tasty.

    I think the answr to your last question is that the intention of the SDOP program (although I will have many naysayers saying the IRS is just looking for extra revenue), is that the IRS is trying to bring in everyone into compliance. Whether that is through SDOP, OVDP, or FATCA, the IRS is doing quite a bit to help taxpayers to comply. Let me explain further. Forget about the 3 years prior to SDOP or SFOP for just a moment.. The very fact that SDOP or SFOP exists means that the IRS is providing a road to compliance without a taxpayer having to paint themselves black (willful), and thus without danger the IRS would be pursuing NW penalties for those years; the NW certification is testament to the taxpayers having that road into comliance territory. A quick asterice here is that the IRS says that doing an SDOP or SFOP does not save a person from having to undergo a specific civil examintion, but I think that would be unlikely. Now, that does NOT mean that the IRS has left off the table any possible willful penalties for prior years. If there were any sort of evidence that foreign banks communicated with account holders as to deliberately hiding their assets (see the Desai case, the Vaibhav Dahake case, etc), then everything is off the table and the IRS will pursue willful penalties. The 3 years prior to SDOP/SFOP, barring any willful characteristics, most probably should be filed if it's just income taxes. But then again, there are those practioners who like QDs (like me, albeit w/RC arguments attached, as suggested by the IRS), and those practioners who simply want GF.

    IN any case, the IRS has left NOTHING off the table, just because a taxpayer has done and completed an SDOP, SFOP, or even, an OVDP.

  7. You're mixing up too much here. There is NO gamble here. I clarified this with the OVDP hotline and an OVDP examiner a few weeks ago.

    1) Requesting a transition to SDOP (streamlined domestic offshore program) or SFOP (streamlined foreign offshore program), as defined by the Transition FAQ 9 for the June 18th programs, only involves a formal request to one's OVDP examiner. That request is done through the NW certifcation, on the 2nd to last page where the form requests the taxpayer to put down his/her reasonble causes for having missed foreign income on the original returns and for not filing original timely FBAR. Additional pages could be attached to expalain one's nonwillful acts of omission. The request (i.e., the certification), if one is in OVDP already, THEN goes to a committee of IRS managers, with or without a positive recommendation from the OVDP Examiner and his/or manager. So far the process is quite similar to an Opt out, except in the transition process, the person CAN be rejected for SDOP or SFOP. If the taxpayer IS rejected, they just "slingshot" BACK into OVDP. Or it can be construed, the taxpayer NEVER left OVDP. There is NO repurcussion for having requested transition formally, and not getting the treatment. Of course if a taxpayer's argument for nonwillfulness is rejected, or his/her request for transition is rejected (for some other reason the taxpayer would have to then find out), then perhaps the writing would proverbially be "on the wall", such that the taxpayer would maybe not want to Opt Out. A formal request to Opt Out is NEVER rejected, but the reasonable cause arguments (RC) which go WITH the Opt Out request COULD be rejected wholly or in part, and the IRS could assess much higher FBAR penalties. These penaltie, subsequent to an Opt Out, COULD THEN be appealed to IRS appeals division, and litigated against in US District or Tax Court (although Jack can correct me on this last part).

    2) A rejected candidate, although left with the "stigma" (scarlet letter?) of having made an unsucessful NW certification, would not mean his certification is false. I imagine that's why you put the quotation marks around the "false" word in your first bullet point above. Knowingly providing a false certification is a WILLFUL act and if the IRS has evidence of that, you'll have to quickly learn to spell T-O-A-S-T. But I presume that you say that because you assume the IRS is construing the taxpayer's RC on the NW certification as not evincing of Nonwillfulness.

    Furthermore, you raise an interesting question with what the IRS seems to be stating willfulness is versus the US Court System's (especially the Supreme Court) says willfulness is (see Cheeks case). I think, for the most part, this blog is about that, willfulness and nonwillfulness, the very heart of all tax crimes. Thus, a full analysis of the good, bads, & uglies of one's fact pattern would be warranted before on decides to Opt Out.

