IRS ANNOUNCES THIRD OFFSHORE VOLUNTARY DISCLOSURE PROGRAM. Gideon Rothschild, JD, CPA

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1 IRS ANNOUNCES THIRD OFFSHORE VOLUNTARY DISCLOSURE PROGRAM Gideon Rothschild, JD, CPA EXECUTIVE SUMMARY: On June 18, 2014, the Internal Revenue Service announced significant changes to both its Streamlined Procedures and the 2012 Offshore Voluntary Disclosure Program ("OVDP"). These changes became effective for all submissions made on or after July 1, The changes provide new options for both resident and nonresident US taxpayers who have not reported their foreign bank accounts and whose non compliance was non-willful and increases the offshore penalty from 27.5% to 50% for taxpayers who had accounts at financial institutions which the IRS has identified publicly as under investigation. BACKGROUND: The current OVDP was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and Since the launch of the first program, more than 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest and penalties. These initiatives offered taxpayers, who failed to file timely foreign bank account reports (FBARs) and report income from such accounts, a chance to avoid criminal prosecution and pay reduced penalties. The 2009 and 2011 OVDPs required a Title 26 penalty payment of 20% and 25% of the highest aggregate balance in the unreported accounts respectively while the 2012 program ratcheted the penalty to 27.5%. In 2013, recognizing that tens of thousands of US citizens living overseas may not be in compliance, the IRS announced a streamlined program which provided taxpayers with a penalty free option if they met certain (stringent) requirements. On June 18, 2014, the IRS announced new streamlined procedures which are less stringent as well as a new OVDP. 1

2 NEW/REVISED PROCEDURES: Changes to the Sreamlined Procedure The Streamlined Procedures provide a mechanism for eligible taxpayers to come into compliance with their reporting and tax obligations by filing amended or delinquent income tax returns and paying a reduced penalty. Major changes to the Streamlined Procedures include: o Extension of eligibility to U.S. taxpayers residing in the United States ( Streamlined Domestic Offshore Procedures ); o o Elimination of the $1,500 tax threshold; and Elimination of the risk assessment process. Beginning July 1, 2014, eligible U.S. resident and non-resident taxpayers who have failed to report the income from a foreign financial asset and pay the required tax thereon may come into compliance by: (1) Filing amended or delinquent income tax returns for each of the most recent three years for which returns were due; (2) Certifying that the failure to file tax returns, report all income, pay all tax and submit all required information returns (including FBARs) resulted from non-willful conduct; (3) Paying all taxes and interest owed; and (4) Filing delinquent FBARs (FinCEN Form 114, previously TDF ) for each of the most recent six years for which FBARs were due. For eligible non-resident taxpayers, the Title 26 miscellaneous penalty will be waived. US citizens, lawful permanent residents (i.e. green card holders), or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement 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 individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. U.S. resident taxpayers who meet the above requirements must pay a Title 26 miscellaneous penalty equal to five percent of the highest aggregate value of the 2

3 taxpayer's unreported foreign financial assets during the three year period for which income tax returns were due (vs. 27.5% or 50% as outlined below). Taxpayers who complete the Streamlined Procedures will not be subject to failure-to-file or failure-to-pay penalties, accuracy related penalties or FBAR penalties, even if their returns are subsequently selected for audit. However, such taxpayers may be subject to IRS examination, additional civil penalties and criminal liability if, upon further review, the IRS determines that the taxpayer's non-compliance was due to willful conduct. As a result, taxpayers concerned that their non-compliance may ultimately be deemed willful should consider participating in the OVDP before making a submission in the Streamlined Procedures (after which time the taxpayer becomes ineligible for the OVDP). The certification of non-willfulness requires a statement signed under penalty of perjury, stating the reasons for non-reporting of income and the circumstances that indicate non-willfulness. n-willfulness generally is demonstrated by inadvertent or negligent conduct and/or misplaced reliance on informed professional advisors. Changes to the 2012 OVDP Similar to the Streamlined Procedures, the OVDP provides eligible taxpayers with an opportunity to come into compliance with their reporting and tax obligations while limiting their exposure to civil and criminal penalties. The most significant changes to the OVDP include: o Imposition of a 50% Title 26 offshore penalty as opposed to a 27.5% offshore penalty if the foreign financial institution OR a facilitator who helped the taxpayer establish or maintain an offshore account has been publicly identified as being under investigation or as cooperating with a government investigation; o Requirement that all taxes, interest, and penalties (including the offshore penalty) be paid at the time of the OVDP submission; and o Requirement of additional, detailed information about financial institutions at which the undisclosed foreign assets were held and entities through which the undisclosed foreign assets were held in the initial application for pre-clearance from the Criminal Investigation Lead Development Center. Taxpayers making a new submission to the OVDP on or after July 1, 2014 may come into compliance by first requesting pre-clearance into the program and submitting the completed (revised) Offshore Voluntary Disclosure Letter and attachments 3

