WILLFUL V. NON-WILLFUL CHECKLIST

INTRODUCTION

This Article is a guide for practitioners and taxpayers in deciding whether to apply for the streamline procedures of the IRS’s Offshore Voluntary Disclosure Program (“OVDP”). The streamline procedures require a certification of non-willfulness from the taxpayer. Non-willful conduct is defined as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirement of the law. The taxpayer is required to provide specific reasons for failing to report all income, pay all tax, and submit all required information returns, such as the Report of Foreign Bank and Financial Accounts (“FBAR”). “Willfulness has been found where ‘the facts and circumstances of a particular case, taken as a whole, demonstrate’ that the taxpayer ‘knew or should have known that there was a risk and failed to take available corrective action,’ with the result being the violation of the law” (McBride, 908 F. Supp. 2d 1186, 1209 (D. Utah 2012), citing Jenkins (citations omitted)). Before making a decision, practitioners and taxpayers must carefully analyze all the relevant facts and circumstances since the IRS looks at circumstantial evidence. However, this creates a high degree of uncertainty when trying to make the determination. This Article helps to ease the uncertainty by providing factors that should always be analyzed.

1. Source Of Funds

The source of funds held in the foreign account is one of the most important factors to take into consideration. If the source was from unreported income, it may be an indicator of willfulness. Moreover, if the taxpayer has inherited funds in a foreign financial account, without any other action on his or her behalf, there is a chance that the IRS might not find it deserving of non-willful status. Practitioners should determine whether the funds in the foreign account were deposited from lawful sources, such as gifts or inheritances or from illegal sources, such as a scheme involving tax fraud or evasion. For example, if the source of funding is overseas earnings from customers who owe the taxpayer money, it may be an indicator of willfulness.

2. Transfer Of Funds

Transferring funds from one foreign institution to another may be an indicator of willfulness. The IRS may inquire as to whether the foreign accounts remain open and if not, where the funds have been transferred to if closed. Closing a foreign account to transfer funds to another foreign account may indicate willfulness more than transferring the funds to a domestic account. Another indicator of willfulness is whether the taxpayer tried to hide his or her interest in the foreign account by holding it in the name of a nominee, transferee, alter ego or successor-in-interest entity with no other business purpose.

3. Access To Funds

Having access to funds from an offshore account by the use of wire transfers made into the US or through the use of a debit or credit card may be an indicator of willfulness. The IRS can inquire about the deposits to and withdrawals from the foreign account including: the manner in which they were made to or from the foreign account; the mechanics of how they were made; the form in which they occurred; the time when they occurred; the limitations on deposits/withdrawals; and documents received when they occurred such as receipts, credit memos and debit memos.

4. Active Management

A taxpayer who actively manages the foreign account may indicate willfulness. A passive investor in a foreign interest without any other management on his behalf might have a better chance of being considered non-willful. Another indicator of willfulness under this factor is when the taxpayer places a “mail hold” instruction on the financial account records of the foreign account.

5. Contact With Foreign State

Travelling to the foreign state to manage the account by accessing the funds, transferring the funds or even to open the account yourself may be an indicator of willfulness. Setting up a foreign entity by travelling to the foreign state yourself may also be problematic. If the funds deposited in the foreign account during the taxpayer’s travels are U.S. funds, then it may indicate willfulness. The amount of times the taxpayer travels to the foreign state per year to make deposits/withdrawals can be an issue as well. Finally, setting up a foreign entity by travelling to the foreign state yourself may also be problematic.