  8. Your verbage "deducted at source" seems to imply what many banks do with interest income or dividend income prior to providing the account holder with the "NET" interest income or dividend income. Indeed, India has this terminology, "tax deducted at source" and many of their banks provide Form 16A for those fiscal years These taxes can USUALLY be taken as a credit without a form 1116 up to a certain max amount (see 1116 instructions), or on the 1116 form itself. You just have to categorize the dividend income as foreign dividends, mention them on both schedule B & form 1116, and then take the taxes which were deducted at source, as taxes paid as of 12/31/xx on form 1116. BOTH the OVDP and streamlined (SDOP & SFOP) programs allow for this provision of the Internal Revenue Code. Just be sure that you CORRECTLY take credit for the taxes which have either accrued or been deducted, in the correct calendar year, as most countries outside of US & Canada operate on a fiscal year basis (India & UK being two fiscal year based countries, from my understanding).

  9. Honestabe1947,

    I agree with your rationale for 50% penalty being on joint accounts in the OVDP. I would think the same would hold true for OVDP Participants transitioning to the SDOP/SFOP. Meaning that if the year end balance (12/31) is still $100, then the joint ownership would only be $50, and thus the penalty would be on this $50. The only differences with regards to the asset penalties are that the SDOP hits the 12/31 balance, whilst the OVDP will hit the NET account's HIGH balance during the calendar year. Imagine an account whose balance has been moved to a later year from an earlier year. It makes sense not to penalize those monies twice. (like if Account A's balance on 12/31/10 closed out in that month, and moved to Account B, where it still remains, it woudl not be fair for the IRS to penalize those same monies twice, once in Account A's 12/31/10 balance and Account B's most recent 12/31/12 balance). Thus there remains much to be clarified.

    Regarding the NW certifciation. I think Jack commented somewhere in this blog that he had simply attached a lengthy Opt out letter to an SDOP request for a client who was earlier contemplating at Opt Out. I have done the same for my client.

    So you can attach more pages, but each page should be necessary and pertinent to your NW explanation. Hope you use a professional to formulate it.

  10. Honestabe1947. You raise valid points, and many which have been rasied before by practioners and taxpayers alike, in different contexts and at different times. Indeed I think the taxpayer advocate has been saying much of the same thing as you are now, with some important exceptions of course. The dislosure programs (with OVDP being one of them, and now its 5th incarnation), probably could have been designed much better. The PR about FBARs, 3520s, and other information returns could also have been done much better. However, you must realize that MOST Americans CANNOT open foreign accounts with countries like UK, India, Canada, Switzerland, and derive many of the foreign tax benefits those countries' provide to US immigrants who have accounts at foreign financial institutions based in such countries. The IRS could, presumably, develop a fairer approach to immigrants, and not cast a wide net (the Green card test rule and the substantial presence test rule are quite draconian), with new immigrants. However, once here in this country, one of the oaths an immigrant takes is to abide by all laws. Having said that, there is not enough information about tax law to new immigrants. Until there are good people like yourself, who call their US senator, and representative, and make the case you make here, with ample facts, I don't think we will see a rollback of many of the things you decry here. Having said that, also, there are groups which take that "fight" to the US Congress: (taxpayer advocate, americans for tax fairness, americans for tax reform, etc.). However, one of the main subjects of this blog is willfulness versus nonwillulness. The IRS is tasked with enforcment, and has come up with a seemingly nuanced definition of willfulness with what the courts have come up with. Thus the immediate debate of the hour is that one, and perhaps on a grander scale, the voluntary disclosure programs, enforcement procedures, and attitudes would be a part of a larger effort to highlight the IRS's misapplied efforts in enforcing an incorrect prosecution of the word, "willful."

  11. Not sure what you are asking. Since the June 18th, 2014 announcement of teh SDOP & SFOP, there has been no change. Transition cases are handled according to Transition FAQ 9. You submit the NW certification, with ample reasoning (probably similar to what you would have in an Opt Out), and that then goes to an IRS Committee of managers. If it's denied, then you're still in the OVDP.

