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Court Opinions – A Year In Review

Several notable court opinions were issued 2016 dealing with a variety of substantive and procedural matters. In our previous post – Tax Controversy 360 Year in Review: Court Procedure and Privilege – we discussed some of these matters. This post addresses some additional cases decided by the court during the year and highlights some other cases still in the pipeline.

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Court Holds that Willful Failure to File FBAR Standard is the Lesser Standard of Recklessness

On December 2, 2016, the US District Court for the Central District of California found that taxpayers who failed to file a Report of Foreign Bank and Financial Accounts (FBARs) for three foreign accounts, one of which, in the court’s view, was intentionally kept secret from all persons except their children, for over a decade were “at least recklessly indifferent to a statutory duty.” Read more about the case here. The court found that the taxpayers were “sophisticated,” pointing to evidence that they ran a successful camera shop, and that they lacked credibility having made several misrepresentations on their failed attempt to apply to the Offshore Voluntary Disclosure Program (OVDP) and for making unbelievable assertions at trial. The court did not apply the heightened standard of willfulness applicable to criminal trials, a violation of a known legal duty, finding that civil trials apply the lesser standard of reckless disregard of a statutory duty. Additionally, the court rejected the defendants’ argument that the government had to show willfulness under the clear and convincing standard of proof and applied the typical civil preponderance of the evidence standard of proof. The taxpayers’ lawyer has stated that they will appeal the decision.

Practice note: Ensuring that OVDP applications are complete and truthful is crucial to their acceptance and, as demonstrated here, can and will be used against the taxpayer in any later proceedings. The taxpayers in this case had a number of factors working against them, and, as shown here, offshore reporting cases will often turn on their own specific facts. As more and more FBAR enforcement cases are being docketed around the country, it will be interesting to see whether reviewing courts will apply a uniform standard for willfulness under the FBAR statute.




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More than 100,000 Taxpayers Become Compliant with Reporting and Tax Requirements, Paying more than $10.3 billion in Taxes, Interest and Penalties

On October 21, 2016, the Internal Revenue Service announced the most current data on the success of its Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures (SFCP) programs. For our prior coverage on the OVDP and SFCP programs please see Offshore Voluntary Disclosure Update and Release of “Panama Papers” May Encourage New Wave of OVDP Submissions.

OVDP program has existed in several iterations off and on since 2009, and the SFCP was made available to non-willful taxpayers in 2014. The programs encourage taxpayers with undisclosed income from foreign financial accounts and assets to become compliant and current with their tax returns and information reporting obligations. The program allows taxpayers to voluntarily disclose foreign financial accounts and assets and pay lower penalties now, rather than risk detection and face more severe penalties and possible criminal prosecution later.

The programs have been successful by all accounts. As of October 21, 2016, 55,800 taxpayers have made disclosures under the OVDP program and have paid more than $9.9 billion in taxes, interest and penalties since 2009. Another 48,000 taxpayers have made disclosures under the SFCP program correcting non-willful omissions and have paid $450 million in taxes, interest and penalties.




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Offshore Voluntary Disclosure Update

The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs in which to report foreign assets and/or income and become compliant with US rules related to the disclosure of foreign assets. One option is the Offshore Voluntary Disclosure Program (OVDP).  Another is the Streamlined Filing Compliance Procedures (SFCP).  SFCP is further bifurcated into two sub-programs—one for US residents (Streamlined Domestic Offshore Procedures or “SDOP”) and one for non-US residents (Streamlined Foreign Offshore Procedures or “SFOP”).  Each program has its own set of tailored procedures and eligibility requirements.

The critical differences between OVDP and SFCP are: (1) the non-willfulness requirement; (2) the look-back period; and (3) the amounts of penalties the US taxpayer must pay.  Specifically, OVDP does not require the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful.  On the other hand, SFCP requires the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful and to also include a narrative explaining such non-willful conduct.  The incentive to demonstrate non-willfulness can be significant.  In general, US taxpayers who enroll in OVDP must pay a 27.5 percent penalty (and in some cases a 50 percent penalty) of the highest aggregate value of undisclosed foreign assets for the OVDP disclosure period (eight years).  However, US taxpayers who enter SDOP must only pay a five percent penalty of undisclosed foreign assets during the disclosure period (three years), and US taxpayers who enter SFOP pay no penalty. (more…)




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IRS Requires “Whole Story” from Taxpayers Seeking to Qualify under Streamlined Filing Compliance Procedures

The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).  One requirement under the SFCP is that that the taxpayer certify that his or her failure to disclose foreign assets was not due to willful conduct.  Before the recent change, the IRS only provided minimal direction, which caused it to receive non-willfulness narratives that did not provide adequate information.  This resulted in certifications that were either questioned or rejected.

On February 16, 2016, the IRS revised the certification forms to include more robust direction and instructed the taxpayer to draft his or her non-willfulness narrative to include the whole story including favorable and unfavorable facts.  A more detailed analysis of the recent changes can be found here.




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