4 disclosing each foreign financial asset. Upon approval of the Criminal Investigation Department, the taxpayer must then submit: (1) Payment of all tax, interest and penalties owed; (2) Copies of all original and amended tax returns for the eight years covered by the voluntary disclosure; (3) A completed Foreign Account or Asset Statement for each previously undisclosed foreign financial asset during the voluntary disclosure period; (4) A completed and signed Taxpayer Account Summary With Penalty Calculation; (5) Signed consents to extend the period of time to assess tax and related penalties and FBAR penalties; and (6) Copies of filed FBARs for the each year of the voluntary disclosure period; (7) Copies of all bank statements for all financial accounts reflecting all account activity for each year covered by the voluntary disclosure period. After a civil examiner has reviewed and approved the taxpayer's submission, the taxpayer will receive a Closing Agreement (Form 906) from the IRS which, once signed by both parties, effectively releases the taxpayer from any civil or criminal liability in connection with the disclosed foreign financial assets during the voluntary disclosure period. A taxpayer who has submitted an Offshore Voluntary Disclosure Letter is ineligible to participate in the Streamlined Procedures (but see transitional procedures below). Transitional Treatment Certain "non-willful" taxpayers who were previously excluded from the Streamlined Procedures (because of their U.S. residency and/or an inability to meet the $1,500 tax threshold) and are now excluded solely because they have already entered the OVDP may be able to elect "transitional treatment," enabling them to take advantage of the beneficial penalty structure of the Streamlined Procedures while enjoying the liability protection of the OVDP. 4

5 A taxpayer who is eligible for treatment under the Streamlined Procedures and who submitted an Offshore Voluntary Disclosure Letter prior to July 1, 2014 but has not yet received a fully executed Closing Agreement may request transitional treatment under the penalty terms available under the Streamlined Procedures. Transitional treatment is discretionary, and the IRS will consider each request in light of the facts and circumstances of the taxpayer's case. If a taxpayer's request for transitional treatment is granted, the taxpayer will not be required to pay the Title 26 offshore penalty prescribed under the OVDP; instead, the taxpayer's offshore penalty would be 5% of the highest aggregate balance of the foreign financial assets (if the taxpayer is a U.S. resident) or nothing at all (if the taxpayer is not a U.S. resident). All other terms of the OVDP would continue to apply. If a transitional taxpayer s request for non-willful consideration is rejected, he may re-enter the OVDI program under its original 2012 terms. te that such taxpayers who request and are granted transitional treatment after entering the OVDI program will still be required to submit 8 years of amended returns (or such lesser number of years as applicable) and pay all applicable late payment and accuracy related penalties, whereas those taxpayers first entering the program after July 1 (without going through the OVDI program) get waivers of such additional penalties and are only required to file 3 years amended returns. COMMENT The IRS has made a good faith effort to respond to the practitioner community s comments and criticism of the OVDI process. This latest program is the third iteration of the program commenced in 2009 after the UBS affair became public. The main criticism of the prior programs was the lack of discretion given to examining agents to modify the penalty unless a taxpayer were willing to take the risk of opting out of the OVDI, which potentially meant exposure to all penalties that might be applicable. Given the significant risk most taxpayers begrudgingly paid the OVDI penalty of 20% % (depending on when they entered the program). By significantly modifying the streamlined program for non-resident taxpayers it is now more likely that those who have been living overseas for years without being fully compliant can enter the program with only 3 years of tax filings and avoid all penalties. Those taxpayers who are accidental Americans, such as those US citizens born of US parents who have never lived in the US should be informed of this opportunity (which, as the IRS notes, can be terminated without prior notice). 5

6 The expansion of the streamlined program to US resident taxpayers who can certify that their failure to file FBARs and report their foreign income was not willful will be a welcome relief to those who have not yet become compliant. However, the risk of having to choose between the streamlined program (which does not provide a get out of jail card) or the OVDI program appears to be a risk that has to be carefully weighed. Once a taxpayer submits under the streamlined program he is not eligible to later submit under the OVDI program. Furthermore, his returns may be subject to full examination and all penalties, including criminal liability since there will be no formal closing agreement in such cases. Since FATCA has now become effective, requiring foreign financial institutions to report their US account holders beginning in 2015, this OVDI program may be the last chance for taxpayers to come into compliance before they are caught and subject to significantly higher penalties and possible criminal prosecution. In addition, most Swiss banks have by now entered into or are negotiating deferred prosecution agreements which will ultimately require them to disclose their US account holders records from years prior to Tax practitioners should ensure that their clients are aware of the serious consequences of hiding assets offshore and the last chance they may have to come clean. CITES: Compliance-Procedures -Taxpayers-with-Undisclosed-Foreign-Financial-Assets 6

7 Drafting Attorneys and Litigation Attorneys Need to Collaborate By Michael Sneeringer i Solo practitioners and smaller law firms practicing trusts and estates law often specialize in either the planning or litigation of estate plans. For some trusts and estates drafting attorneys ( drafting attorney ) the situation often is as follows: (i) take a client that poses problems and hope the case does not lead to litigation down the line (wherein the drafting attorney attempts litigation his or her self); or (ii) simply not take on the engagement at all and pass on the case to a trusts and estates litigator ( litigation attorney ), thereby hoping that the litigation attorney one day returns the favor with a referral. Instead, the drafting attorney should collaborate with the litigation attorney. This relationship is of mutual benefit to both attorneys. This article provides eight scenarios where the drafting attorney can be of help to the litigation attorney and underscores why collaboration is absolutely necessary. A) Why Collaborate? Drafting attorneys often do not litigate, but if they did, they would have ideas on how to attack the general validity and effectiveness of existing estate planning documents such as a will or a trust. The drafting attorney, even without courtroom experience, can still be of benefit to the seasoned litigation attorney. Many drafting attorneys are cognizant of the various errors that can befuddle estate plans, which such information can be extremely important to the litigation attorney. The litigation attorney does not have to spend countless hours conducting research, or waiting on a subordinate to do the research, because, presumably, the drafting attorney already knows the answers. 1