  12. thanks for your reply honestabe1947

    i will be doing streamlined.. i only have interest (TDS) on bank a/cs.. no dividend..

  13. To qualify under Jennifer Best's scenario you had to have left the program by 1 July . However since my clients acted in reliance on Ms. Best's statements, if the 1 July issue goes the wrong way, I expect my clients to be allowed to continue with OVDI if they wish to do so

  14. That is my expectation as well.

    Jack Townsend

  15. honeatsbale1947, can you or anybody else confirm that your point 1 above is correct and has been applied in practice by IRS? Namely, the OVDP/SDOP penalty base is affected by co-ownership. I have been for 3 years in OVDI and received 3 versions of the Form 906, but nobody told me that I could pay less penalty because of shared ownership (not even with non-U.S. persons)

    Jack and other expert on this list, can you confirm this? Have you seen it applied? For me, it would make a huge difference in the OVDI penalty I have already paid and even in the SDOP penalty, if I transition.

  16. Milan - Are we allowed to take the credit for entire 30.9% TDS or only upto a certain %?


  17. Ok thanks. Look forward to seeing how this plays out.

  18. Thanks Milan.

    You may have discussed this in another comment thread, but I find it very interesting that you express a preference for quiet disclosures even after the advent of the SDOP. The IRS is clearly trying to encourage people who were contemplating QDs to "come clean," and the new program is not unattractive.

    I am concerned in this particular case that a QD may be more likely to trigger an audit given that the bank is on the naughty list (Swiss). My other concern - and this topic has been addressed to some extent on this blog - pertains to the bank's "encouragement" of the client to jump on the OVDP conveyor belt to hell. If IRS intends to come down hard on certain types of QDs (i.e., those involving "bad banks"), is it possible that a client's refusal to follow the bank's directions would be twisted into some form of willful non-compliance? At this stage, I feel that taking advantage of the new SDOP would minimize these risks.

  19. I spoke to them about that the first week the new program came out - no joy - as you say this is a Nina Olsen issue

  20. Thanks for your reply. You say that there is no gamble, but you also say

    "Of course if a taxpayer's argument for nonwillfulness is rejected, or his/her request for transition is rejected (for some other reason the taxpayer would have to then find out), then perhaps the writing would proverbially be "on the wall", such that the taxpayer would maybe not want to Opt Out."

    Are you saying the taxpayer "would maybe not want to opt" out because:
    A) The taxpayer realized that his ORIGINAL risk for willfulness has higher than he originally imagined.
    B) The taxpayer now sees that the transitional request rejection is "on the wall" and believes that the examiner will impose higher penalties upon an opt out now, than he would have had the taxpayer not requested the transition in the first place. This could be a result of the opt out examiner being indirectly influenced from the rejected transitional request "on the wall" (see Milgram experiment).

    If it's B, then you support my point of the implicit cost to gamble. Whether you get accepted or not is a random variable. If you get rejected, you will pay by either having very bad opt out utility and/or by having to pay the 27.5% OVDP fine.

    The misunderstanding could also stem from me assuming that this hypothetical taxpayer is already set on opting out, but not mentioning it in my original post.

    Your last paragraph made me realize that there might now be three (or four) different kinds of thresholds/standards with respect to willfulness when it comes to the different disclosure modes:
    1. The standard of willfulness upon an opt-out or QD. One of Jack's previous posts seems to indicate that we have to seperate this item into two (1a and 1b), as the IRS could prefer opt outs over QD's.
    2. The standard of willfulness upon a fresh SFCP application (probably harder to qualify for than 1. because of Jack's remark at the end: "Even less sure how strict the IRS will be on those who are only now coming forward through the 2014 new streamlined procedures").
    3. The standard of willfulness upon a transitional request (Severiano Ortiz's survey seems to indicate that this is harder to qualify for than 2.).
    4. The standard of willfullness upon a opt out after a failed transitional request. I'm not sure where I would place this among the above items.

    Of course in reality there are endless thresholds on willfullness because every examiner (or every jury in district court) is different, but I'm just conditioning against the different disclosure modes in this post.

