In an article that appeared on Tax Connections last week entitled, “Changes To the Streamlined Version of OVDP To Be Announced Soon?,” author Ronald Marini, Esq. foreshadows several changes to the streamlined version of the Offshore Voluntary Disclosure Program. For those cynics who said, “I knew it! It was just a matter of time before the IRS began restricting eligibility to the program,” you can breathe a sigh of relief.
According to two agency officials who spoke on the condition of anonymity (just kidding … they had names) at the fall meeting of the American Bar Association in Denver, the IRS has no such intention. But might I ask, if you were one of those people whose heart began to race upon hearing “changes,” “streamlined,” and “offing” uttered in the same sentence and whose mind jumped to the doomsday scenario of restricted eligibility, what are you still doing sitting on the sidelines?
So if the changes do not affect eligibility, what will they affect? According to Mr. Marini, at least one change will affect the penalty base which is used to calculate the five-percent offshore penalty. Specifically, “domestic participants will have to include, in the penalty base, foreign assets that they may have already reported on a Form 5471 or a Form 3520.”
What everyone is hoping for, and which Mr. Marini honed in on in his article, is that the IRS will provide clarification on what that petulant word called “non-willful” really means. Sure, we’ve all heard it before and perhaps it bears repeating once again: “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
Take, for example, negligence. How is it defined? Is it the same definition that is pounded into the heads of law students in their first year Torts class? In other words, does it have four distinct elements, each of which has to be independently proven before a person can be found liable for damages (i.e., duty, breach, causation, and damages)?
Or does it just have a common, everyday, run-of-the-mill definition, such as the one used in the following sentence: “AV companies that ignore possible security holes are negligent.” As taxpayers and tax practitioners alike know all too well, clarifying the definition of negligence only solves part of the problem. The other part involves knowing what type of conduct, in the eyes of the IRS, amounts to negligence. Here, examples would be helpful.
For example, while checking the wrong box off on Schedule B is not sufficient, by itself, to establish willful blindness for purposes of disqualifying a taxpayer from the streamlined procedures, how about checking the wrong box off on Schedule B after your tax preparer has taken the time to explain what types of foreign assets are reportable? Or, how about a taxpayer who utterly fails to inform his return preparer about an interest that he has in a Swiss bank account, much less ask his preparer the question, “Is it necessary to report my offshore account?” Can such a taxpayer still rely on the streamlined procedures? Would your answer to that question change if the taxpayer did not have the benefit of a “crash course” in foreign asset reporting by his return preparer like the taxpayer in the first hypothetical?
It is no small wonder why the non-willful certification has left so many taxpayers utterly confused, not to mention apprehensive, about whether taking the plunge into the streamlined procedures is the right decision. This has caused some taxpayers to believe that the streamlined procedures are nothing more than a trap for the unwary. As Charles Rettig put it in his article, “Am I Non-Willful Under the OVDP Streamlined Procedures?,” some conspiracy theorists believe that “the streamlined procedures are being used to entice unsuspecting taxpayers into placing their head onto the FBAR chopping block.”
If there is even a scintilla of truth to this, then I couldn’t agree more with Mr. Rettig’s subsequent comment: “the government should be held accountable.” But if all the buzz about the streamlined procedures being the “dawn of a new day” for not quite willful taxpayers is true, and one cannot be blamed for being hopelessly naïve for believing so since it was the IRS, after all, that promoted it as an opportunity for non-willful taxpayers to come “back into compliance through a simplified and expedited process,” then “the IRS should respect the vast majority of streamlined submissions and move on.”
As Mr. Rettig so eloquently states, the integrity of our voluntary tax system is at stake:
“Long-term, the overall integrity of government announcements and programs is far more important than searching through the forest to find that overly aggressive taxpayer(s) who dared falsely certify their knowledge (or lack thereof) of their foreign reporting obligations, under penalties of perjury.”
As if the confusion surrounding the interpretation of the core requirement for streamlined eligibility was not bad enough, the process that the IRS has implemented for reviewing and evaluating streamlined submissions is anything but clear. As coined by one tax attorney, it’s a veritable “black box.” And that too could carry risks.
Catch-phrase definition aside, it’s high time that the IRS provide practical and sound guidance for interpreting this nebulous concept.
Perhaps this is wishful thinking on my part, but I can think of no other issue that taxpayers have been crying out for guidance on more since the unveiling of the newly expanded streamlined procedures and which, sadly, has fallen on deaf ears, than the issue of certifying non-willfulness.
Is guidance just around the corner? Let’s hope so. Of course, only time will tell. In the meantime, taxpayers must come to grips with the fact that non-willfulness is not an easy standard to meet. With that in mind, the best advice is to remain as objective as possible when evaluating the facts and circumstances that – willfully or not willfully – landed you in this awkward position in the first place.
Just like blanket denials of guilt are rarely enough to plant the seed of reasonable doubt in the minds of jurors that are deliberating in a criminal case, “I was not willful” will not carry the day when it comes to convincing the IRS that your undisclosed interest in a foreign financial account was “non-willful.”
But do not lose hope. Perhaps the words of the infamous poet, Dylan Thomas, will provide the necessary inspiration for taxpayers to trudge on even in the wake of the uncertainty that presently exists within the black box of the streamlined procedures:
Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.
[Do not go gentle into that good night]