Beware…the streamlined disclosure doesn’t work for everyone

Beware…the streamlined disclosure doesn’t work for everyone

Last week I received a call from a friend and colleague who asked if she could refer a new client to me. This person we’ll call Bob, contacted her explaining he was in need of some immediate tax advice regarding his foreign holdings. Although my friend is a well-respected tax advisor with over 15 years of experience under her belt, she is not a specialist in international taxation. And, Bob clearly needed the help of an expert in international taxation. I told her that I always appreciate referrals and to give him my contact info.

Bob called me in a panic regarding some advice he had followed about reporting his foreign accounts. He was a U.S. citizen and for years he had maintained undisclosed accounts outside of the U.S. Two years ago, after reading so much about the pressure the IRS was putting on banks and individuals to come forward, he figured it was now or never.  Bob had heard of the Offshore Voluntary Disclosure Program (OVDP) and thought that may be the way to go. He figured the OVDP penalties would be less than the potential penalties outside of OVDP if he were to be discovered; not to mention the possibility of prison.

He contacted a tax professional and explained his situation and that he was interested in the OVDP. When he eventually met with the tax professional, however, he was advised that the streamlined procedure might be a better route for him because the penalties under the streamlined procedure were substantially less than under OVDP. Under OVDP, the penalties are 27.5% to 50% of the highest value of the undeclared foreign assets, plus any back tax, interest, and penalties. Under the streamlined procedure the penalty is 0% to 5% of the highest value of the undeclared foreign assets, plus any back tax and interest, but no penalties. Bob wasn’t previously aware of the streamlined procedure and was grateful the tax professional brought it to his attention. He took the tax professional’s advice and opted for the streamlined procedure as opposed to the OVDP. With his mind at ease, he was sleeping well once again; until last week, that is.

It turns out that Bob’s panic was justified.

After reading a recent blog, Bob realized he may have made a serious mistake by submitting a streamlined procedure, as opposed to an OVDP. In order to qualify for the streamlined procedure, the failure to comply must have been non-willful. Basically, the taxpayer must have not known about his compliance requirements, had a misunderstanding of the law, or something like that; you can’t qualify for the streamlined procedure if you knew you were supposed to report your foreign holdings and didn’t.

Although it is possible Bob was not properly advised about the non-willful requirement of the streamlined procedure, the truth is that Bob wasn’t totally honest with the tax professional. Bob led him to believe that he didn’t know his foreign holdings needed to be reported to the IRS until just recently, and this wasn’t totally true. Bob became aware of the fact that he was supposed to report his foreign holdings a couple of years before taking part in the streamlined procedure

What Bob didn’t know when he opted for the streamlined procedure, was that under the streamlined procedure the Justice Department and the IRS don’t make any promises that the taxpayer won’t be audited or criminally prosecuted.  Now that many Swiss banks have turned over their records to the U.S. tax authorities, the IRS and Justice Department are looking through the data to ensure that the taxpayers were, in fact, truthful in their streamlined procedure and OVDP submissions. Additionally, the IRS is reviewing the statement of facts taxpayers submitted with their streamlined procedure submissions to ensure that the taxpayer’s actions were, in fact, non-willful. If it is determined they weren’t, they lose the advantages of the streamlined procedure, and can be subject to full penalties and be criminally prosecuted.

While Bob did properly disclose all his foreign holdings in his streamlined procedure submission, he was concerned the IRS may determine his actions weren’t non-willful. This is a real risk for Bob because he had known for several years prior to submitting his streamlined procedure that he should have been disclosing his foreign holdings.

While the streamlined procedure is the right way to go for many taxpayers, it is not for all. Many taxpayers are lured by the streamlined procedure, although they don’t technically qualify, because it sounds like a good idea—it’s faster, easier, and a less expensive than the OVDP—it only works if you are squeaky clean (and Bob wasn’t).

The takeaway is, make sure you are being advised by someone who is an expert in the tax field with which you need assistance. Be completely forthcoming with that tax advisor, so they know how to properly advise you.  Bob now has some decisions to make as to how to proceed, and he could wind up paying much more than had he been forthcoming and entered OVDP from the start.

If you have questions about your international tax matter, including whether you qualify for the OVDP or streamlined procedure, call Esquire Group today.

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