    If Jack is reading this: Where do you think standard 4. would fall relative to standards 1-3?


  21. I am torn about whether people who owe no tax (but have not filed for several years) can certify that conduct is not willful. There was no intent to obstruct the collection of tax and no tax to collect however there is a failure to satisfy known duties to file an FBAR and return in a timely manner. This may be appropriate for a QD since the facts dont fit the new information filing only rules because no returns were filed. However I would assume QD with big numbers may be pulled Thoughts?

  22. How does anybody will know about FBAR or Global taxation for someone who has come to this country on VISA. Unless there that information is clearly mentioned in VISA application. Or there is some kind of test similar to driving test to know then about these obligation. It is very diffcult to anybody to know these requirement unless CPA to tax preparer inform the client about FBAR and tax on foreign interest income.

    Different taxpayer have different financial situation some are poor and some came on temporary work VISA to earn some money in order have better life or fund their kids education.Some People faced lot of difficulties to get good education and to come US to get a better job. How it is fair to give 5% penalty on their entire money for their honest mistake. Some may think that it is not big amount. In reality there are lot of people has their life.

    When there is no knowledge of law or obligation , people tend to make mistake. It is not easy for people to know without any background knowledge. I don't think people will have any issue to pay penalty proportionate to tax loss.

    People will pay penalty since most of the people are scared. We know IRS is a powerful agency.But with Great power , comes great responsibility. They should be compassionate and forgive ordinary people who made honest mistakes. Definitely those tax payer will give back and lot of people who caught up in this mess are very young who has entire life ahead and I am sure they will pay lot of tax in future.

  23. Ex IRS attorney's first name didn't perhaps start with an s and his last name start with an m and end with a k?

  24. You can only take credit for taxes that are actually due and paid. If the taxes that were actually owed to the foreign government are below 30.9% (because of deductions or exemptions), then you cannot claim a credit.

    Say the foreign bank deducts 30.9%, but your actual liability to the foreign government is zero since you are below the foreign government's income exemption limit. You cannot claim the tax deducted as a credit. it is irrelevant whether you actually filed a foreign tax return to get a refund or not, what is relevant is that you could have claimed a refund if you had filed a foreign return.

  25. Milan what are you talking about again ?

    The 20% accuracy penalty will be dropped outside of OVDI/P (QAR) during Opt-out. Further because of the 3y tax SOL the income tax, failure to file & failure to pay penalties will not be the same either

  26. ...One was an ex IRS Attorney, in private practice who I fired because he
    was plain rude and could never keep my account balances or numbers
    straight- ie incompetent and did his best to ' scare' me about what the
    IRS ' could ' do.....

    YES that is him ...... !!
    I have a few more quotes from him : 1. “For most of these folks (taxpayers) this is the hill they may choose to die on as
    the most significant economic event (FBAR penalties) of their entire lives. “… meaning please send me your retainer.
    2. 2. "You can relax now - we got you covered "... meaning please leave me alone now until you need to replenish your retainer.
    3. " ...the IRS was going to fight a lot harder to do better than the 5% penalty.... meaning I am short on my monthly OVDP client annuity revenue.
    4. " OVDI/P and FS2011-13 are all the same..." .....meaning I really have no clue what I am talking about.

    5. ..... "we need the flexibility to go over bottom level IRS workers' heads, be creative with the many alternatives options
    available to us, involve other functions on a formal or informal basis,
    or use any tactic formal or informal techniques if it means putting
    forth a vigorous defense of your case with the IRS..." meaning if I cannot convince my client confuse him with regards to the monthly billing statement.

    6. ...." we
    need to dictate to bottom level clerks how they should categorize your
    case on the Byzantine and labyrinth-like interlocking relics of IRS "computers"....

    meaning please don`t be alarmed if after 12 month we still don`t understand your case and facts or circumstances.

  27. But if that is indeed the case, then the streamlined rules would be problematic for a lot of expats, many of whom don't file or routinely file late on the basis that they rarely, if ever, owe tax. On the other hand, one would think the whole point of the new streamlined program would be to bring those people into compliance and get them back into the system.

