In the right circumstances, joining the streamlined Filing Compliance program to report foreign financial accounts can be a quick and cost-effective way to become fully compliant with IRS requirements. But streamlined filings can be exceptionally risky. We take extra care to ensure that our clients understand the dangers that attend streamlined filings, and that both the letter and the spirt of the streamlined compliance program are fully honored. The key aspect being the form 14653 / 14654 narrative.
INTENTION OF FORM 14653 – 14654 NARRATIVE
Streamlined filings are intended as expressions of good faith by taxpayers who were honestly unaware of the extent of the reporting needed or even the existence of their foreign financial holdings. The IRS and DOJ naturally take a long look at streamlined filings to ensure that the good faith they claim is entirely warranted. When they find that it is not, taxpayers can find themselves open to draconian penalties and criminal prosecution.
Streamlined filings are intended for a narrow, if not uncommon, range of circumstances in which taxpayers are unaware of the nature of their foreign financial holdings. Typically, this involves part of an inheritance, especially one received when the taxpayer was a child. Even when asked directly whether they have any foreign financial accounts to report, such taxpayers may in good faith answer no. The resulting return may be false in that it omits a foreign account, but because it is not willfully so, the omission is not penalized heavily when it is finally acknowledged, nor does it invite criminal prosecution. The streamlined compliance program allows taxpayers to make a credible and well-documented case that positively asserts their non-willfulness when previously failing to report their foreign financial accounts.
THEIR INTERPRETATION OF YOUR FORM 14653 / 14654 NARRATIVE MEASURES WILLFULNESS?
Because demonstrating a lack of willful deception is something like proving a negative, both the IRS and the DOJ scrutinize streamlined filings with extraordinary care. Streamlined filings are only allowed under well-defined conditions; taxpayers should resist the temptation to interpret these conditions too self-servingly.
Even when an account was established without the taxpayer’s knowledge or explicit consent, subsequent actions and certain other factors may be seen to demonstrate knowledge of the account with it a degree of willfulness that obviates a streamlined filing.
These factors may be largely passive, and may well be compatible with a properly documented and fully approved streamlined filing. Such factors include:
- A false answer to the question “Do you have a financial interest in a foreign bank account?”. Found at the bottom of schedule B, most of my self preparing clients don’t particularly remember the answer.
- The account’s behind held by a foreign entity such as a corporation, foundation, or trust, especially when that entity is registered in a location such as Panama or the BVI
- Assignment of a number, nickname, or code name as the account’s sole means of identification
- A request by the taxpayer that any mail or other documentation related to the account be held by the foreign financial institution and not shared with the account’s owner
That last example demonstrates a relationship with the institution at which the account resides, and represents a somewhat more obvious suggestion that the taxpayer knows enough about the specific account in question to have been reasonably held responsible for acknowledging its existence to the IRS. In such a case, it may be difficult to make an affirmative case that the taxpayer declined in good faith to document ownership of the account, and a streamlined filing may be inadvisable. Other factors all but raise a red flag for the IRS and DOJ. These include:
- Movement of money between foreign accounts, especially if money was moved after July 1, 2008
- Deposits into or withdrawals from the account, particularly if those transactions were limited to cash
- False reporting of cash removed from the foreign account and brought into the United States, even if such false reporting is claimed to have been non-willful
- Interaction with representatives of the foreign financial institution hosting the account, regardless of whether such interaction included an explicit request that the account not be revealed to the IRS
These actions demonstrate a familiarity with the overseas financial account that likely precludes a claim of non-willfulness, especially if it involves large sums of money. A streamlined filing that includes any of the above may well encourage an audit of all tax years documented in the filing. If the audit concludes that the taxpayer failed willfully to report a foreign financial account, the consequences can range from severe fraud penalties to criminal prosecution encompassing both the initial failure to report and the false statements that followed.
Even when the dangers are so great and the demands of streamlined filing so clearly delineated, the financial benefits involved can tempt taxpayers into submitting a filing that all but invites disaster. When clients seem intent on shoehorning poor cases for non-willfulness into streamlined filings, we can help save them money and legal trouble by apprising them of both the stakes involved and of the resources available to the IRS and the DOJ when investigating streamlined filings.
Often, this boils down to reminding the client of why they are considering a streamlined filing in the first place: there are no secret bank accounts. Along with the very existence of the foreign financial account in question, the IRS and the DOJ are aware of a surprisingly broad swathe of information related to overseas accounts held by US taxpayers and the extent to which those holdings are in compliance with current tax law. Any government investigation of a taxpayer’s foreign accounts will uncover any communication between the taxpayer and the overseas institution at which the accounts are held. In many cases, since bankers can be fastidious note-takers, investigators may be aware of the details of such communication.
The streamlined filing itself may make a case for willful conduct that some taxpayers may find difficult to overcome. Among other documentation, the filing requires a wide range of records from the foreign bank, including account-opening documents and signature cards. Simply informing an opportunistic client of this fact may be enough to demonstrate that the evidence points incontrovertibly to prior knowledge of the account and to a willful failure to report it sooner.
The streamlined filing program offers generous terms to taxpayers who failed in good faith to acknowledge foreign financial account holdings in past tax filings. It balances this generosity with severe punishments for those who act in poor faith. Taxpayers who wish to submit streamlined filings should know that there is precious little grey area involved. Streamlined filings are regularly examined in minute detail by the IRS and the DOJ, and any statements proven to be false or simply omitted can expose taxpayers to more severe penalties and for a longer list of transgressions.
We help our clients by casting a skeptical eye on their initial claims and reminding them of the burden of proof carried by a streamlined filing, and the consequences for failing to meet that burden. Contact us today if you believe your form 14653 / 14654 Narrative needs to be reviewed. You can also check the IRS FAQs on these forms.