Streamlined Filing & IRS Voluntary Disclosure Examples (Willful or Non-Willful)

Streamlined Filing & IRS Voluntary Disclosure Examples (Willful or Non-Willful)

Streamlined Filing & IRS Voluntary Disclosure Examples 

When Taxpayers are out of compliance for not having properly reported their foreign accounts, assets, investments, or income – they are considered non-compliant US persons for tax purposes. As a result, they could become subject to foreign account fines and penalties. In order to avoid (or minimize) these penalties, Taxpayers who are not under audit or examination may consider entering one of the IRS offshore disclosure programs. There are various different programs, but the two most common are the IRS Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures.  Our international tax law firm specializes exclusively in offshore disclosure and compliance. We have handled thousands of offshore disclosures in over 85 countries — involving many different categories of accounts and assets. While each and every taxpayer’s submission is unique, many disclosures will fall into one of a few different categories – with the key issue being: was the taxpayer willful or non-willful? When a person is willful, the only program they qualify for is the IRS Voluntary Disclosure Program. And, since the IRS uses a very nebulous definition of the term willful, it can make the decision-making process for submission unnecessarily complicated. Here are five common types of disclosures we come across often in our practice.

But First, This Article Is Not Legal Advice

The purpose of these examples is to give laypersons an opportunity to understand that they are not alone in this process and that there are various types of submissions that are relatively common. You should not rely on this article for your own individual situation because your facts will undoubtedly be different in one way or another — and those small differences can cause a butterfly effect on your submission opportunities. That is why you should speak with a Board-Certified Tax Law Specialist who specializes exclusively in international tax matters to get a good understanding of the process and potential strategies. And, of course, beware of fearmongers and general tax practitioners who market themselves as international tax law experts.

Five Examples of Streamlined and Voluntary Disclosure

Here are five “common” types of non-compliance examples:

Stopped Reporting FBAR and FATCA

Bill is a US citizen who has foreign accounts in many different countries. He has lived abroad and worked as a consultant for long stretches in different countries; he has amassed a small fortune. Bill started filing his FBARs back in the late 1990s, but by 2012 and the introduction of FATCA Form 8938, along with becoming the owner of a foreign trust as a result of an inheritance left to him by his foreign relatives – he decides to throw in the towel and stop filing since his foreign financial institutions all assured him that they would not report him to the US government. Years later, Bill decides he wants to come clean with the IRS. If Bill wants to submit to one of the offshore programs, Bill would be considered willful.

Never Filed, But Knew She Should

Peggy is a Lawful Permanent Resident who relocated to the United States about 10 years ago. She has several foreign accounts and investments overseas including foreign mutual funds. She learns from her foreign bank that her foreign mutual funds are considered PFIC, and that she may get stuck with a very significant tax liability above and beyond that of other passive income. The bank tells her to speak with a CPA because they are pretty sure she has to report. Peggy does a bit of her own research before contacting a CPA. She comes to the conclusion that she probably has to report her foreign monies to the IRS, but does not want to hear it directly from anyone. She presumes if she does not have direct knowledge, then she cannot have technically known that she should have reported. Presumably, Peggy would be considered willful.

Received Bad Advice From an Inexperienced CPA 

Hank is a US citizen who inherits some foreign accounts. Hank does a bit of Internet sleuthing and decides that he probably has to do something with the foreign accounts that he inherited, but he is not sure what. Hank reaches out to a CPA who turns out to not have any experience in international tax matters but says she will conduct some research and get back to him.  The CPA follows back up and tells Hank that from her preliminary research, she believes Hank may have to file something, but she is not sure what. Since the CPA is unsure, Hank decides not to file anything. This is a “wobbler” situation in which the specific facts and circumstances surrounding what other type of research was done to learn about the reporting is crucial to analyzing willful vs non-willful. That is because simply relying on a professional (especially one who does not have experience in offshore reporting) is generally not sufficient for the “professional reliance on a tax professional” exception.

Received Bad Advice From an Offshore Tax Professional

Luanne is a US citizen who invests overseas. She invests primarily in growth funds and therefore, does not receive any dividends. Likewise, she was also gifted 12% of a foreign company, but the company does not distribute any income to Luanne either. Luanne speaks with a CPA who represents that he is experienced in international tax matters and tells Luanne that she does not need to report the assets because she does not receive any income. Of course, this is inaccurate but since Luanne relied on a CPA who represented that he has experience in these types of matters, Luanne is a good candidate for one of the non-willful disclosure programs. 

Unaware of Requirements and an Uncomplicated Return

Kahn is a US Lawful Permanent Resident who came to the United States recently. He has some foreign accounts but is unaware that he had any reporting requirements. Kahn goes to a tax professional to assist him, but the tax professional only asks him about his US income and assets and never inquires about his foreign assets. This is a very common situation and before being able to determine whether or not Kahn is willful or non-willful, the totality of the circumstances surrounding the non-compliance must be evaluated carefully to see what actions Kahn did, could, or possibly should have taken in learning about the foreign asset reporting requirements.

Common Factors to Consider in Willful vs Non-WIllful

When it comes to offshore compliance, there are many factors to consider before determining whether or not someone is willful or non-willful – and oftentimes it can feel like trying to put a circle through a square peg. No two disclosures are the same, and some common factors to consider are:

  • How long has the person been a US person?

  • How long has the person had foreign assets, accounts, and income?

  • Did the US person have a tax professional they worked with?

  • Did the person receive specific advice about the specific asset issue?

  • Is the tax return complicated outside of the foreign money?

  • Did the Taxpayer use commercial software?

  • Did the Taxpayer already pay foreign taxes?

Try to Avoid Fearmongering Attorneys and Accountants

One of the most discouraging parts about offshore disclosure is the fact that some attorneys take pride in trying to scare unsuspecting taxpayers into believing that they are going to prison or that they are automatically willful simply because they made a mistake. That is not true at all and if you want to learn more about how to protect yourself and what to look out for, we have a separate article that you can access about fearmongering by International Tax Lawyers.

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Our International Tax Lawyer team specializes exclusively in international tax.

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