  28. I would imagine this type of approach is all too common in for FBAR ambulance chasers (even though I don't know the lawyer in question). Funnily enough, I agree with the first quote, which is why clients need real advocacy, not administrative form filling and excessive billing. Getting financially destroyed by the IRS is bad enough without feeling that the very people who are meant to assist you through an incredibly difficult period have their hands in your wallet as well.

  29. Could you provide a method of contacting you pls? Such as an email address?

  30. Hophi, You are correct, partly correct, I think. You lost me after the first sentence which is very clear and I agree
    Tax deducted at source on Interest ( eg in India) is noted on a Form 16A- this can be claimed as a credit on US taxes as it is due and paid
    ( Regardless of whether in the big picture you had to pay a paid taxes in India or got a refund)
    Tax deducted at source on Dividends is paid directly by the Companies to the Tax authorities at ~31% in India. So the dividends received in hand by the stockholder are tax free for Indian tax purposes. I don't think this 31% paid by the Cos can be claimed as a credit on the US Tax returns

  31. The first name started with an S all right, last name started with a W
    I have found that even the current law firm I'm with has been railroading ANYone dumb enough with undeclared foreign accounts ( including me I'm afraid) to join OVDP

  32. Latest Update- OVDP Transition Tax payer. When asked about a higher standard for non -willful than in the case of Streamlined Domestic, the agent complained that most of the Transition certifications they are receiving are incomplete. We take this to mean err on the side of a complete if lengthy explanation vs. a brief explanation.
    No discussion on signature authority only accounts. I would leave them out, to include the same is like wearing a 'kick me' sign and presenting your posterior to the IRS

  33. Reading about this makes me very uneasy. I make in a week what my tax lawyer charges for an hour. I'm already down over $10k for less than $40 of offshore tax liability (as a result of being an uninformed expatriate) and I haven't even faced the IRS civil penalties yet. I had to get psychological counseling (which, luckily, was free for me) because of the huge financial burden that took its toll on my sleep and psychological well-being.

  34. Do you need help or guidance regarding your offshore circumstances ?

  35. I previously wrote about some concerns of a failed transitional request, but I now believe that it is a terrible idea in general:
    - If you get accepted, chances are you could have gotten RC from a civil audit (since the transitional requirements are so strict and you have to be completely in the clear to qualify).
    - If you get rejected, an
    auditor could be pressured/influenced to assign a higher fine than one had you not requested a (failed) transition in the
    first place. Even if this statement is not factual, the result **cannot be better** with the stigma of a
    failed transitional request than without one.
    Therefore a transition seems to be completely dominated by civil audit option (for benign actors) and dominated by OVDP for willful sharks already in the program (& potentially annul-OVDP-into-SFCP, I'm not sure if that's an option). I can't imagine a situation in which a transition is worthwhile - does anyone see a hypothetical situation in which it is?

  36. Robot - you aren't alone..
    are you doing SDOP?

  37. I wonder if that is true. I know I sound like a broken record, but as far as I can tell, reasonable cause is a defense to non-wilfulness, and from its definition, excludes negligence. Whereas the transition rules explicitly allow for negligence. One question to open up is whether or not that matters in practice, i.e., whether there are situations that often arise whereas negligence exists but does not give rise to wilfulness. I would assume that it does and such explanations are the basis for opt outs but would welcome comments from others.

  38. Confused Person - I am in similar shoes as you are.. can you please get in touch with me.. Anon2014R @

  39. No, I'm doing OVDP with the intention of opting out at the end.

  40. While the decision of a fresh SFCP application appears to hinge on the willfulness-nonwillfulness barrier (i.e., negligence vs. intent), the OVDP-into-SFCP decision feels to me to depend on a stricter standard (based on Severiano Ortiz's comments and another comment I read somewhere else). Whether that standard goes all the way down to the one between RC and NW, nobody knows yet. Even if it doesn't go all the way down there, it could very likely be the case that the audit option is superior to a successful transition request (all else being equal) in terms of civil penalties unless we are talking about pathological examples with exorbitantly high account balances and/or account numbers (I'm basing this statement on the NW ceiling in the mitigation guidelines).

