Certification of Non-Willfulness (2018) – Tips for Your Offshore Certification

Certification of Non-Willfulness (2018) – Tips & Best Practices

Certification of Non-Willfulness (2018) – Tips & Best Practices by Golding & Golding

Certification of Non-Willfulness (2018) – Tips & Best Practices by Golding & Golding

The IRS Certification of Non-Willfulness (IRS Form 14653 and 14654) is one of the most important aspects of making an IRS Streamlined Offshore Filing Compliance submission.

Certification of Non-Willfulness 

If you are making a Streamlined Foreign Offshore Procedures submission, you use IRS Form 14653; if you are making a Streamlined Domestic Offshore Procedures submission, you use IRS Form 14654.

What Do I Write?

It is very important to understand the basic premise of non-willfulness, in order to understand what facts you may, or may not want to include in your streamlined certification.

The following are a few tips if you are attempting to do this on your own. Please keep in mind that since there is a legal aspect to this submission, you will always want to retain an experienced Streamlined Disclosure attorney to assist you.

With that said, for some our more determined do-it-yourselfers (we get it), you may want to try it yourself. Alternatively, the Attorney fees may just too out of reach at the current time (we get it).

Still, IRS Offshore Voluntary Disclosure is a passion of ours, and the only area of tax law we handle. Therefore, we wanted to at least provide some basics for you, as to what you may consider when preparing your own Certification of Non-Willfulness Statement:

You Cannot Be Even a Little Willful

We understand that common sense would dictate that if a person was willful, then they would not attempt to enter the program – or at least enter it and acknowledge willfulness. But, we have seen that when individuals approach us after being rejected from the program, many of the certification statements have the same problem. The individual has acknowledged that they were willful, but is asking for forgiveness.

If you are willful, you do not qualify for the streamlined program. Thus, you cannot technically draft a certification of non-willfulness. In other words, if you are willful but very, very sorry, you are still willful, and your only option for formalized offshore disclosure is the traditional OVDP.

Do Not Write a Novel

Yes, the certification statement asks for significant facts to substantiate your non-willfulness – which you must provide. But, it is not asking for you to write a novel (no matter how good or interesting your writing is). Typically, you should be able to integrate all of the necessary information for your non-willful certification within a page or so.

Each person’s facts and circumstances are different, but typically no circumstance requires a 10-page summary.

Be Clear and Concise

The IRS agents are overworked and underpaid. If you could find a way to say the same sentence using seven words instead of 15 words, then you should do it. You should do your best to write and rewrite the statement as many times as necessary to get it to its most concise point – while still including all of the necessary information.

If you are submitting your statement after writing it on your first go-round, you should reconsider, and possibly rewrite the statement a few more times before submitting.

Be Respectful

The IRS agents are only doing their job; it is not as if the agents have it out for you. Whether you want to believe that or not, we’ve been doing this for many years, and we can tell you most agents are not gunning to become the head IRS person in charge.

They have a job and they have certain protocols for accepting or rejecting a submission. There is no need to be rude to the agents; rather, be respectful and you will find that being respectful will go a long way (no matter how much you have a distaste for the IRS or the U.S. Government in general)

Review the IRS Form Instructions Before Submitting

The IRS periodically updates the program requirements, and updates the version of the forms. It is important that you have met all the necessary requirements, both substantively and administratively — so that your submission does not get kick-backed unnecessarily.

The IRS is a government agency and not the most well-oiled machine. We have had situations where the IRS will send our client a bill asking for payment of the penalty, even after we have submitted the penalty and the IRS accepted and deposited the check.

In other words, do your best to follow all directions but realize even if you do the IRS may follow-up with issues which you know you have already resolved and handled (and even in these situations, you should try to be respectful – no matter how hard it may be)

Make Sure To Apply To The Correct Streamlined Program

It is important to note, that the distinction between domestic and foreign relates specifically to the residence of the applicant – not the location of the accounts. In other words, whether or not you qualify for Streamline Domestic vs. the Streamlined Foreign is determined by whether you qualify as a Foreign Resident or not.

We hope these tips have helped. We’ve also reproduced a summary of our previous article which details the difference between the two streamlined programs for your review

Summary of Domestic vs. Streamlined Foreign

The IRS Streamlined Filing Compliance Procedures (aka “Streamlined Program”) are comprised of the Streamlined Domestic Offshore Procedures and/or the Streamlined Foreign Offshore Procedures.