8 Moreover, the litigator does not have the time or skill set (in some cases) to draft documents for that same litigious client who just walked in the door. Thus, a quid-proquo relationship develops, whereby the drafting attorney refers the client to the litigation attorney (for purposes of taking on the litigation matter), in return for the litigation attorney later referring the very same client back to the drafting attorney (to draft estate planning documents following what hopes to be a successful litigation or settlement). If the client is a current client of the drafting attorney, then the client will appreciate the drafting attorney s added value in relying on an expert litigator instead of taking on the litigation his or her self. A collaborative relationship is best when two people bring two very different sets of skills to the table. This article explores eight collaborative scenarios and, in each scenario, it is contemplated that a new client has approached the drafting attorney for advice (not a current client of the drafting attorney whereby the errors would be the fault of the drafting attorney): 1) Undue influence. This scenario involves a home healthcare aid, relative, or sometimes a complete stranger suddenly becoming a beneficiary under a deceased parent s estate planning documents, or being names the trustee of a deceased parent s trust or the executor of a deceased parent s will (or worse, both!). This situation is a direct result of the United States aging population. Many baby-boomers and members of America s Greatest Generation are susceptible to elder abuse and undue influence. Previously, divorce rates were lower, children lived close to home and people did not live as long. Today, the opposite is true. As people grow older, many do so without proper supervision by others in a family setting. Such an absence of love and 2

9 companionship ultimately leaves the elderly isolated and vulnerable to third parties seeking an inappropriate relationship in order to be compensated. While each state has different laws governing causes of action against those who take advantage of others for financial gain and such a discussion is outside the scope of this article, the alert drafting attorney should be able to spot facts which may suggest duress, force, coercion or fraudulent contrivance to the extent whereby there is a destruction of the free agency and willpower of the testator/testatrix or grantor/settlor. The drafting attorney should turn over such a case to the litigation attorney in order for the seasoned litigator to review the facts and create a plan of action to invalidate the documents drafted when mom was caught in a weak moment and made an in-home caregiver the beneficiary, trustee, executor, etc. ii 2) Drafting for changes in the law. This scenario occurs when an estate planning document, such as a revocable trust, contains references to old provisions in the Internal Revenue Code, such as a prior unified credit amount, that ultimately leave one or more trusts overfunded for one beneficiary and underfunded for another. Usually the scenario involves a spouse from a second or third marriage receiving more or less money than the children from a first marriage. Many clients have documents drafted with old governing laws. For example, the unified credit amount is currently $5.34 million, indexed for inflation. As this number increases, bequests in trust may often be under or over funded, causing unnecessary estate, gift or income tax consequences. Such problems are prevalent where a client refuses to update his or her previously drafted documents. 3

10 The litigation attorney may be able to show that the errors in the drafting document error the fault of an unsophisticated drafting attorney. A prudent attorney addresses this issue with annual client updates with existing clients. It is the lackadaisical attorney who continues to leave client documents in limbo where this issue becomes a matter that the litigation attorney can pounce on. The litigation attorney is usually better suited to know whether a cause of action may exist for such poor planning and the drafting attorney is then able to collaborate and brainstorm with the litigation attorney as to what may have been a better plan of action with regards to the decedent s trust document. iii 3) The conflicting pre-nuptial agreement. This scenario occurs because according to a married couple s pre-nuptial agreement, one spouse was to receive a benefit upon the other s death; however, the original drafting attorney never included the corresponding provision in the estate planning documents of either of the spouses, ultimately precluding one spouse from a very generous benefit that he or she expected. The institution of marriage has changed dramatically. Today, the divorce rate is rising, while also, a greater percentage of the population is on a second or third marriage. As such, today s married couples are consistently entering into pre-nuptial and post-nuptial arrangements. It is the drafting attorney s responsibility to ask clients if they have entered into such arrangement(s), prepare documents providing for the provisions in such arrangements and where necessary, consult the family law attorney that has prepared such arrangement. If the drafting attorney counsels an aggrieved second marriage client following a death, and notices the lack of coordination between pre/post nuptial arrangements and the estate planning documents, the litigation attorney 4

11 should be consulted immediately before assets are distributed. The litigation attorney will know what cause of action to bring, and the drafting attorney will know the holes in the original estate planning documents for the litigation attorney to attack. iv 4) The know-it-all. This scenario occurs because one sibling bullies the other siblings following the death of the second parent. Either a sibling threatens to sue the other siblings or starts to take assets without the consent of the other siblings. The drafting attorney happens to have a client consultation with a distraught family member who feels bullied by other beneficiaries and/or fiduciaries. Often, the drafting attorney will need the help of the litigation attorney to apply pressure and reason to the situation so as to provide a friendly (or sometimes antagonistic) push back to the bullying beneficiaries and/or fiduciaries. This family situation often produces bad feelings and bad results; however, your client is always the number one priority. It may be that the attorney is defending the reasonable party or the bullying party. It is important that the drafting attorney knows when to call on the litigation attorney before things get ugly. The litigation attorney is best suited to help the client enforce his or her rights to the assets, and probably has more experience consoling and reasoning with the aggrieved party in this situation. v 5) Substance abuse. Usually, this scenario occurs because the family is concerned that one of the beneficiaries has a substance abuse problem and will not be able to handle the assets; however, a parent, who is the testator/testatrix or grantor/settlor, it may be that the parent or the trustee/executor has the substance abuse problem, 5