6. Communication With U.S. And Foreign Financial Institutions

The threshold question under this factor is whether a U.S. or foreign bank, brokerage firm or other financial services company was involved in setting up the taxpayer’s foreign entity, foreign account or in advising in its use? If the answer is yes, then communications between the taxpayer and the institution regarding bank secrecy, taxation and/or disclosure of any foreign accounts and subsequent failure on the part of the taxpayer to act may indicate willfulness. The IRS may also inquire about the documents provided to open. A taxpayer using dual national status to open or maintain a foreign account under a foreign passport or other name may indicate willfulness. Another act on behalf of the taxpayer that may be problematic is when the taxpayer instructs the foreign bank not to send him records due to the secrecy of the account. Finally, there is a presumption of willfulness if the taxpayer knowingly waits for his or her foreign bank to become compliant with the Foreign Account Tax Compliance Act (“FATCA”) or to enter into a non-prosecution agreement (“NPA”) with the Department of Justice (“DOJ”) before voluntarily coming forward. According to the DOJ and the IRS, the presumption is based upon the fact that the Offshore Voluntary Disclosure Program has been available to taxpayers since 2009.

7. Communication With Attorney Or Accountant

The threshold question under this factor is whether a business person (advisor), accountant, attorney, or return preparer in the U.S. was involved in setting up the foreign entity or in advising in its use. If the answer is yes, then deliberately failing to disclose the existence of a foreign account to the person the taxpayer is dealing with may indicate willfulness. Any efforts made on behalf of the taxpayer to conceal the existence of the foreign account, such as lying to the advisor, accountant, attorney or return preparing when asked if they have a foreign account, is problematic. For example, completing an “organizer” for your tax professional and failing to state the existence of any foreign accounts may be an indicator of willfulness. The IRS may inquire about any communications between the persons mentioned and the taxpayer regarding bank secrecy, taxation and disclosure of foreign accounts.

8. Willful Blindness

One of the IRS’s favorite tools is the concept of willful blindness. Under this concept, willfulness can be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements. Failing to seek independent legal advice about how to properly handle a foreign bank account when clearly needed may constitute willful blindness. The taxpayer’s perceived degree of financial and business sophistication and education are factors that can be used when determining whether the taxpayer was willfully blind. Another issue that comes up is whether a taxpayer who checked the wrong box or no box on Schedule B is willfully blind. Fortunately, the IRS has guidance on this issue in its Internal Revenue Manual, which states that: “The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.”

9. Manipulation To Avoid Creditors Or During Divorce Proceedings

Changing the name of a foreign nominee, transferee, alter-ego or successor-in-interest entity that holds the foreign account to avoid creditors or to hide it from your spouse during divorce proceedings may indicate willfulness. Trying to prove non-willful status is difficult when the taxpayer is knowingly hiding the foreign account from creditors or from their spouse.

10. Information sharing agreements

Taxpayers and practitioners should always be aware of information sharing agreements between governmental institutions in the United States and even between the U.S. government and foreign governments. When taking part of the OVDP, a taxpayer’s information may be shared to state authorities like the Franchise Tax Board in California for example. This can create state level problems compliance and enforcement problem in those states, like California, which do not have a conforming voluntary disclosure program. . The problem is that trying to solve a tax issue may create problems that are outside of tax. For example, if a taxpayer was committing welfare fraud and voluntarily came forward under the OVDP, the taxpayer’s information can be shared with the proper authorities and the taxpayer can be prosecuted for welfare fraud. This problem can occur with immigration as well. A taxpayer’s permanent residency can be at jeopardy when failing to comply with tax laws. Under a global perspective, 51 countries recently signed on to an automatic exchange of tax information at the Global Forum on Tax Transparency convened by OECD/G20. Ever since FATCA was enacted, the United States has already been engaged in the mutual exchange of tax information under its provisions. Foreign banks that have requested NPAs have been cooperating with the DOJ, the IRS and any other domestic or foreign law enforcement agency designated by the DOJ.

CONCLUSION

The ten factors in this Article are only a few important factors that taxpayers and practitioners should be aware of when making the determination of whether to certify non-willfulness. Unfortunately, there is not much guidance from the IRS on the treatment of non-willful status under the streamline procedures of the OVDP and not enough case law to be fully confident before making a decision. Regardless of this problem, the most important duty of the practitioner is to ask the right questions to have the most information possible from the taxpayer. Without asking the right questions and getting the right answers, a practitioner cannot give the best advice to the taxpayer.