More on the New 2014 “Streamlined” Process for USCs and LPRs Residing Overseas

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The June 2014 changes by the IRS in its offshore voluntary disclosure (“OVD”) program are significant and worthy of discussion for USCs and LPRs residing overseas.

I will dedicate several blogs to this topic over the next few weeks.  See, these posts on the topic for additional background:  See, “IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance” – How Will These Changes Affect USCs and LPRs Living Outside the U.S.?

See, New 2014 “Streamlined” Process for USCs and LPRs Residing Overseas – The Thorny “Certification Requirement”

See,earlier post –Why the so-called “Streamlined” Process is “Much Ado About Nothing” – Legally Speaking,

This post is dedicated to some background, about the legal framework of the OVD and what the IRS calls “streamlined” filing.

First, it is worth reiterating, that the tax law, Title 26, is not the source of the terms of either the OVD or Streamlined.  For some basic background of the statutory regime and Title 26 (along with Title 31, et. seq), see, Why the FBAR (late filed or never filed) is not a requirement for the Certification Requirement of Section 877(a)(2)(C) – (5 Years of Tax Compliance)

In addition, the Bank Secrecy Law, title 31, is not the source of the terms of either the OVD or Streamlined.

Rather, the Internal Revenue Service (the agency responsible for enforcing Title 26) has created its own terms and conditions as part of both the OVD and the “Streamlined” process.  See,the “FAQs” that are published by the IRS:  Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers: Effective for OVDP Submissions Made On or After July 1, 2014

The terms of these FAQs are not law.  The IRS can change them at anytime and without notice to anyone.  Indeed the IRS has changed and modified them on numerous occasions since the initial OVD program in 2009.

Second, it is crucial to understand the basic framework of the law from Title 26 that all USCs living overseas are subject to; and the various consequences of the law.  Plus, many LPRs living overseas are subject to Title 26 (but not all of them – depending upon a number of factors).  The U.S. tax law is complex and there are numerous compliance requirements with onerous penalties that can be assessed.  For instance, see,  “PFICs” – What is a PFIC – and their Complications for USCs and LPRs Living Outside the U.S.  

Also, see, US Citizenship Based Taxation. In addition, see, What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?

In that post, I summarize the principle criminal statutory rules in Title 26 – which are set out below:

1.         Criminal Offenses under Title 26 (Federal Tax Law)

a.         Tax Evasion (IRC Section 7201)

b.         Filing a False Return or Other Document – Perjury (IRC Section 7206(1) )

  • (i)        Aiding or assisting in the perpetration of a false or fraudulent document (26 U.S.C. § 7206(2))
  • (ii)       Removal or concealment with intent to defraud, commonly related to untaxed liquor (26 U.S.C. § 7206(4))
  • (iii)     Compromises and closing agreements involving fraud or concealment (26 U.S.C. § 7206(5))

c.         Failure to File Return, Supply Information, or Pay Tax – (IRC § 7203 – Misdemeanor – up to 12 months imprisonment)

d.         Fraudulent Returns, Statements, or Other Documents (IRC § 7207)

e.         “Structuring” Transactions to Evade Cash Reporting (IRC § 6050I)

In addition to these tax specific crimes, other key crimes commonly used by IRS CI agents in tax cases, particularly international cases, include:

2.         Tax Related Criminal Offenses under Titles 18 and 31 (Not Tax Law Specific)

a.         Conspiracy (Section 371 of Title 18)

  • (i)        Elements of the Offense
  • (ii)       Penalties and Statute of Limitations

b.         False Statements (Title 18 U.S.C. § 1001)

  • (i)        Penalties and Statute of Limitations

c.         Perjury

d.         Mail fraud

e.         Principals and those Who Aid and Abet (Title 18)

f.          Accessory After the Fact

You may be asking – “If the terms and conditions of OVD and Streamlined are not the law – why should I consider either in my circumstances?”

The OVD is a bargain between the IRS/Justice Department and taxpayers.  In short, if you participate by its terms, you will not (at least “should not”) be criminally prosecuted.  The OVD program is in my view a program worthy of consideration for those who have committed any of the above tax and tax related crimes; and this will depend entirely upon the facts of each case.   How, when and if these laws have been violated, can only be analyzed and considered for each particular case, based upon the detailed factual circumstances of each individual.

For those individuals, who have not committed any of the above tax related crimes, the OVD program is probably not a good option for such USC or LPR residing overseas.  See an earlier article I published titled –  The 2013 GAO Report  of the IRS Offshore Voluntary Disclosure Program, International Tax Journal, CCH Wolters Kluwer, January-February 2014.   PDF version here.

There is one caveat to this issue, which arises from the willfulness FBAR penalty.  The government has argued (at least in one case) that multiple year 50% willfulness penalties can apply, even if the individual had no knowledge of the law – See,  FBAR Penalties for USCs and LPRs Residing Overseas – Can the Taxpayer have no knowledge of the law and still be liable for the willfulness penalty? See government memorandum.

Clearly, the facts of the Zwerner case need to be considered carefully in how and why the government argued their position.  It seems, maybe the biggest fact used against the taxpayer was that he had “touched the money”; i.e., drawn and spent some of the funds over the years?

Next, if there is little risk of a 50% willfulness penalty and there is no criminal liability, the so-called “Streamlined” process is an option.  However, again, the terms of the “Streamlined” are not terms set forth in Title 26; they are made up by the IRS.  They also do not bind the IRS.  I strongly recommend reading the post, –Why the so-called “Streamlined” Process is “Much Ado About Nothing” – Legally Speaking which provides the following about the process (before modified in its current form – which continues to be applicable today):

Does any of the above [referring to Streamlined] protect the USC residing outside the U.S. from an audit for any year a U.S. federal income tax return was not filed?  The short answer is  – NO!

Does any of the above statements in the IRS announcement mean that a USC residing overseas could not be subject to late payment or late filing penalties for not previously filing U.S. tax returns.  The short answer is  – NO!

Does any provision in the IRS announcement mean the FBAR penalties could not apply for failure to file.  The short answer is  – NO!                  See, When does the Statute of Limitations Run Against the U.S. Government Regarding FBAR Filings?

Does any of the above statements in the IRS announcement mean that a USC residing overseas can never be subject to penalties for not filing information returns regarding their non-U.S. international assets and “specified foreign financial assets”?   The short answer is  – NO!                     See, USCs and LPRs residing outside the U.S. – and IRS Form 8938

Importantly, there is nothing in the law (e.g., Title 26 or elsewhere) that would obligate any USC or LPR residing overseas to participate in either OVD or the “streamlined” process.  Both have different consequences, potential benefits, and certainly legal risks.

Finally, the last option, that is actually subject to the law, i.e., Title 26, is filing tax returns through normal channels.  Most all U.S. taxpayer file tax returns through this normal procedure.

As always is the case, but particularly for those who have not filed tax returns or FBARs, the facts of each particular case need to be considered, to determine the legal risks, benefits and consequences of any of these three approaches.

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