12 While the drafting attorney can draft around beneficiaries who are known to have substance abuse problems during the lifetime of the grantor/settlor or testator/testatrix, upon the client s death, when the assets are to be distributed pursuant to the terms of the documents, the distributions may be years later and circumstances change, sometimes for the worst. The litigation attorney s role here is to protect the assets from the worrisome beneficiary and protect the beneficiary from his or her self: is it time to Baker Act the beneficiary or stage an intervention? The drafting attorney may have little to no experience in this area and thus the litigator needs to become co-counsel. The biggest worry is that after distributing all of the assets, including the assets to the problem beneficiary, the beneficiary may later find sobriety (or other epiphany/ cometo-jesus moment) and sue the drafting attorney for letting him or her plunder his or her inheritance. The litigation attorney will have dealt with this situation previously, know how to use the laws in the particular state to protect the beneficiary (from his or her own self-destruction) and understand how to handle the overall family dynamic with regards to the particular situation. vi 6) Family/friend fiduciary. In this scenario, a family friend or advisor is put in charge as the trustee and executor. This scenario occurs because either the decedent did not trust the beneficiaries to cooperate and marshal the assets upon his or her death, or the estate plan was created when the beneficiaries were minors so there were no other qualified individuals to serve as fiduciaries. In either case, the problem is that the decedent named an individual who is unqualified, or even unfit to act in such a fiduciary role, particularly when there are significant assets in play. 6

13 Drafting attorneys often come to the initial client meeting of aggrieved family members and learn that the accountant or family friend is the fiduciary in charge because he or she was the decedent s confidant. Often this fiduciary does not know the children, but does not want to give up his or her role. Why? Either the fees involved are too good to pass up or the decedent had a verbal agreement with the confidant that he or she would serve as a fiduciary, no matter what. Here, the drafting attorney may need the litigation attorney to call on the fiduciary and the fiduciary s attorney to work out a scenario whereby a more qualified person or institution can be brought in or some other arrangement agreeable to the family can be reached. Additionally, where the unsophisticated person is put in charge and begins on an acceptable course of administration, but later gets behind in filings (for example, the tax returns or the annual accountings to beneficiaries), the litigation attorney would also step in to initiate a change. The decedent may have had the best of intentions; however, once the breadth and depth of the work involved is realized, suddenly, the named fiduciary is not the best choice. The drafting attorney will not have all the resources nor know of all the administrative hurdles to jump through in order to replace the fiduciary; the litigation attorney will understand state law and what course of action to take. vii 7) Major drafting errors. This scenario occurs because a decedent had an estate plan either drafted online or by an attorney who does not specialize in estate planning. The drafting attorney can spot the errors, and then bring in the litigation attorney to organize a plan of attack: is court action necessary; will all of the beneficiaries and fiduciaries agree to a certain course of action? This scenario represents the most common way for the drafting attorney to start a beneficial 7

14 relationship with the litigation attorney. The drafting attorney can help the litigation attorney and then assist when the aggrieved beneficiaries later need their own estate planning documents drafted or other necessary services. Another key in this scenario is that if an older client engages the drafting attorney during his or her life with badly drafted documents, a new plan must be created as soon as possible. For example, if the client dies during the new engagement with the old documents in place, his or her beneficiaries may initiate litigation with the new drafting attorney under the pretenses that the new attorney should have recognized the old documents were bad and immediately created a new plan, no matter how new the engagement. Often, the new drafting attorney can prevail, showing that the client was slow to move the engagement forward; however, the drafting attorney will have been dragged through the litigation mud in the meantime It behooves drafting attorneys to immediately recognize the severity of the situation and move quickly to create new documents. The beneficiaries will recognize the drafting attorney s attention to the matter and may later applaud the drafting attorney s speed and attention. If the drafting attorney is unsuccessful and the client dies before the documents are signed, a good litigation attorney can help protect the drafting attorney. viii 8) The Snowbird. The final scenario occurs when clients from a northern state move to a southern state, with advantageous tax laws, for winters or permanently. If the former state law is irrelevant and the decedent has old documents but is properly considered to have lived out the rest of his or her life in the new state, no problems may exist. Issues arise when the decedent had sufficient ties to the prior state to be deemed 8