International Tax Compliance is a major enforcement priority for the IRS. With the introduction of FATCA (Foreign Account Tax Compliance Act),  more than 100 countries and more than 300,000 Foreign Financial Institutions “FFIs” have agreed to report U.S. Account Holders to the IRS.

Why? because the penalties for failing to comply with even the FBAR Requirements can reach as high as $10,000.00 per account, per year (if you were non-willful) and as high as 100% value of the account if you were willful.

Our International Tax Lawyers represent hundreds of taxpayers annually in Streamlined Domestic Offshore Procedure submissions and Streamlined Foreign Offshore Procedures in over 55 different countries.

The Streamlined Offshore Procedures are a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance before it is too late!

We will provide you a basic summary to help you understand the differences:

Can the IRS Terminate the Streamlined Programs?

Yes. The Streamlined Filing Compliance Procedures can be terminated at any time. While there have been rumblings about the offshore disclosure programs terminating for some time now, it seems to be that the IRS may really be terminating the programs in the near future, as provided by some of the higher-up at the IRS at a recent conference in late 2017.

As a result, we imagine that many individuals will be considering entering the program before it’s too late. Therefore, while we always recommend using an experienced streamlined disclosure attorney to assist you with handling the process, we also like to try to educate individuals – so that if an applicant is going to try to do it themselves, they will at least have the correct information to do so.

Streamlined Filing Compliance Procedures – The Basics

The Streamlined Domestic Offshore Procedures are more common than the Streamlined Foreign Offshore Procedures, simply because the IRS put up many roadblocks to meeting the Foreign Resident requirement for SFOP.

Streamlined Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures are designed for non-foreign residents. In other words, in order to apply to this program, you must be a US resident and not considered a foreign resident. Moreover, the applicant must meet two main requirements.

  • Non-Willfulness
  • Filed Timely Original Tax Returns

Streamlined Non-Willfulness

In order to be non-willful, the individual must show that they…weren’t willful – yes, that’s pretty much the extent of the definition provided by the IRS. In other words, the IRS likes to try to place the burden on you, the individual, to prove that you are non-willful.

In fact, the IRS has gone to great lengths to keep the specific analysis it uses to determine that somebody was willful under lock and key — going so far as fighting it in court. In our experience, we have found that typically, common sense rules dictate.

For example, if you literally had no idea that foreign accounts needed to be reported, and your actions, behavior, and history shows that you did not access the foreign accounts, withdraw any money from them, etc., then chances are you will able to show you were non-willful.

The further you sail away from those shores, the murkier the water becomes, and with it is an increased risk that the IRS may dispute your claim that you are non-willful.

The following are common questions to consider regarding willful vs. non-willful

  • What is your U.S. status?
  • How long have you been in the United States for?
  • How many years have you filed U.S. tax returns?
  • What types of investments do you have overseas?
  • Do you utilize a financial planner?
  • Do you have a CPA or EA?
  • Is your CPA or EA experienced in international tax?
  • Did the CPA or EA send you questions in writing asking about Foreign Accounts or Income?
  • Did you respond truthful to the CPA or EA?
  • Did you complete a schedule B?
  • Are you tax compliant in the country in which the accounts are maintained?
  • Did you have unreported income as well?

These are just some of the many questions you should consider prior to determining whether you were non-willful.

What if I was Willful?

*If you were willful, then you should never submit to OVDP. Unfortunately, there has been an influx of inexperienced attorneys who will prey upon you, and convince you to go streamlined instead of OVDP. They will make it seem that if you only have a small amount of income, or were only noncompliant for a few years, that you can still go streamlined.

This is both improper and unethical, and if you come across an attorney trying to sell you on this false bill of goods, you should contact his or her local state bar association. Click Here for a Case Study Example of what happens when the IRS catches you.

Filed Original Returns Timely

In order to qualify for the Streamlined Domestic Offshore Procedures, you must show that you filed your original returns timely. There is some wiggle room regarding the terminology “timely,” and if you filed your returns, but they were filed late — you should consider having a tax attorney contact the streamlined program directly to assess whether you may qualify despite having filed late original returns.

Streamlined Domestic Offshore Procedures Summary

The Streamlined Program requires the applicant to amend and pay outstanding tax liability for the last three (3) years to include unreported foreign income and unreported foreign accounts that were not previously reported on a U.S Tax Return. It also requires the applicant to file six (6) years of FBARs (FinCEN 114) and pay a (relatively) small penalty which equals 5% of the highest year end value for any given year, unless you qualify as a foreign resident for 330-days, in which you can receive a penalty waiver!