  41. "Further ,this is an indication of the mindset at the IRS- that taxpayers in OVDP (or any taxpayer) are mostly dishonest."

    Or it could be an indication of smart revenue management. If you had a pool of people telling you that they'll give you 27.5% in a few months (ignoring those that intend to opt out), would you settle for 5% now? The 5% is designed to bring many fishes on shore in the future, not to refuse to squeeze the ones you already have in the net for their precious caviar.

    This is just speculation though. You could be right in that the reason for the transitional strictness is a result of the IRS looking more suspiciously to those particular individuals who were ready to pay the 27.5% (again, ignoring those that intend to opt out).

  42. Robot,
    I feel for you. Your comments are thoughtful and make sense.
    Re : Withdraw from OVDP into SFCP or SDCP option, I wondered about the same thing. You could try, ie submit the SFCP anyway, it would go to a different auditor and if the IRS cashes the check , you can tell the OVDP examiner, sorry, you are already in the clear. What can the IRS do anyway? Audit you at most, and if you have nothing to fear other than the aggravation and wasted time, remember they fear the same thing.
    I think we need more un- orthodox moves such as above.

    The IRS will likely get a lot of Transition requests, ( more than Opt outs), I dont think they can do a civil audit for all or even most.
    I agree, a failed transition request may carry some stigma to the Opt out auditors, but if you have good facts truly are Non- willful Opt out is an option

  43. I am looking for some help to complete the certification for SDOP. Any one submitted returns under SDOP?. There are many people seems to be have similar facts as me.

  44. sorry to hear that, it sounds like that your tax lawyer is more part of the problem than the solution ?

  45. He's brilliant and an authority when it comes to offshore matters, but sometimes I feel like I'm renting a Bugatti Veyron for my morning commute (i.e., I'm just a minnow and sometimes I wonder if I could have just done it myself). What's really sad is that on top of that I'm also stuck with a surgery bill from two weeks ago, albeit not as expensive as my total expected legal costs (thanks to my health insurance I only pay 1/4th of the total bill). Life has really been a nightmare for me lately. Thanks for your sympathies, and sorry for the off-topic rant.

  46. Thanks for your kind words. I'm not sure about the feasibility of that option, but it sure adds administrative overhead (and this directly adds to my bill, as I am represented) and it could easily be that my expected civil penalties are less than the 5% SFCP fine (or relatively close).

  47. Confused Person - Are you planning to do it yourself or thru an Attorney?

  48. Does anyone know if you get accepted for transition from OVDP, if you will get your 20% accuracy penalty refunded to you?

  49. I am posting this as warning to those of you in OVDP that have not yet opted out and have not yet been given transitional approval. I won't sign my 906 because the agent has made repeated tax calculation mistakes and sent 3 revisions and the 906 is still wrong. They now have threatened to kick me out of program, even though I have asked my agent to consider my request for transition. The IRS knows that if they kick me out before I opt out that I won't be allowed to do a transition as per FAQ 4 in the transitional rules. Very sneaky. I have written a formal complaint saying that until they formally deny my transition request, I won't consider signing the 906, and I won't opt out, and it would be very harsh and unjustified of them to kick me out before they correct their mistakes on the 906 and send me a correct accounting. The agent acknowledges the calculations are incorrect, but still has started removal procedures. Go figure??

  50. Blackseal
    You can try fighting back though TAS, your congressperson and your senator. And you should.
    The next batch of people that feel wronged are those who closed out their cases with 906s
    As Robot pointed out, SDP is to get catch NEW fish- you ( and I are already in the net because we joined OVDP) and as Robot disturbingly pointed out, the IRS intends to treat differently.

    Perhaps some good samaritan will file a class action suit....