15 a domiciliary or resident of such former state, in which case the litigation attorney may need to be consulted, especially a litigation attorney who practices in the former state. Some states, including New York, may assert issues such as domicile in that former state for state income and inheritance and/or estate tax issues. Property may need ancillary administration in a host of other states. While ancillary administration issues and laws of states are outside the scope of this article, the prudent drafting attorney must find the right people in order to properly devise property left in the former state. The litigation attorney may have work to do in order to argue that the decedent that did not have significant ties to the former state in order to avoid the tax issues being litigated and collected by the former state. This is a good thing for the drafting attorney because, under this set of facts, the drafting attorney is able to use contacts in other states in order to properly close the estate. This opens up a whole new world of cross state referral sources and communications for the drafting attorney. ix B) Conclusion The scenarios previously presented are ripe for collaboration between the drafting and litigation attorneys. When the drafting attorney his little to no experience as a litigator, a do-it-yourself approach can prove problematic and only leads to a litigator eventually getting involved, so why not be proactive and collaborate? i Michael Sneeringer was admitted to the Florida Bar in He practices in the areas of estate planning, probate administration, tax and asset protection planning at the Law Offices of Nelson & Nelson, P.A. in rth Miami Beach, FL. He was recently awarded a fellowship by the Real Property, Probate and Trust Law Section of the Florida Bar. He can be reached at michael@estatetaxlawyers.com. ii For additional resources regarding undue influence, see Kirch, Balancing Discretion to Give and Undue Influence Concerns, 38 EST. PLAN J. 28 (Aug. 2011). iii For articles discussing the transformation of laws and how estate planners can plan under uncertainty, see generally Franklin & Law, Portability s Role in the Evolution Away from Traditional By-Pass, 37 EST., GIFT & TR. J. 135 (Mar. 2012); Scroggin, Estate Planning to Cope with the Current Legislative Uncertainty, 34 EST. PLAN J. 10 (May 2007). 9

16 iv For another resource on the topic of family law pitfalls and estate planning, see Pankauski, When Worlds Collide: The Interplay Between Family Law and Probate Administration, 27 PROB. & PROP. 59 (Jan./Feb. 2013). v For articles addressing the family dynamics associated with estate planning, see Fisher, The Power Tools of Estate Conflict Management- Recharging the Culture of Estate Conflicts, Part 2, 24 PROB. & PROP. 42 (July/Aug. 2010); Fisher, The Power Tools of Estate Conflict Management- Recharging the Culture of Estate Conflicts, Part 1, 24 Prob & Prop 42 (May/June 2010); Folberg, Mediating Family Property and Estate Conflicts-Keeping the Peace and Preserving Family Wealth, 23 PROB. & PROP. 8 (v./dec. 2009). vi For an additional resource on planning for substance abuse issues, see Gassman, Piper & Fala, Prescription to Adapt Estate Plan to an Addicted Beneficiary, 40 EST. PLAN J. 15 (Dec. 2013). vii For more resources on the fiduciary dilemma, see Ebner, Shutting Down a Fiduciary Who is Misusing Trust Assets, 27 PROB. & PROP. 35 (Jan./Feb. 2013) and Llewellyn II, Selecting a Successor Trustee- Why the Usual Suspects May t Be Your Best Choice, 27 PROB. & PROP. 46 (Jan./Feb. 2013). viii For an article addressing the perils of budget conscious estate planning, see Goffe & Haller, From Zoom to Doom? Risks of Do-It-Yourself Estate Planning, 38 EST. PLAN J. 27 (Apr. 2011). ix For a comprehensive article on changes in domicile and its effects on estate planning, see Brogan Jr. & Ross, Changing State of Domicile is Easier Said Than Done, 39 EST. PLAN J. 3 (July 2012). 10

17 IRS Amnesty for Certain US Taxpayers with Offshore Income and Assets David Neufeld 1 On June 18, 2014 the IRS in IR ( Taxpayers/Streamlined-Filing-Compliance-Procedures) modified its Streamlined program for certain US taxpayers who have failed to properly file tax returns or foreign bank account reports (FinCEN 114, formerly TD F ) (FBARs), offering the closest thing to a total amnesty practitioners could have predicted. Those that qualify could find it very beneficial; most significantly the program permits the potential waiver of most or all penalties. Ultimately the determination of whether it is available to those otherwise qualified is based on whether the IRS decides a taxpayer s past non-compliance was willful. Depending on how one guesses the Service will come out on that tells taxpayers what they should do; if they feel they can make a good case for non-willfulness they should embark on this new program, but if not then they might consider either entering the Offshore Voluntary Disclosure Program (OVDP) program, opting out or doing a quiet disclosure. BACKGROUND For years the Service and Treasury have been on a highly publicized crusade to uncover assets of US taxpayers hidden outside the US, the income from which is not reported, and criminally prosecute those non-compliant taxpayers and those bankers and advisors who accompanied or led them down this path. In this context hidden assets include accounts not reported on FBARs, foreign information returns such as the Form 3520 and, in more recent years, the Form Alongside this stick the Service has dangled a carrot of sorts since Those taxpayers who properly voluntarily offered themselves up could get a virtual get-out-of-jail-free card, shielding themselves from criminal prosecution. But, unlike the game Monopoly, freedom is not free; participation in the OVDP (earlier versions were called the OVDI) cost some taxpayers a major portion of those hidden assets through tax payments, special FBAR penalties (now 27.5% or maybe 50% of certain asset values) and the 20% accuracy related penalty and interest. Such is the cost of the certainty of freedom. This is coupled with the FATCA enforcement efforts directed against the foreign banks that, in effect, deputized hundreds of foreign banks to enforce US tax laws and become informants. 1

