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Prudence And Caution: The Antidote To The Hazards of Certifying Nonwillfulness Under The Streamlined Procedures

Back on August 13, 2014, the IRS issued an update of the Internal Revenue Manual that sheds some light on what type of submissions might be ripe for audit under the streamlined procedures. For those unfamiliar with the Internal Revenue Manual, it is the “official source of instructions to IRS personnel relating to the organization, administration, and operation of the IRS.”[i] It contains instructions that IRS employees rely upon to carry out their responsibilities, such as procedures for processing and examining tax returns.

The most critical aspect of the update is an instruction that requires submissions containing five or more foreign information returns to be referred for examination.

9. To complete adjustments on Form 1040X filed under the SDO:

6. After making the assessment, refer any case with 5 or more foreign information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621) by e-mailing the CIS ID number to “*LB&I OVDP Compliance” with an explanation that the case is being forwarded due to 5 or more foreign information returns. Enter CIS notes indicating the case was referred to *LB&I OVDP Compliance “5 or more foreign income statements.”

NOTE: The total of 5 forms is a combination of all years filed. For example submissions containing 3 Forms 5471 for 2011 and 3 Forms 5471 for 2012 would be referred since the total is 6. Submissions with a combination totaling less than 5 would not be referred.

What type of foreign informational returns are contemplated by this instruction? The enumerated forms can be grouped into a “catch-all” category for transfers of property or cash to foreign entities or corporations. If there are at least five such returns in the taxpayer’s streamlined submission, then the agent must refer the case to the Large Business and International division of the Service (LB&I).

The purpose of such a referral is not so the taxpayer can be entered into a drawing for a three-day cruise aboard the Disney “Magic.” Instead, it is quite the opposite. It likely means that an examination of the submission is on the horizon. And if you think that the examination will be nothing more than a cursory review of account statements and records, you are sorely mistaken.

No, in order for such an examination to live up to the IRS’s hard-earned reputation as a relentless bloodhound hot on the trail of a pestilent fox, it must be just as probing as a rectal examination. Very simply, the entire submission will be scrutinized, not the least of which will be the nonwillful certification.

And that can be the cause of more than just a little discomfort. Why? Because if the legitimacy of the certification is ever called into question, the submission could be outright rejected. And if the submission is rejected, not only would the taxpayer be deemed ineligible for the streamlined procedures but he would also be ineligible for OVDP.

This is the painful reality (or should I say, “byproduct”) of an amnesty program where the IRS gets to set the rules of engagement. Why? For no other reason than that it is their program. This puts taxpayers in the unenviable position of having only one shot at getting this right. Therefore, the first choice had better be the right choice (no pressure).

Keep in mind that the favorable penalty treatment that has come to be a hallmark of the newly expanded streamlined procedures is limited to those taxpayers who can certify – under penalty of perjury – that their failure to report or pay taxes on their offshore accounts was the result of non-willful conduct.

A submission that has been flagged for review is just as vulnerable as the poor soul running for his dear life down the narrow streets of San Fermin with a raging, twelve-hundred pound bull chomping at his heels. In the same way that a red flag is certain to get the attention of a bull, a submission that is flagged for review is certain to get the attention of an even more intimidating creature: the dreaded IRS revenue agent. And when that happens, what is already an unnerving process will become that much more unnerving.

With the threat of multiple FBAR penalties dangling over the taxpayer’s head like the sword of Damocles, it might seem as though things couldn’t get any worse. Unfortunately, they can. Because the streamlined procedures do not immunize a taxpayer from criminal prosecution, there is a far more dire consequence of drawing the ire of the IRS, one that is as paralyzing to a taxpayer as “he who must not be named”[ii] is to a “muggle”[iii]: a referral to Criminal investigation. To say that a referral alone could turn a person’s world upside down is a complete understatement.

The requirement that submissions containing five or more foreign information returns be referred for examination is a stark reminder of what awaits those who throw caution to the wind and make the submission anyway. That cavalier attitude is unbecoming in today’s environment where the government is aggressively pursuing U.S. taxpayers with undisclosed offshore accounts.

Does the corollary to the rule apply? In other words, does less than five information returns mean that a taxpayer can sit back on his laurels and assume that he will sail through the streamlined process unscathed? A taxpayer who assumes as much might just as well be playing a game of Russian Roulette.

Why? As Jack Townsend, author of Federal Tax Crimes, so eloquently wrote in his blog entitled, “New IRS Internal Guidance on Processing Streamlined Submissions”:

“The returns could be picked up under the regular IRS procedures which, inter alia, score returns for factors unrelated to offshore accounts. Then, once an audit starts, the assumption would be that some level of audit of the certification will take place.”

Mr. Townsend issues a stern warning to taxpayers who might be tempted to make an “aggressive certification of nonwillfulness,” even those that claim to understand their “audit risk factors”:

“The proper way to analyze this is that you should not certify if you are making a false certification or, if you can’t calibrate nowillfulness exactly, a certification of nonwillfulness when the facts put you toward the willful end of the spectrum.”[iv]

One final item highlighted by the IRM update is worthy of noting: if the IRS initiates a civil examination for any year covered by the submission – regardless of whether it relates to undisclosed foreign financial accounts – the taxpayer will be ineligible from using these procedures. For that reason, taxpayers should ensure that they are not at risk for a civil examination for any other reason.

While both scenarios pose significant risk, either one could be avoided altogether by consulting with an experienced tax attorney. Contact the attorneys at DeBlis Law for a confidential consultation.

Original Post By:  Michael DeBlis

[i] Internal Revenue Manual, Wikipedia, (last visited November 2, 2014).

[ii] A reference to Lord Voldemort (a.k.a. “Dark Lord”).

[iii] A reference to a “a person who is born into a non-magical family and is incapable of performing magic.”

[iv] Mr. Townsend makes the following disclaimer: “That is not legal advice to anyone, for I do not provide legal advice on this blog without specific engagement of my services. This is just a cautionary concern that I think readers should consider.”

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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