As we set the 2014 tax filing season in the books and turn
towards 2015 tax planning, one area of concern is compliance for those individuals still facing offshore tax issues. Unfortunately, due to attorney-client privilege it would be unethical to disclose the facts and circumstances of particular filings made under the streamline filing compliance procedures.
I would therefore like to highlight a group of U.S. taxpayers with a strong set of facts and circumstances that keep them in the realm of non-willfulness and thus able to obtain compliance through Streamline Filing. These taxpayers are the typical “accidental-American.”
There is no one-size-fits-all definition of an accidental American. General scenarios can be any of the following.
- Taxpayer was born in the U.S. to foreign parents on a work assignment in the United States. This taxpayer left the country shortly after birth, has never returned, and was never told about her or his citizenship by their parents until recently.
- Taxpayer was born abroad to American parents. The taxpayer has always lived in a foreign jurisdiction and considers themselves a citizen of that jurisdiction only.
- Taxpayer’s parent was born abroad to American parents (i.e. grandparents). The taxpayer has always lived in a foreign jurisdiction and considers themselves a citizen of that jurisdiction only.
- Taxpayer was an American citizen but obtained citizenship in a foreign jurisdiction many years ago and was told that she or he lost their American citizenship as a result of obtaining new citizenship.
- Taxpayer’s parents obtained American citizenship when living in the United States. Taxpayer obtained green card status but never applied for citizenship. Taxpayer moved back to foreign jurisdiction and believes they are citizen of only that foreign jurisdiction.
As one can see, there are many different permutations that could lead to a person having American citizenship or residency status and thus an obligation to file tax returns based on worldwide income.
In all of these scenarios the common theme for the taxpayer’s attitude or mental state is negligence. Non-willful conduct is “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 inquiry whether an action or inaction of a taxpayer is willful or non-willful is a facts and circumstances determination that requires diligent and scrupulous judgment.
When conducting a due diligence review of the facts and circumstances, the mental state for knowledge is crucial to making the determination of willfulness versus non-willfulness. The case law is sparse and generally in favor of the IRS as the standard of willfulness has a very low threshold when you factor in willful blindness and conscious avoidance. Thus, one of the stronger scenarios that truly exemplifies negligence and non-willfulness is that of the accidental American.
The facts and circumstances for accidental Americans should easily illustrate non-willfulness in the eyes of the IRS. The certification through IRS Form 14653 will also be relatively straightforward. As with all Streamline Filing certifications, an analysis of each year under the covered period is crucial to demonstrate negligence versus conscious avoidance or willful blindness.
Streamline Filing for those taxpayers in a foreign jurisdiction that meet the non-residency requirements is one of the better voluntary disclosure practice paths to compliance. The program requires filing the last six years of FBAR reports, the last three years of tax returns (whether delinquent or amended), and payment of any unpaid tax plus statutory interest for the three years of returns.
If a taxpayer has filed tax returns in a foreign jurisdiction, it is likely that between foreign tax credits, tax equalization agreements, and/or tax treaty implications there will be little or no tax due to the IRS. Finally, unlike with the Streamline Domestic program, there is no uniform penalty for Streamline Foreign.
The current DOJ Offshore Initiative in conjunction with FATCA has made the world smaller and, as time goes on, taxpayers in foreign jurisdictions will not be able to claim that they were unaware of the filing obligations, at least not under the current case law.
Persons who are in one of the accidental American scenarios and have yet to attain a compliance path, should immediately seek the assistance of a Federally Authorized Tax Practitioner qualified in the area of Voluntary Disclosure Practice.
About Five Stone Tax Advisers
Five Stone Tax Advisers has years of experience negotiating directly with the IRS to get the best possible outcome for you. Our International Tax Advisory and Compliance unit has a team of tax attorneys, certified public accountants and enrolled agents that form a single sourced point of contact that will provide services for all the legal, compliance and financial reconstruction aspects of offshore account cases.
