[International Tax Compliance]
Taxpayer, Was Your Conduct Non-willful?
U.S.taxpayers that have inadvertently failed to report reportable foreign financial assets and income may have the option of the Streamlined Filing Compliance Procedures (Streamlined). The Streamlined Procedures are only available to U.S. taxpayers that have acted non-willfully that have failed to report reportable foreign financial assets and pay all the taxes due with respect to those assets. The individuals and estates cannot be under IRS examination, and they both must have a valid tax identification number.
Individual taxpayers or estates using Streamlined Procedures must be able to certify that their failures to report are related to non-willful conduct. According to IRS: "Non-Willful conduct 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". “Willful is voluntary, conscious, and intentional.” The certification of non-willful conduct to IRS is a written statement signed under penalties of perjury. It certifies the non-willful conduct of the taxpayer with respect to all reportable foreign activities and assets.
IRS provides the following guidance to taxpayers with respect to the explanation of non-willful conduct
- Provide specific reasons and background for the failure to report all income, pay all tax, and submit all required information returns, including FBARs.
- Include the whole story including the unfavorable and favorable facts. Include personal background, financial background, and anything else relevant to the failure to report all income, pay all tax, and submit all required information returns, including FBARs.
- Explanation of the source of funds in all the foreign financial accounts/assets. For example, explain whether the accounts/assets were inherited, whether the accounts/assets were opened while residing in a foreign country, or whether there was a business reason to open or use it.
- Explanation of the taxpayer’s contacts with the account/asset including withdrawals, deposits, and investment/management decisions. Provide a complete story about the foreign financial account/asset.
IRS acknowledges that common situations for taxpayers are that they:
- Failed to disclose their financial interest in or signature authority over a reportable foreign financial account on Form 1040, Schedule B.
- Realized that they owned or controlled a foreign entity (e.g., corporation, trust, partnership, IBC, etc.) and failed to properly disclose reportable ownership and/or control of the entity or transactions with the foreign entity.
- Relied on a professional advisor.
IRS states that there are taxpayers that need protection from criminal prosecution because their reporting failures have been non-willful. The Streamlined Program is designed to assist taxpayers with coming into compliance, and remedy their past mistakes. Its purpose is to provide taxpayers with an option for becoming and remaining compliant. Don’t be a victim of your own making. Consult your tax specialist now.