Certification of Non-Willfulness, Writing Tips & Best Practices

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Certification of Non-Willfulness, Writing Tips & Best Practices

Certification of Non-Willfulness, Writing Tips & Best Practices

Certification of Non-Willfulness

U.S. Taxpayers who reside either in the U.S. or abroad and who have failed to report their foreign accounts, assets, investments, and income in prior years have the opportunity to safely get into IRS foreign reporting compliance by submitting to the streamlined procedures. To qualify with the streamlined procedures, a taxpayer must be non-willful. Unfortunately, the Internal Revenue Service does not provide a bright line test or direct roadmap for taxpayers to follow in order to certify their non-willfulness. Some of the key issues to consider are:
      • How long has the taxpayer been a U.S. person?
      • Does the taxpayer live in the United States or abroad?
      • Has the taxpayer been properly filing their annual tax returns?
      • Does the taxpayer file their own returns or use a tax professional?
      • When did the taxpayer learn about the international information reporting requirements?
Unfortunately, there are many general tax practitioners who falsely claim to be experts and make many mistakes when preparing the taxpayer certification statement. While the certification statement may seem relatively straightforward, there are many pitfalls and landmines to be cognizant of when crafting a non-willfulness streamlined statement. Let’s look at some of the common Streamline Procedure mistakes to avoid.

Common Streamlined Filing Compliance Mistakes to Avoid

The IRS Streamlined Offshore Procedures (stand-alone procedures) is in its eleventh year and has been one of the most successful IRS Programs used to bring non-willful taxpayers safely into compliance for undisclosed foreign accounts, assets, investments, and income. The stand-alone procedures were developed in 2014 — and were originally part of OVDP (Offshore Voluntary Disclosure Program). Our international tax law specialist firm (Golding & Golding) represents clients exclusively in IRS offshore disclosure and international tax non-compliance matters. We have represented thousands of clients in over 85 countries with offshore disclosure matters and have successfully submitted and completed thousands of streamlined procedures submissions for taxpayers with all types of simple-to-complex issues, including:
      • Foreign Income (earned and passive)
      • Foreign Accounts
      • Foreign Gifts
      • Foreign Trusts
      • Foreign Rental Properties
      • Foreign Businesses
      • Foreign Mutual Funds and ETFs
      • Foreign Unit Trusts
      • Foreign Life Insurance 
      • Foreign Pension
Here are some of the more common streamlined filing mistakes to try to avoid. *An update to our 2020 original article.

Properly Analyzing the Willfulness/Non-Willfulness Issue

If you are willful, you do not qualify for the streamline procedures, delinquency procedures, or reasonable cause. The problem is that there is no “bright-line test” to determine willful vs. non-willful — and many fearmonger-type tax practitioners/attorneys are all too eager to throw a taxpayer into the voluntary disclosure program without providing sufficient understanding of the parameters of the VDP ‘Program’ and/or properly analyzing the different factors to determine willfulness.

Overwriting the 14653 and 14654

The streamlined certification forms are not dissertations, and taxpayers should not be drafting 15-page, single-spaced summaries. Whenever a streamlined certification is rejected, it is typically (but not always) because the submission is way too long — and includes information that begins to look more like reckless disregard or willful blindness (willfulness) than mere negligence or inadvertence (non-willful).

Including Exempt Assets in the Penalty Computation

Not all foreign assets are included in the penalty computation in a Streamlined Domestic Offshore submission (Streamlined Foreign has no penalty). For example, individually owned rental property and RRSP are not subject to the SDOP penalty.

Not Responding to Further IRS Inquiries

There is no closing letter with a streamlined case; the matter can stay open for several years. Sometimes the IRS will follow up after the submission. If you retained a tax/legal firm that provided flat-fee for the full representation — then this should not be a problem.  Other firms that charge hourly and use outside CPAs tend to forget about the matter after it has been submitted — even though most submissions are subject to a six-year statute of limitations and the IRS will oftentimes follow up on a variety of issues. When the taxpayer client confronts the Attorney, the Attorney claims that either:
      • The CPA should have responded; or
      • Representation did not include post-submission follow-up (and now they want you to replenish the retainer).
This type of failure to follow up with the IRS can lead to an audit/examination and ultimately the IRS rejecting the submission.

Timing the Streamlined Submission

Depending on which submission procedure a Taxpayer is applying for, there are different rules to keep in mind. For example, with a Streamlined Foreign Offshore Submission, a Taxpayer can submit original tax returns, but for a Streamlined Domestic submission, the Taxpayer can only submit amended returns. These requirements must be considered in conjunction with the quiet disclosure rules.

Foreign Residence Requirement for SFOP

To qualify for the Streamlined Foreign Offshore Procedures and the coveted penalty waiver, Taxpayers must qualify as foreign residents. Qualifying as a foreign resident under the Streamlined Foreign Offshore Procedures has very specific requirements — and it is not as simple as living overseas for more than half a year.

Penalty Calculation for SDOP

Under the Streamlined Foreign Offshore Procedures version of the program, there is a 5% Title 26 miscellaneous offshore penalty. Not all assets are included in the penalty base, so it is important to evaluate the assets carefully to determine which assets should be excluded from the penalty.

Which Foreign Tax Forms are Required

Missed international reporting forms are a mixed bag. That is because while some forms are typically always required such as the FBAR and FATCA Form 8938 (presuming that the thresholds were met) – other forms are a bit more ambiguous. For example, a foreign pension may be considered a foreign trust for Form 3520/3520-A reporting, but Revenue Procedure 2020–17 and the new proposed foreign trust regulations eliminate the Form 3520 reporting requirement for certain foreign trusts. Likewise, while some tax practitioners are all too eager to qualify any passive investment as a PFIC (which typically requires an 8621 Form to be filed), that is not always the case that foreign passive investments qualify as a PFIC.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.