  51. Milan, were you able to find out whether paper stock certificates are subject to penalties under OVDP?

  52. Milan,

    Did you handled any SDOP cases in last few weeks. It would great if you could share your experiences. Mainly looking for a help on drafting the certification. It would helpful if you could share some information on certification. I know every one may have different facts. Most of the people did not know about FBAR and Global taxation. How draft in a proper way given this situation.


    FBAR vs 8938 Link above.
    FBARs do NOT require Stock certificates to be included, so there is no FBAR penalty (per my reading). 8938 does require it to be reported
    OVDP is a different ball game - the FAQs are all you have to reference- the IRS can interpret it as they choose- see what its says about stock certificates
    However since the OVDP penalty is in lieu of FBAR penalties, you could argue that stock certificates do not need to be included

    Stock certificates are not a financial account, and so I dont think there is any reporting by the Banks. I am not a tax professional , I am only trying to help. If you put the stock certificates out there, I think the OVDP Agent will include it. If you do not, you have a reason why you do not ( not required by FBAR) .
    I went out of my way to make a full an honest declaration on OVDP and it cost me dearly in time and money. For example, I had never heard of PFIC and I reported Mututal funds in the OVDP. It cost more in PFIC accounting expenses than I earned on the PFICs!

  54. Gottalove I shorthanded my thought. Where there is no tax due, there should not be a problem under the new rules for filing documents where there was no underreporting of a liability. Where a taxpayer has significant income and lots of FTCs and owes tax that is a nominal percentage of gross income, they may feel as if they owe no tax but if tax of say 20k is due and there is a known legal duty I think its less clear and that the facts will determine whether the person can sign a certification.

  55. Thanks honestabe1947 for sharing your thoughts on this topic.
    Sorry to hear about your circumstances. Did you consider the opt out? Just curious.

    Regarding the Stock certificate discussion thread...
    OVDP 2012 says in FAQ 35:

    "The offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset."

    In other words stock certificates are not exempt if there is tax non-compliance. That is my understanding of FAQ applied to stock certificates. Maybe a tax professional will comment here.

  56. I have one in submission at committee, for the transition. I am not sur what else you are asking. If you are asking about going directly into SDOP, there is no letter to draft. If you are transitioning into SDOP (or SFOP) from OVDP/I, then you would write a letter explaining your reasonable causes, similar to what you would write in an Opt Out Reasonable Cause letter, in order to successfully transition into SDOP/SFOP from OVDP/I.

  57. Just because a taxpayer is rejected for transitionary treatment into SDOP or SFOP, does NOT guarantee or mean a higher probability of higher penalties, were that taxpayer to Opt Out. So I reject your extrapolation of the situation in "B". I also disagree with your multiple threshholds or standards with respect fo willfulness -- they are not dilineated differently according to whether a person transitions, does a QD, a transition to SDOP/SFOP, or a The only difference in these voluntary disclosure program settings is the standard of proof and the burden to prove nonwillfulness (specifically in a transitionary setting from OVDP to SDOP/SFOP and on an Opt Out).

    The standard of willfulness is not different in an Opt Out versus a transition to SDOP/SFOP. nor is it any different in a QD setting, where the taxpayer may have discovered his original filings missed global income and assets.

  58. No I have not, but I would think not, as they do not qualify as "other financial accounts" for FBAR purposes (even though under FATCA, they DO qualify as foreign financial assets, for the 8938)

    I wish to clarify something on this topic: FATCA harks to Section 6038D and Sections 1471-1474 to define, "foreign financial assets", and "financial institutions" for purposes of the Form 8938.

    However, the FBAR harks to 31 CFR 1010.350 - REPORTS OF FOREIGN FINANCIAL ACCOUNTS and Section 5314 (specifically 5312(a)(2)) as to what constitutes "other financial accounts" and "financial institutions."

    Stock certificates are not mentioned anywhere, for FBAR. Here is a nice link:

    However, I should add that, Section 1471(d)(2)(A) and (B), says, except as "otherwise provided by the Secretary,..." which means, that one can and should refer to the FBAR statutes (1010.350 & Section 5314, 5312), as to what a financial account and financial institution is. Thus I find the last link I posted from the IRS, quite misleading.

