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IRS Clarifies Requirements for Establishing Non-Willful Conduct in Offshore Disclosure Cases

Voluntary disclosure programs exist for taxpayers that are not in compliance with their tax and information reporting obligations with respect to foreign bank accounts and assets.  The Internal Revenue Service (IRS) recently re-released the certification forms used to apply under one such program, the Streamlined Filing Compliance Procedures (SFCP).  This program allows taxpayers who have previously (and non-willfully) failed to file or pay tax on foreign financial assets to come into compliance without the steep penalties applicable under the traditional Offshore Voluntary Disclosure Program (OVDP).  The revised forms require a detailed narrative explaining that the failure to report and pay the tax was not due to willful conduct.  Applications without the necessary details will not be accepted.


The United States taxes income earned anywhere in the world, including interest earned on foreign bank accounts.  The United States also requires U.S. citizens and residents to file various information reporting returns disclosing certain interests in and transactions with foreign entities, receipt of certain foreign gifts, and financial interests in any accounts held with a foreign financial agency if the aggregate of the foreign accounts exceeds $10,000.  This last requirement is satisfied by filing a Report of Foreign Bank and Financial Accounts (FBAR).

The consequences for failing to file an FBAR can be steep, ranging from a civil penalty for non-willful failure to file of $10,000 per year, to criminal penalties of $500,000 and/or up to 10 years in prison.  The civil penalty for willful failure to file is the greater of $100,000 or 50 percent of the account balance, and the general criminal penalties include a $250,000 fine and/or up to five years in prison (increasing to 10 years in prison and/or $500,000 if the violation was part of greater criminal activity).

Before the creation of voluntary disclosure programs, taxpayers that had failed to file FBARs and other required information returns might have chosen not to come forward because the risk of detection was low and the cost of compliance was high.  This situation changed in 2009, when the IRS created the first disclosure program providing rules for taxpayers to come into compliance and achieve closure and finality.  A second disclosure program was announced in 2011.  Based on the success of these first two programs, the current OVDP was implemented in 2012 and remains ongoing.  Under the OVDP, a taxpayer is required to file all required tax and information returns for the prior eight years, and pay tax, interest and a 20 percent penalty on any unreported amounts.  In lieu of all other penalties that might apply, the taxpayer is also required to pay a penalty equal to 27.5 percent (or 50 percent with respect to accounts held with certain financial institutions) of the highest aggregate value of offshore holdings that are related to the taxpayer’s non-compliance.  

Streamlined Filing Compliance Procedures

One criticism of the voluntary disclosure programs was that they did not meaningfully differentiate between willful and non-willful actors.  This resulted in potentially steep penalties for taxpayers who inadvertently and unknowingly failed to meet their U.S. tax filing and reporting obligations.  The IRS attempted to address this issue in the most recent OVDP by concurrently announcing the SFCP.  However, as originally announced in June 2012, the SFCP was available only to non-resident, non-filer U.S. taxpayers, and the strict requirements disqualified many taxpayers that had not engaged in willful conduct.

In June 2014, the IRS announced that it was revising the SFCP to remove many of the strict requirements and was expanding the program to both resident and non-resident U.S. taxpayers.  Two sets of procedures were announced depending on residency status: Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.  Unlike the OVDP requirements, the SFCP filing requirements extend to only the prior three years for tax returns and six years for FBARs.  In addition to paying any additional tax and interest due for this shortened period, the taxpayer must sign a statement certifying that (1) he or she is eligible for the streamlined procedures; (2) all required FBARs have been filed; and (3) the failure to file tax returns, report all income, pay all tax and submit all required information returns, including FBARs, was not due to willful conduct.  If these requirements are met, a taxpayer filing under the domestic procedures is liable for a 5 percent penalty (as opposed to 27.5 percent or 50 percent under the OVDP), and a taxpayer filing under the non-resident procedures is not liable for any penalty.

It appears that, in an effort to obtain the benefit of the significantly reduced penalty under the SFCP, many taxpayers were providing certifications with little or no explanation to support a finding of non-willfulness.  In response, the IRS recently re-released the certification forms to clarify that taxpayers “must provide specific facts on this form or on a signed attachment explaining [their] failure to report all income, pay all tax, and submit all required information returns, including FBARs.  Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief.”  Thus, a complete and accurate statement supporting a finding of non-willfulness is key to gaining entry into the SFCP and paying little or no penalty.

View the IRS’s SFCP webpage.

View the SFCP resident certification form.

View the SFCP non-resident certification form.

© 2022 McDermott Will & EmeryNational Law Review, Volume V, Number 33

About this Author

Astrid B. Owen, International Trust, Tax, Wealth, Attorney, McDermott law firm

Astrid Owen is a partner in the law firm of McDermott Will & Emery UK LLP, based in its London office. Astrid advises internationally based clients and their family offices, trustees and private banks on international trust, tax and wealth transfer issues, with emphasis on Continental Europe, the Middle East, the UK and the US.

+44 20 7577 3486
Andrew R. Roberson tax attorney McDermott Will. Andy handles tax cases in Federal court, United States Tax Court

Andrew R. Roberson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Andy specializes in tax controversy and litigation matters, and has been involved in over 30 matters at all levels of the Federal court system, including the United States Tax Court, several US Courts of Appeal and the Supreme Court. 

Andy also represents clients, including participants in the CAP program, before the Internal Revenue Service Examination Division and Appeals Office, and has been successful in settling...

K. Christy Vouri, tax, international, world, attorney, McDermott Will, law firm

K. Christy Vouri is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She focuses her practice on U.S. and international taxation. Prior to joining McDermott, Christy served as a law clerk to Judge Robert A. Wherry, Jr. in the United States Tax Court.  She is an adjunct professor of tax practice and procedure litigation at the Georgetown University Law Center.