  • Amend the last 3 years of Tax Returns
  • File required forms such as 3520, 3520-A, 5471, 8621, 8865, 8938, etc.
  • File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
  • Take a “snapshot” of the aggregate offshore unreported balances on 12/31
  • Pick the highest year’s 12/31 annual aggregate value
  • Multiply the value by 5%
  • Pay the outstanding Tax, Interest on Taxes due, along with the 5% percent penalty

Streamlined Foreign Offshore Procedures (SFOP)

In order to qualify for Streamlined Foreign Offshore Procedures, you must meet two major requirements:

  • Qualify as Non-Willful; 
  • Meet the 330-Day Foreign Residence Test/Non U.S. Person; and
  • You do not have to have filed all prior year tax returns.

How to Qualify as a Foreign Resident?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three (3) tax years or do not meet the Substantial Presence Test in one of the last three (3) tax years) you may obtain a waiver of all FBAR and FATCA penalties.

IRC 911 (Physical Presence Test vs. Bona-Fide Resident Test)

The Streamlined Foreign “330-day rule,” is a hard and fast rule.

Thus, the Streamlined Foreign “330-day rule” should be distinguished from Internal Revenue Code section 911 which is used by taxpayers trying to claim the Foreign Earned Income Exclusion by showing they qualify for either the physical presence test (330 days) or the bona fide residence test. Thus, even though a person could qualify as a bona fide resident under IRC 911 for the foreign earned income exclusion, it does not mean that they qualify for the streamlined foreign program. 

As provided by the IRS: The discussion of the non-residency requirement for eligibility for the Streamlined Foreign Offshore Procedures refers to IRC § 911 and its regulations.  Does that mean that anyone who is non-resident under IRC § 911 and its regulations is non-resident for purposes of the Streamlined Foreign Offshore Procedures?

*The reference to IRC § 911 and its regulations is only to the parts of those authorities that define “abode,” which are found in IRC § 911(d)(3) and Treas. Reg. § 1.911-2(b).  Non-residency for purposes of the Streamlined Foreign Offshore Procedures is defined in those procedures, and not in IRC § 911 and its regulations.

Streamlined Foreign Offshore Procedures Summary

  • Amend the last 3 years of Tax Returns, or file original returns
  • File required forms such as 3520, 3520-A, 5471, 8621, 8865, 8938, etc.
  • File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
  • Pay the outstanding Tax, Interest on Taxes due, and the penalty is waived

What Forms Must be Reported?

The following is a list of common forms which many people were never aware they had to report, but which the failure to report may lead to extensive fines and penalties:

Reporting Foreign Accounts (FBAR)

There is a lot of information online regarding the FBAR (Report of Foreign Bank and Financial Account Form) due to the extremely high penalties involved with this form. We have written countless articles, which you can find in our International Tax Library, by clicking here

If you are a U.S. Person, it does not matter whether or not you have to file a US tax return to determine if you have to file an FBAR. The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FBAR Form and report all of the accounts.

It does not matter if the money is all in one account, or in 15 different accounts. It also does not matter if the majority of the money is in one account, with minimal amounts of money in the remaining accounts – rather, once you meet the threshold requirements, you have to report all the accounts.

Penalty: The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

Golding & Golding Resources: FBAR FAQFBAR Penalties

FATCA Form (8938)

FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.

Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Golding & Golding ResourcesForm 8938 FAQForm 8938 Penalties

Foreign Gift Form (3520)

If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have the file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).

Penalty: The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Golding & Golding ResourcesForm 3520 Penalties

Foreign Corporation or Foreign Partnership (5471 or 8865)

The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return

Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Golding & Golding ResourcesForm 5471 Penalties

Passive Foreign Investment Company (PFIC)

One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.

As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules)

Penalty: The Penalties for not filing an 8621 run concurrent with the 8938 penalties (see above).

Golding & Golding Resources: Form 8621 PenaltiesPFIC Form 8621 Excess Distribution Calculation

Foreign Trust (3520-A)

A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you and placed $5 million in trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.

Penalty: The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

Golding & Golding ResourcesForm 3520-A Foreign Trust Penalties 

Foreign Real Estate Income

Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.

A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.

PenaltyVaries, depending on the Nature and Extent of the non-disclosure.

Golding & Golding ResourcesForeign Real Estate Income FAQ

Golding & Golding, A PLC

We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Sean M. Golding is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Sean and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an Attorney.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
International Tax Lawyers - Golding & Golding, A PLC

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