How Does the IRS Address Willfulness in Streamlined Compliance Cases?

 Posted on September 22, 2022 in Taxation Law

The IRS has been very clear that it may take action against taxpayers with undeclared foreign accounts. In fact, the IRS often specifically targets individuals who have failed to comply with U.S. tax laws by willfully hiding their assets in offshore accounts. However, the agency is also aware that many of these taxpayers may not have been willful in their actions, and they may be seeking to come into compliance through the Streamlined Compliance Procedures. It is important to understand how the IRS determines whether or not someone was willful in their failure to disclose a foreign account. Based on the results of a recent court case, there are some situations where the IRS may reject a taxpayer's self-certification of non-willfulness.

Non-Willfulness Under the Streamlined Compliance Procedures

U.S. taxpayers are required to report any foreign accounts they own to the IRS, and this is typically done by filing a Foreign Bank Account Report (FBAR) on an annual basis, as well as submitting a Statement of Specified Foreign Financial Assets (Form 8938) with their annual tax returns. Failure to submit these forms can result in significant penalties. However, those who have not reported foreign assets as required may be able to come into compliance with their requirements through the Streamlined Compliance Procedures.

One requirement of Streamlined Compliance is that a taxpayer's failure to report foreign accounts must have been non-willful. This means that the taxpayer acted unintentionally and without any intent to violate tax laws. There are a number of factors that the IRS will consider when determining if someone was willful in their actions, including whether or not the individual was aware of their tax reporting obligations, whether they took steps to hide their assets, and whether they were truthful with the IRS. In order to be considered non-willful, it is important for the taxpayer to show that they made a good faith effort to comply with U.S. tax laws. 

Court Case Addresses Self-Certification of Non-Willfulness

When using the Streamlined Compliance Procedures, a taxpayer will submit a certification that lists all of their undisclosed foreign assets and states that their failure to meet their reporting requirements was non-willful. This statement is made under penalty of perjury. However a recent court ruling shows that the IRS is not required to accept a person's self-certification, and if it determines that a person willfully violated tax laws, additional penalties may apply, and the taxpayer may even be subject to criminal prosecution.

In the case of Flint v. United States, the executors of a woman's estate sought to recover a miscellaneous offshore penalty that the woman had paid under the Streamlined Compliance Procedures. In reviewing the case, the IRS determined that although the woman had certified that her failure to disclose foreign assets was non-willful, she had not informed her U.S. CPA of foreign accounts she owned and she did not make a good-faith effort to understand and comply with U.S. tax laws. Due to these indicators of willfulness, the court denied the request to return the penalty that had been paid.

Non-willfulness in cases related to foreign assets can be a complex issue. For many years, the IRS considered violations of reporting requirements to be non-willful if it could be demonstrated that a person acted negligently, made mistakes, or inadvertently committed violations due to a good-faith misunderstanding of U.S. tax laws. However, in recent years, the IRS has determined that reckless actions by taxpayers may be considered willful violations, including failing to disclose foreign accounts to professionals who prepare tax returns.

Contact Our San Jose Streamlined Compliance Lawyer

At John D. Teter Law Offices, we can help you protect your rights and interests as you address issues related to foreign assets. We will provide you with legal representation as you deal with the IRS and ensure that you take the correct steps to minimize your potential penalties. Contact our San Jose, CA offshore tax compliance attorney at 408-866-1810 to set up a consultation.

Sources:

https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures

https://www.irs.gov/pub/irs-utl/CertUSResidents.pdf

forbes.com/sites/irswatch/2015/08/02/irs-fbar-streamlined-procedures-revisited-am-i-non-willful/