Growing up, your mother probably resorted to sweetness to get you to confess to the broken window she knows your baseball caused. It was easier for you to take the blame then because her words were comforting and put your mind at ease. Well, the IRS has resorted to something quite similar.

On June 18, 2014, it announced changes to its offshore voluntary compliance programs to accommodate the needs of individuals whose failure to report overseas accounts wasn’t willful. Three options were offered as a result:

1. The Offshore Voluntary Disclosure Program (OVDP)
2. Streamlined filing compliance procedures
3. Delinquent Report of Foreign Bank and Financial Accounts (FBAR).

Many people with unreported offshore accounts could breathe easy with these. While eligible taxpayers outside the U.S. were freed from all penalties, those in the U.S. only face a penalty equal to 5% of their foreign financial assets. Even better was the IRS’s offer to waive all income tax penalties related to non-U.S. income.

Confessing, i.e. Filing Non-Willfulness Under the Streamlined Procedures

With such a warm embrace facing them, taxpayers wouldn’t hesitate to certify that their conduct was “non-willful,” which according to the IRS is “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.”

To establish non-willfulness (an act which would result in penalties of perjury, mind you), a certification certifying the conduct as well as its reasons are in order. However, you need to invest a little extra time, effort and thought into your confession or else the IRS won’t believe your conduct to be non-willful.

Stepping back in time, you knew that you had to win Mom over or else she’d own your weekends, TV time, and playthings. The IRS is no different. Unfortunately, doe-eyed expressions of guilt and a tear rolling down your cheek won’t help you here.

While preparing your explanation of non-willful conduct, your “story” should be told. In other words, you can shout from the rooftop that your conduct was “non-willful” from now until eternity, but unless you discuss and explain why your conduct doesn’t fall in the willful blindness category, the IRS is likely to view this as being nothing more than self-serving.

As noted by Charles Rettig, an expert in the field of foreign asset reporting, a certification should necessarily include “objective supporting evidence.” In a Forbes article entitled, “Am I Non-Willful Under The OVDP Streamlined Procedures?,” Mr. Rettig writes, “What objective evidence might exist to appropriately demonstrate a lack of personal knowledge by the taxpayer about their foreign reporting requirements?”

For those unfamiliar with the concept of “willful blindness,” this is a good time for a brief discussion of it. Willful blindness is a watered-down version of the gold-plate standard for willfulness (i.e., the heightened definition for willfulness), which is defined by the IRM as “an intentional violation of a known legal duty.”

A few primers on willfulness are in order. The burden of establishing willfulness is on the IRS. In the FBAR context, the IRM provides that the only thing that a person need know is that he has a reporting requirement. If a person has such knowledge, the IRM asserts that the only intent needed to constitute a willful violation of the requirement may be a conscious choice not to file an FBAR.

Under willful blindness, willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements. For example, the failure to learn of the filing requirements coupled with other factors – such as efforts taken to conceal the existence of the accounts and the amounts involved – may lead to a conclusion that the violation was due to willful blindness. However, the mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was due to willful blindness.

According to Mr. Rettig, two of the most salient questions that must be asked and answered when assessing whether the taxpayer made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements are as follows:

(1) “Should the taxpayer have inquired of their return preparer about the need to report an interest in a foreign financial account?”

(2) “Should the preparer have gone beyond providing a tax organizer that recites the Schedule B reference relating to an interest in a foreign financial account and perhaps explained what types of foreign interests are reportable?”

It goes without saying that when drafting your non-willful certification, you should include statements which prove that you didn’t “intentionally violate a known duty” while filing your offshore returns. Another expert tip is to go over all the important facts and issues which the IRS may lump into the willful blindness category before filing your certification. If the examining agent decides to investigate your case further, the last thing you need is to be caught with your pants down tax-wise.

If you’re surprised or discredited, your certification won’t only be rejected, but the IRS will grill you with harsh penalties or even refer your case to Criminal Investigation. The best case scenario in this case is you facing penalties greater than the 5% you wished for but still less than the OVDP’s 27.5% or 50%.

Getting off the Hook

You need to thoroughly invest in due diligence to avoid the IRS’s punishments, which has been known to drive many a sane taxpayer to the brink of insanity. This is why talking with a tax attorney is a great idea. He or she can go through your account records and speak with other people involved with the account. He can also check the consistency of your explanation and ensure that it is supported by hard evidence, such as tax and information returns. Having the “right” documents to prove your story and calm down the IRS agent is priceless.

Your tax attorney will be able to provide practical and sound advice on what may be the most important decision that you ever make – whether your certification can be submitted in good faith. In other words, is willful blindness so big of an issue that it would be hard for you to claim, in good faith, that you were truly non-willful?

If your certification can still be made in good faith, you can choose to proceed with the streamlined submission or perhaps, consider making a “quiet disclosure” outside of the IRS’s voluntary disclosure framework. Of course, there are risks inherent in making a quiet disclosure. One such risk is that the IRS may examine one or more tax years. Of course, a quiet disclosure might result in no examination at all. This can be likened to a game of Russian Roulette, but remember what Mom said about gambling. In the event of a tax Armageddon – i.e., an examination that leads to the assertion of onerous civil penalties – remember that you have the right to raise any one of a number of defenses to the IRS’s determination at an administrative appeals conference or in tax court, at a bench trial.

On the other hand, if it becomes clear that support for “non-willfulness” is lacking or that your “willful blindness” denials are weaker than you first thought, you can make a voluntary disclosure under the Offshore Voluntary Disclosure Program.

Now none of this is easy. Each option has consequences that must be carefully considered. For example, avoiding OVDP like it is the bubonic plague when firm indications of fraud exist, for no other reason than to minimize a distasteful offshore penalty, is no less foolish than the robber who goes to great lengths to avoid being identified in a convenience store robbery, using a ski mask and rental car for the occasion, but who forgets to change out of his work uniform before making his grand entrance.  And, lest I forget, that work uniform has his name stitched across the front.

The expression, “Don’t be penny wise and pound foolish” might just as well as have been invented for this very scenario. Indeed, as unpleasant as the onerous 27.5% offshore penalty might be, think about how much worse a criminal investigation or prosecution would be.

If you choose the wrong option and the IRS calls you out for it (very simply, the IRS believes that your decision for doing so was, shall we say, less than accidental), then just like Mom owned your behind for lying, the IRS won’t be in a very forgiving mood. As Mr. Rettig put it best, you may well endure the wrath of the IRS:

“Those who dare consider taunting the government should be aware that the government possesses considerable information and may be able to relatively quickly determine submission of misleading or false certifications.”

If there is a lesson to be learned here (and Mom will probably agree that there is), it’s this: get experienced counsel on your side to avoid a sticky mess that may last longer than you would on this earth.