18 As practitioners became more familiar with the intricacies and nuances of this program they and their clients have gotten comfortable with alternative strategies, including quiet disclosures and opt outs. Quiet disclosures are an attempt to discretely file late returns and forms without exposure to the OVDP penalties or criminal prosecution. This might slip through the audit web or it might not; the Service has said publicly that they are on the lookout for this and recently got significant public relations mileage out of a case where they (and ultimately a jury) came down particularly hard on a taxpayer out of Florida. 2 Opting out is an alternative that might be considered by a taxpayer who believes he or she is not at risk of criminal sanctions and can withstand a full audit. As it turned out, given the typical fact patterns and relatively low revenues of the opt out cases on the one hand and the increased need for personnel to run these lengthy exams on the other, the Service was committing a disproportionately large amount of resources and, with the exception of cases like Zwerner, not getting anything like the revenues they get from the quicker OVDP cases or the explosive press they get from the criminal prosecutions. The Service has recognized that there are clearly those who fall within the technical definition of non-compliant taxpayers but who, for one reason or another, have found themselves in that position without a willful intent to avoid compliance. Thus, in 2011 they began a Streamlined program to allow non-willfully non-compliant non-resident US taxpayers to come clean with far less exposure than otherwise available. But, given limiting definitions, this class turned out to be so small as to provide no measurable relief to the Service, still overwhelmed by not only the large number of OVDP participants but the even more time consuming opt outs. Clearly a better crafted Streamlined program would absorb many of those otherwise opting out, freeing Service personnel to pursue bigger game. And that is what we got on June 18, THE 2014 STREAMLINED PROGRAM Eligibility Criteria If the OVDP is for willfully non-compliant individuals who now wish protection from criminal prosecution and opting out is for those who, notwithstanding their failure to file returns, are comfortable they are not exposed to criminal prosecution and are willing to roll the dice on a body cavity audit and the potential array of income tax non-compliance penalties to avoid the 27.5% of asset value miscellaneous penalty, the Streamlined Program is for those who know and can certify, if necessary, non-willfulness, have not committed tax fraud and otherwise meet the eligibility requirements. (For a helpful guide through the eligibility requirements see the attached flow chart.) 2

19 The Streamlined Program is actually two programs with a common starting point, the Streamlined Foreign Offshore Procedures for those US taxpayers 3 who are non-residents and fit into the program and the Streamlined Domestic Offshore Procedures for those residents who qualify. For non-residents this can mean no penalties whatsoever; for residents the penalty can be a fraction of that to which they might otherwise find themselves subject. Whether resident or not, each have several eligibility criteria to meet but it all starts with one litmus test: was the non-compliance willful? Lack of willfulness, we are told in the IRS announcement, means negligence, inadvertence or mistake or a good faith misunderstanding of the law. 4 Recent cases have determined that reckless disregard and willful blindness is each an indicator of willfulness. 5 Where the line is drawn between willful and non-willful is not clear. Perhaps a depositor with a bank identified as a criminal actor under FATCA might imply willfulness, certainly where there is evidence in the account record for evasive actions like a promise not to tell the U.S. government about the account. Perhaps an inheritor of a foreign account or one named to a foreign bank account by a parent without his own knowledge will be deemed non-willful. Perhaps one born in the US but resident in a foreign country for the bulk of her life might never even think she has a US filing obligation and might be deemed non-willful. Certainly greyer areas exist. In order to invoke this criterion, the taxpayer must certify under penalties of perjury that [m]y failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. (A draft of the requisite form for the non-resident is at for the resident it is at Don t be wrong about willfulness or not only will the taxpayer be rejected from the program but OVDP with its criminal protections will no longer be available and there might possibly be an additional charge of perjury. Other criteria include: getting in their door before the Service or Justice Department is knocking on (or in) yours; there cannot be an active civil audit of any issue, not just the offshore issues, and there cannot be an active criminal investigation. A pre-clearance letter is a necessary first step as anything sent to the government during an investigation would be an admission; not being in the OVDP; being in the OVDP or being in the Streamlined Program are mutually exclusive forever. Enter the Streamlined Program and kiss the possibility of OVDP and its shield against criminal prosecution goodbye; enter the OVDP after 3

