Cheap Shelf Or Top Shelf?

Many people make purchase decisions based on cost, and little else. “Motor oil is motor oil,” they insist. In the minds of many, it is pure folly to pay X dollars per month for auto insurance when another company provides the same service for a mere Y dollars. Or, they ask rhetorically, what moron would pay X dollars per gallon for gasoline when the station a quarter-mile down the road only charges Y dollars?

But, as the corporate shills at Valvoline were quick to remind Earl, cost is only one element in a purchase decision. As many of us know through bitter experience, some insurance companies happily accept your monthly premium payments but strangely disappear when you actually have a claim. And no matter what the good folks in Iowa say, some cars just do not run well on ethanol.

But let’s assume that Earl is something of a wheeler-dealer and he has some unpaid foreign taxes. He’s heard good things about this Offshore Voluntary Disclosure Program, but he soon learns about the mandatory 27.5 percent penalty, and the bloom goes off the rose in very short order. That “ongoing cooperation” provision is also a concern, because although Earl may be a bit parsimonious, he’s certainly no rat.

After a few more clicks on Google, he stumbles across the Streamlined Filing Compliance Procedures, and he can hardly believe his eyes. No mandatory penalty? No ongoing disclosure requirement? Sign me up!

How It Works

As an initial note, understand that the IRS does not offer the SFCP to be merciful. Instead, this process is a vehicle to get as much money as possible as efficiently as possible, plain and simple. To qualify, the taxpayer must:

Be an individual (no LLCs, partnerships, and so on),

Not be being audited,

Owe at least three years of FBAR taxes, and

Not have “willfully” failed to pay them.

Willfulness – “ay, there’s the rub.” This is a subject we’ve touched on before, but as a quick reminder, conduct is arguably not willful if it was based on an honest misunderstanding of the tax law or a good faith belief that no tax was due. Of course, the Service generally maintains that these arguments border on willful blindness.

But back to the process. The three years of new or amended returns must be filed, and the taxes, interest, and penalties must all be paid; these returns should include verbiage like “streamlined foreign offshore” at the top. FBARs for the last six years must also be on file, with the similar “streamlined” designations. Finally, the appropriate certification must be attached, and the IRS typically requires a wet-ink original signature.

Additional requirements apply if the asset is a retirement or savings account. In these situations, the taxpayers must normally submit written requests to elect income deferral, along with a summary of the circumstances.

If this process is not strictly followed, the Service typically throws the amended returns into the general submission bin, and the taxpayer receives no SFCP preferential treatment.


The IRS imposes a flat 5 percent penalty in these cases, using the asset’s highest aggregate value during the three-year period, or whatever the disputed period may be. Effective January 1 of last year, the Service updated and clarified the five percent rule. It applies only to assets that the taxpayer personally controls, like a bank account with signature authority. Furthermore, any asset that was not included on the FBAR or other disclosure is not calculated. And, if there is a question as to residency, the SFCP regulations apply instead of the normal Section 911 test.

If you think that all sounds too good to be true and there must be a catch, you may be right. We’ll look into the potential problem areas in future posts, but in a nutshell, there are several possible issues:

Loss of Foreign Earned Income Exclusion: The Tax Court recently confirmed that late-filed returns often mean a FEIE forfeiture.

Foreign Tax Credit: The same theory applies here. Remember that late-filed SFCP returns are still late-filed returns.

Future Action: This is the big one. Whereas the OVDP basically ends the matter, SFCP participants are at risk for future audits and criminal investigations.

There may also be issues with gift recharacterizations, especially ones that come from a corporation or partnership.

The bottom line is that the SFCP is an ideal path for many taxpayers who simply have a few years of unfiled or incorrect returns. But if your issues go deeper, it may be better to look elsewhere.

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


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