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Streamline Procedure Risks: Are you really Non-willful?

By admin of MillarLaw A Professional Corporation On Sunday, July 10, 2016

According to reports in Tax Analysts there have been 54, 000 Offshore Voluntary Disclosure  (OVDP) participants 30,000 Streamline Procedure filings.  The Streamline Procedure filings are now the subject of intense Department of Justice (DOJ) and IRS review.  The DOJ and IRS ar looking for taxpayers who made improper use of the Streamline Procedures.

There are two categories of Streamline Procedures.  The categories are Resident and Non-resident.  The penalties due under both procedures  FBAR and tax are substantially less than the OVDP. However,taxpayers remain exposed to prosecution and IRS audit since the taxpayer does not receive a “Closing Agreement”.  Further, the taxpayer may face information return penalties, such as the penalty for late filiig of a Report of Foreign Gift, Devise or Bequest, Form 3520, or Return of Controlled Foreign Corporation, Form 5471.

The Resident Streamline Procedure requires a 5% civil miscellaneous penalty (FBAR penalty) based upon the highest annual balance in foreign financial accounts in the last 6 years.  There is no FBAR penalty for Non-residents.  Contrast that with the OVDP FBAR penalty of a minimum of 27.5% of the highest single year annual  balance in the last 8 years or 50% if the bank was under investigation by the DOJ at the time of the filing.  These are just the FBAR penaly differences, there are significant other program differences as well.

According to the DOJ given the huge potential cost differences some taxpayers have inappropriately used the Streamline Procedures and falsely signed Certifications  of “non-willfulness” .

In order to use one of the Streamline Procedures a taxpyer must certify under penalty of perjury that their conduct was “due to negligence, inadvertence or mistake,or conduct that is a result of a good faith misunderstanding of the law”. The DOJ and IRS are reivewing all the Streamline filings to date and matching the account disclosures with information obtained from at least 80 Swiss banks.  The DOJ and IRS  are looking for taxpayers who failed to report all foreign financial accounts, used false vendors, or who left one bank and moved to another (“leavers”), in other words evidence of deliberate “willful” conduct.  There is often a fine line between “willful and non-wllful” conduct.  The DOJ and IRS will make prosecution and civil audit determinations upon review of the information they obtain from the banks and compare that information with the taxpayer’s Certification of Non-willfulness.

Defense of the Streamline Procedure cases will depend on establishing the accuracy of the representations made by the taxpayer and using that information to show negligence as opposed to deliberate actions. In some cases the defense of mental incapacity will play an important role.

Taxpayers in the Streamline Procedure who have not been audited, but were not forthright in their Streamline Procedur filings should prepare now for possible prosecution or civil fraud investigations if they were an account holder at any of the 80 Swiss banks.  The statute of limitations will not run on these filings due to the continuing nature of the non-disclosure. The best course of conduct for such taxpayers is to discuss the curative steps with counsel expert in voluntary disclosures.

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