What Are the Concerns for Taxpayers Considering a Streamlined Filing?

The Internal Revenue Service’s (IRS) streamlined filing compliance procedures provide a way for U.S. taxpayers to mitigate the consequences of failing to disclose their foreign financial assets. Taxpayers who qualify to submit a streamlined filing are not subject to failure-to-file, failure-to-pay or accuracy-related penalties and instead pay a five-percent “miscellaneous offshore penalty” in most cases.

This can significantly reduce the costs of failing to timely file a Report of Foreign Bank and Financial Accounts (FBAR)—and it is the main benefit of submitting a streamlined filing in most cases. But, before submitting a streamlined filing, taxpayers need to ensure that they qualify, and they need to be aware of the potential risks involved.

Do You Qualify to Submit a Streamlined Filing?

The first concern for taxpayers considering a streamlined filing is determining whether they qualify. As discussed below, submitting a streamlined filing when you don’t qualify can have serious adverse consequences. While taxpayers must work with their counsel to carefully assess their eligibility on a case-by-case basis, the general qualifications for submitting a streamlined filing are as follows:

1. Certification of Non-Willfulness

One of the most important aspects of the streamlined filing process is that it requires a certification of non-willfulness. To submit a streamlined filing, a taxpayer must be able to certify that “the failure to report all income, pay all tax and submit all required information returns, including FBARs . . . was due to non-willful conduct.”

The IRS defines non-willful conduct as “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.” If a taxpayer cannot certify as to the non-willfulness of his or her failure to file an FBAR, then the taxpayer may need to consider a voluntary disclosure instead of a streamlined filing.

2. No Pending Audit or Investigation

In order to qualify to submit a streamlined filing, a taxpayer cannot be subject to a pending IRS audit. This is true “regardless of whether the examination relates to undisclosed foreign financial assets.” Taxpayers seeking to submit streamlined filings also cannot be subject to a criminal investigation by IRS Criminal Investigation (IRS CI). The streamlined filing compliance procedures are intended to encourage taxpayers to come forward voluntarily upon realizing that they have made a mistake. Once a taxpayer becomes the subject of an audit or investigation, any disclosures are no longer “voluntary,” and the benefits offered under the streamlined filing program are no longer available.

3. No Prior “Quiet Disclosures”

A “quiet disclosure” involves filing a delinquent or amended return in an attempt to address a previous filing failure without triggering scrutiny from the IRS. Quiet disclosures are generally disfavored, and the IRS makes clear that submitting a streamlined filing does not validate any prior quiet disclosures. While submitting a quiet disclosure does not bar a taxpayer from submitting a streamlined filing, any penalties applied to the violations addressed in the quiet disclosure “will not be abated.”

4. Valid Tax Identification Number

Only taxpayers who have a valid tax identification number are eligible to submit a streamlined filing. For most taxpayers, this is their Social Security number (SSN). Taxpayers who are ineligible for an SSN may be able to apply for an individual tax identification number (ITIN), and it is possible to submit an ITIN application along with a streamlined filing.

5. Specific Requirements for U.S. Residents and Taxpayers Living Abroad

In addition to these four basic eligibility criteria, certain additional criteria apply depending on whether a taxpayer is residing in the U.S. or abroad. The IRS has separately published instructions for U.S. taxpayers residing in the United States (the Streamlined Domestic Offshore Procedures) and those residing in other countries (the Streamlined Foreign Offshore Procedures).

Consequences of Submitting a Streamlined Filing When You Don’t Qualify

For taxpayers who submit a streamlined filing, the risks involved are greater than simply being denied penalty relief. If the IRS rejects a taxpayer’s streamlined filing for any reason, this rejection can lead to a variety of adverse consequences.

Submitting a streamlined filing—even a successful one—does not insulate a taxpayer from facing scrutiny in relation to the taxpayer’s other filings. The streamlined filing compliance procedures apply only to the filings used to disclose offshore accounts and other foreign financial assets (including, but not limited to, FBARs). Thus, if a taxpayer’s disclosure of offshore filing compliance failures raises concerns about other areas of compliance, the taxpayer’s streamlined filing could trigger an audit or examination.

Additionally, the IRS makes clear that returns submitted under the streamlined filing compliance procedures “may be selected for audit under the existing audit selection processes . . . and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.” As the IRS goes on to explain, this means that taxpayers’ streamlined filings “may be subject to  . . . additional civil penalties, and even criminal liability, if appropriate.”

It is also important to note that the IRS does not take taxpayers’ certifications of non-willfulness at face value. The IRS will make its own determination of willfulness, and if it determines that a taxpayer’s failure to timely disclose the taxpayer’s foreign financial assets may have been willful, it will reject the taxpayer’s streamlined filing. In this scenario, the taxpayer’s voluntary disclosure does not provide any protection, and the information contained in the taxpayer’s streamlined filing may be used in support of a civil audit or criminal investigation.

Discuss Your Options with an Attorney at Brown Tax, P.C.

If you are contemplating a streamlined filing and would like to know more about the benefits and risks involved, we invite you to get in touch. We represent high-income and high-net-worth taxpayers in streamlined filing, voluntary disclosure and other high-stakes federal tax matters. To arrange a confidential initial consultation at Brown Tax, P.C., please call 888-870-0025 or contact us online today.