20 June 30, 2014 and the Streamlined Program is not available. However those in the OVDP before July 1, 2014 and not yet having executed a closing agreement are in a small club, able to test the OVDP waters and then jump to the Streamlined program. What s unclear is if there is or will be any time limit to this choice. But if one does qualify, the benefits can be huge. It is a virtual amnesty from most if not all penalties for past non-willful indiscretions and apparently a cost the government is willing to bear in order to return non-filers back onto the grid where their compliance can be monitored going forward. Benefits for Residents (the Streamlined Domestic Offshore Procedures) In addition to the eligibility criteria, resident individuals (citizens or permanent residents) or estates otherwise meeting the criteria must have filed a Form 1040 or 1041, as the case may be, for each of the three prior years for which a filing deadline (as extended) has indelibly passed and file an amended Form1040/1041 for each of those years along with all international information returns (e.g. Form 3520, Form 5471 and Form 8938) even if such form would otherwise be filed separate from the return. Any retirement income deferral elections can be made retroactively. Also any unfiled FBARs that have not been filed over the prior six years must be filed. Finally any unpaid tax going back three years, interest and a miscellaneous offshore penalty must be paid upon entrance into the program. The calculation of the penalty is different than its cousins in the OVDP. Whereas in the other programs the penalty is based on the highest value and highest account balances of all assets to which the penalty applies over the entire review period (six years or eight depending on which program), the Streamlined Program for residents looks to the highest aggregate year-end balances and account values over the time period for each relevant foreign financial asset. What this seems to mean, but is far from clear, is that it is an asset by asset review. For instance, for each asset that was excluded from an FBAR one would take the highest year-end value of that particular asset over the prior six years and apply a 5% penalty. 6 If an asset was erroneously excluded from a Form 8938 or the gross income from an asset was not reported (even if the asset had been disclosed), then take the highest year-end value of that particular asset over the prior three years and apply a 5% penalty. Then aggregate all such 5% penalties. tably, the calculation base for this penalty is limited to the undeclared assets rather than all of one s foreign financial assets (whether required to be declared or not) that may have been related to the unreported income or assets, as would occur under the OVDP. However you cut it, this will be well below the total of the 20% accuracy related penalty plus the 27.5% penalty otherwise payable within the OVDP; this may even be a better deal than opting out simply from the perspective of costs 4

21 and fees to get through the audit. Speaking of audit, participants in the Streamlined Program are told that they need not worry that participation will necessarily lead to an exam or other penalties. The only caveat is that the returns are subject to audit in the normal return pool as would any other return that is filed that year. That presupposes that entrance in the Program is not an indicator on the DIF score or otherwise a red flag. Also, if the initial return was filed fraudulently or there are independent items on the return that could generate a deficiency or a penalty then those taxes and penalties can be assessed. Benefits for n-residents (the Streamlined Foreign Offshore Procedures) If residents have it good, non-willfully non-complaint non-residents must be dreaming. If one can pass through the non-residency hoop and has non-willfully failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR... with respect to the foreign financial asset... (emphasis added) then they have no penalties zip zero nada of any kind for anything that appears on the return. They just need to (1) file any delinquent Form 1040/1041 from the prior three years with any delinquent international information return, (2) file any delinquent FBAR from the prior six years and (3) pay all outstanding taxes and interest for the prior three years even if they have been failed to pay tax for many more years than three. Interestingly, although these programs have always been about unpaid taxes in the end of the day, it has always been bootstrapped by the investigation of the failure to disclose foreign financial accounts on the FBAR. Yet these non-resident Streamlined cases might involve only Form 1040 non-filing and might not have even involved a failure to file the FBAR. As with the Domestic program, audits are not automatic but can happen in the normal course of events and deficiencies and penalties can arise for issues developed by the audit other than from the non-filings covered by the program. Determining n-residency Determination of non-residency is similar to but not precisely lined up with the rules of section 911, the foreign earned income exclusion. A U.S. taxpayer is not a resident of the U.S. if (1) he or she is physically outside the U.S. for 330 full days in any one or more of the most recent three years for which the U.S. tax return due date (as extended) has passed and (2) in that time frame the taxpayer did not have a U.S. abode. 5

22 Physically Outside the US To be physically outside the U.S. seems self explanatory and likely poses no real issues except for those on the cusp of meeting or failing to meet this rule. One might be tempted to look for guidance, nevertheless, to the regulations under section 911, but that section refers to days present in a foreign country or countries. Maybe this is a difference without a distinction, but the rules interpreting days present in a foreign country treat days on the ground different than days flying over, for instance, which would not seem to matter to those concerned only with days outside the U.S. The 330 day rule of section 911 applies to a rolling 365 day period, and is not slavishly tethered to the calendar year. It seems the only way to make the rule work for the Streamlined Program would be to interpret the 330 day rule as 330 days out of a calendar year. However, this is not certain. Abode in the U.S. What appears simple is not always so. Clearly, one with an abode in the U.S. is a resident. The Service directs us to Publication 54, a dog eared copy of which (or the digital equivalent) is in the possession of every U.S. expat, for an explanation of the term abode in this context. 7 Abode has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. Abode has a domestic rather than a vocational meaning and does not mean the same as tax home. The location of your abode often will depend on where you maintain your economic, family, and personal ties. 8 The guidance goes further to clarify that section 911 and its regulations would allow that neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual s abode is in the United States. Invoking the section 911 regulations specifically for this purpose highlights the inapplicability of those regulations to the 330 day rule, above. A note on return filing deadlines Throughout this Program timeframes are defined in terms of the last day (as extended) for filing a return. For the Form 1040, that will be April 15 for some taxpayers and October 15 6

