United States: IRS Changes Streamlined Filing Compliance Procedures For Non-Willfulness Certification Forms

The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).  SFCP is a program offered by the IRS to individuals who have not previously disclosed foreign assets to the U.S. government.

The IRS introduced SFCP in June 2014 as an alternative to its existing Offshore Voluntary Disclosure Program (OVDP), which was designed more for taxpayers who willfully failed to disclose foreign assets.  Specifically, SFCP is intended to cover individual taxpayers who non-willfully failed to disclose foreign assets (e.g., they did not know about the requirement or their ownership interest in foreign assets).

The IRS has created two separate tracks for taxpayers wishing to enroll in SFCP—one track for taxpayers who reside in the United States (hereinafter "resident SFCP track") and another track for taxpayers who reside outside the United States (hereinafter "non-resident SFCP track").  The eligibility requirements for the separate tracks have some notable variations.  The threshold eligibility inquiry is the taxpayer's residency.  A taxpayer will be treated as not residing in the United States if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the taxpayer did not have a U.S. abode and the taxpayer was physically outside the United States for at least 330 full days.

If the taxpayer meets the non-residency test, then the taxpayer may enter the non-resident SFCP track, provided the taxpayer can certify that: (1) he or she failed to report income from a foreign financial asset and pay tax as required by U.S. law [and may have failed to file a report of foreign bank and financial accounts (FBAR)]; and (2) such failures resulted from non-willful conduct.

However, if the taxpayer fails the non-residency test, then the taxpayer must enroll in the resident SFCP track.  The resident SFCP track imposes more stringent eligibility requirements.  That is, the taxpayer must be able to certify that: (1) he or she has previously filed a U.S. tax return tax return (if required) for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed; (2) he or she has failed to report gross income from a foreign financial asset and pay tax as required by law (and may have failed to file an FABR and/or one or more international information returns); and (3) such failures resulted from non-willful conduct.

If a taxpayer can certify that he or she meets the eligibility requirements, then the taxpayer may make a voluntary disclosure as part of the SFCP program.  The non-resident SFCP track requires the taxpayer to submit, in addition to filing any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed: (1) delinquent or amended tax returns, together with all required information returns for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date has passed); (2) the full amount of the tax and interest due in connection with the delinquent or amended returns; and (3) a completed and signed Certification by U.S. Person Residing Outside of the U.S. (Form 14653).  Taxpayers who enter the non-resident SFCP track are generally not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, FBAR penalties, or a Title 26 miscellaneous offshore penalty.

The resident SFCP track has similar disclosure requirements.  Specifically, in addition to filing any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed, the taxpayer must submit: (1) amended tax returns, together with all required information returns for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date has passed); (2) the full amount of the tax and interest due in connection with the amended returns; (3) a completed and signed Certification by U.S. Person Residing In the U.S. (Form 14654); and (4) the Title 26 miscellaneous offshore penalty (which is equal to 5 percent of the highest aggregate year-end balance/value of the taxpayer's foreign financial assets that are in the SFCP penalty base).  However, taxpayers who enter the resident SFCP track are generally not subject to failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties or FBAR penalties.

Besides the residency test, the key differences between the non-resident and resident SFCP tracks are: (1) only non-resident SFCP track participants may submit delinquent U.S. tax returns; and (2) non-resident SFCP track participants are not subject to a Title 26 miscellaneous offshore penalty.

Nevertheless, taxpayers in the non-resident and resident SFCP tracks must submit either a Form 14653 or a Form 14654.  Both forms include the certifications that the taxpayer must make in order to participate in the respective SFCP track.  One certification that appears on both forms is that the taxpayer's failure to disclose foreign assets due to non-willful conduct.  As part of such certification, the taxpayer must provide specific facts and reasons (generally on a signed attachment) why their conduct was non-willful.

The IRS revised Forms 14653 and 14654 early in 2016. In February 2016, the IRS added a section to Form 14653 requesting detailed information regarding presence outside the U.S. during the streamlined procedures submission period.  Now, the IRS requests that U.S. citizens or lawful permanent residents indicate whether they were physically outside the United States for each year in the covered three-year period. Also, for joint submissions, the IRS states that both spouses filing a joint certification must meet the non-residency requirement. If the number of days physically outside of the United States differs for each spouse, then each spouse needs to disclose that on the chart on the Form 14653 or in an attachment thereto.

Also in February 2016, the IRS revised Forms 14653 and 14654 to change the directive to taxpayer's that was provided in the prior versions of the forms which advised taxpayers to "provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs.  If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice."  This minimal direction caused the IRS to receive Forms 14653 and Form 14654 that it deemed did not provide adequate information, so the certifications were either questioned or rejected.  Consequently, the IRS revised the advice to include more robust direction.  Now the IRS also instructs the taxpayer to

Include the whole story including favorable and unfavorable facts.  Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs.  Additionally, explain the source of funds in all of your foreign financial accounts/assets.  For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.  And explain your contact with the account/asset including withdrawals, deposits, and investment/management decisions.  Provide a complete story about your foreign financial account/asset.   If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice.

Given the expanded advice by the IRS, taxpayers' non-willfulness statements will undoubtedly be measured against a higher standard.  Now, the IRS expects the taxpayer to disclose unfavorable facts (e.g., facts related to education, profession or previous conduct).  Therefore, it will be necessary to draft a narrative in a manner that is most favorable to the taxpayer.  This would include explaining why the favorable facts clearly overshadow the unfavorable facts, such as, "Even though the taxpayer is a CPA, she was unaware until 2 months ago that her parents opened and funded a foreign bank account for her when she was a child."  As a corollary, to the extent the taxpayer or taxpayer's counsel does not feel comfortable the favorable facts clearly overshadow the unfavorable facts, enrolling in OVDP should be considered as an alternative along with potential opt-out consequences once in the OVDP program.

IRS Changes Streamlined Filing Compliance Procedures For Non-Willfulness Certification Forms

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.