    Here is a nice article:

  59. The answer is no. See the FAQs.

  60. Milan, you are making a lot of assertions about what might happen. You may be right or you may be wrong. There has been skepticism expressed by attorneys as to whether if you apply for transition and your request for 5% is denied you are simply back in OVDP. That's what the FAQs say but lawyers have expressed some skepticism over this. Am I correct that you are not an attorney? I am concerned that people may take unknown risks based on your comments.

  61. Milan, you said "The income tax, accuracy related penalties, failure to file &
    failure to pay penalties are going to be the same whether one is in the
    OVDP or Opts Out."

    That is not correct. There is no accuracy-related penalty on optout as these would be considered QARs.

    Furthermore, under optout some of the earlier years of the 8-year period would have dropped off because of SOL; if they drop off because of SOL for the Federal return, they would also drop off the state return in my state (which pretty much mirrors the Federal return.)

  62. If someone has 100K total being churned through multiple accounts opened and closed, at any one time the balance cannot exceed $100K. Money cannot be in two places at the same time. Therefore the Dec. 31 balance (or balance on any other day of the year) cannot be $450K.

  63. Quote of the day : ".....the taxpayer may have discovered his original filings missed global income and assets....."

  64. " I also disagree with your multiple thresholds or standards with respect for willfulness [...]. The only difference in these voluntary disclosure program settings is the standard of proof and the burden to prove nonwillfulness"

    How are these two standards different? If I'm being accused of something, my expected penalty category is directly related to how much I can prove my "innocence".

    Further, from the above article, we can guess that it's tougher to transition than to apply to the SFCP as a newcomer. Of course, (as mentioned) a failed transitional request does not imply willfullness. But an inexperienced opt-out examiner is not guaranteed to know this. Which also leads me to this: I don't claim that a failed transitional request guarantees higher penalties after an opt-out (vs. never having applied for a transition in the first place); my claim is that it cannot look better and whether it could be worse depends on the examiner (i.e., it is unknown).

    Regarding your last paragraph (opt-out vs. QD), I've read on multiple websites that the IRS will be aggressive on QD's after the GAO report last year. I was able to dig up a cached report: On page 15, there is a quote from an IRS agent:

    "The guidance we're getting on quiet disclosures has been extremely harsh . . . Essentially those taxpayers walked past compliance three times: They didn't file correctly the first time, they didn't come in under voluntary disclosure, and now they're trying to hide it by slipping it in through an amended return. Don't expect much leniency if we have a quiet disclosure case; agents are being told to be aggressive."

    To this day, I still consider the term QD ambiguous: Some practitioners claim it's just amended returns (along with delinquent FBAR's), others claim it also includes a letter outlining RC arguments (which wouldn't make it 'that quiet').

  65. PR
    I'm in OVDP 2011( not 2012). The stock certificate or not does'nt really matter because in my case its not a certificate its a bank account.

    You bet I considered Opt out, but I plan to Transition- Im so sick of this and have spent so much money, that Id rather just pay the 5% AND BE DONE

  66. Robot,
    On the point about the IRS agent saying the "guidance on QD is harsh" , that may be true but so far as we know, not a SINGLE QD has been audited
    I know of one case, where a taxpayer did a semi- QD ( approx 1.5 years back). The IRS cashed his check. Later he got a call from the IRS telling him to enter the OVDP program. He ignored the call as well as written notices. Finally the taxpayer called the IRS and told them to quit calling him, check cashed, matter closed.
    He never heard back.
    So maybe the QD bluster is just that


  67. Furthermore, you raise an interesting question with what the IRS seems to be stating willfulness is versus the US Court System's (especially the Supreme Court) says willfulness is (see Cheeks case)

    Actually, as Jack as pointed out, appellate courts have been willing to accept willfulness in FBAR cases even on the basis of 'reckless' behavior such as not clicking the Schedule B question properly (and not including income). Whether the Supreme Court would disagree and would overturn an FBAR case is another matter -- I doubt it very much because the Court takes only a small fraction of cases.


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