23 for others. Still others will have a June 15 testing date. For the FBAR, that will be June 30. Advisors need to be cognizant of these dates in relation to what they tie to. For instance, for 2013 a taxpayer outside the country qualified to file on June 16, 2014 who satisfies the nonresidency rule for 2010 but not for 2011, 2012 and 2013 (remember, this need be met for only one of the three years) would want to keep the filing date for 2013 from passing as long as possible in order to file for the Foreign Offshore Program using the 2010 non-residency dates. Had June 16, 2014 come and gone for that taxpayer without extension he cannot enter the Foreign Offshore Program. A similar analysis might benefit a taxpayer in the Domestic Offshore Program depending on how his year-end account values look for the relevant years for purposes of determining the penalty; in some cases letting a year pass helps, in others it could be devastating. ***** For the right taxpayer the Service has exhibited unusual generosity by waiving most if not all penalties and limiting the liability for past taxes to three years. But a detailed analysis is required to be certain one is the right taxpayer as a mistake can be terribly costly. 1 Law Office of David Neufeld, 5 Vaughn Drive, Suite 201, Princeton, New Jersey (609) , David@DavidNeufeldLaw.com 2 U.S. v. Carl Zwerner, Civ.. 13-cv (S.D. Florida, May 28, 2014): jury verdict for 150% of account values (50% for each of 3 years). The case settled after trial for a lesser figure. 3 Even non-citizen aliens are included in this group if they have a U.S. tax obligation and fail the substantial presence test for one of the prior three years. 4 See, e.g., Cheek v. U.S., 498 U.S. 192 (1991); Income Tax Reg (c). 5 U.S. v. Williams, 489 Fed.Appx. 655, 2012 WL (C.A.4 (Va.)), 110 A.F.T.R.2d , USTC P 50,475 (4 th Cir. 2012); U.S. v. McBride, 908 F.Supp.2d 1186, 110 A.F.T.R.2d , USTC P 50,666 (D. Utah 2012) 6 Although the penalty is based on year-end values, the FBAR and Form 8938 filing requirements are based on thresholds relative to highest values during each year. An analysis must first look to the entire year to determine if a filing is mandated and then, if so, the year end value for the penalty calculation. 7 This author finds it galling that the Service continues to lazily refer taxpayers to Publications and then take litigating positions that such reliance is improper and the Tax Court buys it no less. See, e.g. Bobrow v. Commissioiner, T.C.Memo (January 28, 2014). 8 Pub. 54, page 12. The concept of abode (or in New York, permanent place of abode ) often comes up in the context of state residency (e.g. those who prefer to be state tax-free in Florida rather than state taxed in New York). See Gaied v. New York State Tax Appeals Tribunal, 22 N.Y.3d 592, 6 N.E.3d 1113, 983 N.Y.S.2d 757, 2014 NY Slip Op (2/18/2014). 7

24 2014 Streamlined Offshore Filing Program Eligibility Individual or Estate Streamlined Foreign Offshore Procedures Consequences: 1 File delinquent 1040s/1041s for prior 3 years and make all available elections for retirement income deferrals*** Failure to report income from a foreign 2 File all delinquent international information financial asset ("FFA") or pay the tax; returns (e.g. 5471, 3520, 8938) failure to file int'l info returns; failure to 3 File delinquent FBARs for prior 6 years file an FBAR with respect to FFA was non willful* 4 Pay all tax and interest upon filing the returns 5 penalties of any kind (failure to file, failure to Willing to certify subject to penalties for pay, accuracy related, FBAR) for anything reported perjury that noncompliance was not on the return**** willful 6 automatic audit**** 7 Participation in OVDP (i.e. criminal shield) not permitted t under civil examination for ANY Ineligible Streamlined Domestic Offshore Procedures reason Consequences: 1 File amended 1040s/1041s for prior 3 years with all delinquent international information returns (e.g. 5471, 3520, 8938) and make all available t under Criminal Investigation elections for retirement income deferrals 2 File FBARs for prior 6 years 3 Pay tax and interest; Penalty = 5% of the highest aggregate g year end balance/value of all subject FFAs over the 3/6 year period 4 automatic audit or other penalties In OVDP 5 Participation in OVDP (i.e. criminal shield) not permitted Entered OVDP before July 1, 2014 prepared by David Neufeld, Esq. David@DavidNeufeldLaw.com Princeton, NJ Have not yet received a Closing 2014 David S. Neufeld Agreement US Citizen, Permanent Resident or estate of same Fails to satisfy the Substantial Presence Test during any 1 of most recent 3 years for which filing due date (as extended) has passed Eligible for Streamlined Foreign Offshore Procedures Physically outside the US for at least 330 full days during any 1 of most recent 3 years for which filing due date (as extended) has passed** US abode for any 1 of most recent 3 years for which filing due date (as extended) has passed** Previously filed all 1040s/1041s for each of most recent 3 years for which filing due date (as extended) has passed Eligible for Streamlined Domestic Offshore Procedures Eligible for Streamlined Foreign Offshore Procedures Ineligible * Negligence, inadvertance or mistake, good faith misunderstanding of the law ** These are the non residence requirements, which must operate for both spouses if joint filers. The rules under section 911 are invoked for some parts of this rule but not others. (1) It is not clear if this 330 day rule is the same as the 330 days out of the rolling 365 day period under section 911 or a new rule that is strictly within a calendar year; it appears to be the latter. (2) This rule focuses on days outside the US whereas section 911 refers to days in a foreign country; not the same thing. (3) The definition of "abode" in the section 911 regs are specifically invoked; temporary presence in the US and maintenance of a dwelling in the US do not necessarily mean the abode is in the US. *** Reference to "prior 3 years" or "prior 6 years" means the three or six years immediately preceding for which the filing deadlines as extended have expired. That means if the due date for the immediately preceding year is still open the operative period leapfrogs back to the year before that one. **** There may still be an audit in due course under normal procedures and penalties assessed for other items; also if the original return was fraudulent or the FBAR non compliance willful.