Are OVDP taxpayers seeking transitional treatment in the streamlined procedures going to be held to a different “non-willful” standard than taxpayers entering the streamlined procedures directly?

The vast majority of taxpayers having previously undisclosed interests in a foreign financial account or asset likely believe they are more "non-willful" than not. The issue is whether the IRS will agree.
The certification requires that the taxpayer “provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.”

The ability to prove something that simply did not exist is difficult, at best. How does a taxpayer actually provide “specific reasons” in their certification confirming that they did not know of the FBAR filing requirements? Will the government discount statements by the taxpayer attempting to disprove knowledge as self-serving unless accompanied by objective supporting evidence? What objective evidence might exist to appropriately demonstrate a lack of personal knowledge by the taxpayer about their foreign reporting requirements?

Those directly involved in creating and maintaining the foreign account and assets are the only ones capable of determining whether determining non-willful status. If such status is not supported by sufficient objective facts, consider other methods of coming into compliance, including the OVDP.

The government may have or subsequently receive information that does not support such status. All relevant facts and circumstances must be carefully analyzed before making a determination regarding the submission of a "non-willful" certification requesting participation in the streamlined procedures.

The IRM defines the test “willfulness” in the FBAR context as a determination of whether there was “a voluntary, intentional violation of a known legal duty.” The burden of establishing willfulness is on the IRS and may be demonstrated by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR context, the IRM provides that the only thing that a person need know is that he has a reporting requirement. If a person has that knowledge, the IRM asserts that the only intent needed to constitute a willful violation of the requirement may a conscious choice not to file the FBAR.

Under the concept of “willful blindness,” willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. Should the taxpayer have inquired of their return preparer about the need to report an interest in a foreign financial account? Should the preparer have gone beyond providing a tax organizer that recites the Schedule B reference relating to an interest in a foreign financial account and perhaps explained what types of foreign interests are reportable?

In the FBAR context discussing “willful blindness,” the IRM states:

"An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provide further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file [the FBAR]. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to follow-up on this knowledge and learn of the further reporting requirement as suggested on Schedule B may provide some evidence of willful blindness on the part of the person. For example, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.”

Taxpayers recently attempting to transition from the OVDP into the streamlined procedures are receiving some degree of pushback from the government. Transitional treatment has been denied for many on the basis of “willful blindness” where the government believes the return preparer likely inquired about the foreign account or where the taxpayer simply failed to advise their return preparer of the existence of an interest in a foreign financial account (whether or not the preparer inquired about such an account).

Will a return preparer actually step up and confirm they knew of the existence of a reportable interest in a foreign financial account and to some degree erroneously advised the taxpayer that the FBAR was not required to be filed? Will the IRS somehow punish the preparer who steps up and admittedly gave the wrong advice . . . or no advice . . . or looked the other way . . . when faced with facts that would objectively lead an observer to inquire about the possible existence of a foreign financial account?

Those who are now eligible to transition into the streamlined procedures but came forward to enter the OVDP before the streamlined procedures were revised should be treated fairly and in a similar manner to those who now enter the streamlined procedures directly. The streamlined procedures clearly define the term for “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.” The relatively more culpable standard of “willfulness” or “willful blindness” is not even remotely referenced in the streamlined procedures.

Does the definition of “non-willful” conduct set forth in the streamlined procedures apply . . . or not?  If that definition is not intended to be significantly more user friendly than the historic definitions of “willfulness” and “willful blindness” then why was it included in the streamlined procedures? Can taxpayers rely upon the streamlined procedures if their return preparer declines to confirm a lack of inquiry to the taxpayer about the existence of an interest in a foreign financial account?

Can taxpayers rely upon the streamlined procedures if they simply failed to advise their return preparer of the existence of an interest in a foreign financial account? The IRS IRM affirmatively concludes that “The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.” Does a common sense definition of “non-willful” conduct apply . . . or not? If unable to convince the government of the taxpayers "non-willful" conduct within the streamlined procedures, the taxpayer might  consider litigation. However, in litigation the "jury of your peers" may look more like the 99% of the population who have trouble understanding why anyone would even have an interest in a financial account located in a foreign country.

If, as some believe, the streamlined procedures are being used to entice unsuspecting taxpayers into placing their head onto the FBAR chopping block, the government should be held accountable. However, if, as most believe, the streamlined procedures were designed to provide not quite willful taxpayers an opportunity back into compliance through a simplified and expedited  process, the IRS should respect the vast majority of streamlined submissions (and requests for transitional treatment) and move on !!
http://www.forbes.com/sites/irswatch/2014/08/08/am-i-non-willful-under-the-ovdp-streamlined-procedures/