The IRS provides voluntary disclosure options for taxpayers who have failed to report their foreign financial assets and pay all tax debts, and now wish to be compliant. The Streamlined Disclosure Program is only applicable if your actions were non-willful. If your conduct was willful, the IRS’s Offshore Voluntary Disclosure Program (OVDP) may be a better option.
What Is the Streamlined Disclosure Program?
For the OVDP, you need eight tax returns and eight Foreign Bank Financial Accounts (FBARs), in addition to your paying all taxes, interests, and a twenty-percent penalty of what you owe. Finally, you must pay 27.5% of the eight-year high balance in your offshore accounts.
The Streamlined Program, on the other hand, asks you to present three tax returns and six FBARs, and you will need to pay taxes and interest with no penalties. You will not have to pay 27.5% of your offshore account balance; instead, you pay five percent of the highest balance. And if you live abroad, there is no offshore account penalty at all.
Still, neither of the disclosure programs offer any kind of certainty. They do, however, allow the IRS to conduct civil and criminal investigations on the narrative you present.
To qualify for the Streamlined Program, the following four requirements must be met:
- You must certify that your conduct was not willful.
- If the IRS has already initiated a civil examination of your tax returns for any year, you cannot participate in the Streamlined Disclosure Program; but, you can consult with your agent. Likewise, if you are under criminal investigation by the IRS, you are ineligible for the program.
- For those that are eligible and previously filed delinquent or amended returns, all previous penalty assessments must be paid.
- In order to participate in the program, you must have a valid Taxpayer Identification Number (a valid SSN, ITIN, or EIN).
How Do You Know if You’re Willful or Non-Willful?
In many cases, those that fail to file FBARs do so out of negligence, inadvertence, or from a simple mistake that arises out of a “good faith” misunderstanding of the law. They are able to provide the IRS with a specific reason for their failure to report all income. For these taxpayers, their conduct would most likely be considered non-willful, and they would have a good chance at qualifying for the Streamlined program.
And yet, there are those that might have a harder time proving their mistakes. The IRS considers conduct willful if they find it to be a voluntary, intentional violation of a known legal duty. This means a taxpayer had the knowledge of reporting requirements and still made a conscious decision to not comply. For the failure to report foreign accounts on an FBAR, the IRS only needs to prove that a person had knowledge of the requirements. If you knew you had a duty to file FBARs, then you also knew it was illegal not to file.
A taxpayer may feel that (s)he avoids willful conduct because (s)he was unaware of these legal duties; however, this is not necessarily true. The IRS may also feel that the conduct was due to “willful blindness,” meaning that the taxpayer made an effort to avoid learning about FBAR reporting and recordkeeping. In this case, lack of knowledge is not the result of a “good faith” misunderstanding.
Keep in mind that the Streamlined Disclosure Program is more rigid than the OVDP, and is aimed toward people who are comfortable with their non-willful narrative.
These Situations May Keep You from Qualifying for the Streamlined Program
The IRS may have a hard time believing in a “good faith” misunderstanding if they see a taxpayer has:
- Set up trusts or corporations in an apparent effort to hide assets,
- Reported one account and not another,
- Deposited or withdrawn large amounts of cash, or
- Withheld necessary information from his or her return preparer.
If any of these apply to you, the Streamlined program may not be the best option, and you may wish to choose another form of voluntary disclosure.
How Can I Prove It Was an Honest Mistake?
Some taxpayers manage to avoid being branded “willful” if they are able to convince the court they possessed a genuine misunderstanding of the law. Even if it is an unreasonable misunderstanding, the argument may be accepted—as long as it’s genuine.
Another argument frequently used to avoid a guilty sentence of tax evasion is that one had a good faith belief that no tax was due. This may be used to dispute the IRS’s belief in one’s “willful blindness.” Although, if there is any doubt in the honesty of the claim, it is unlikely a taxpayer would be considered non-willful.
Let an Experienced Sacramento Tax Attorney Help Determine the Best Voluntary Disclosure Program for You
If you are hoping to become compliant with the IRS but are unsure as to which program suits your situation, we encourage you to speak to a tax lawyer. NewPoint Law Group can provide the guidance and support you need to dispute your tax debt. To schedule a confidential consultation, call 1-800-358-0305 or contact us online.