Willful Or Non-Willful? That Is The Question: IRS Rejects Non-Willful Certification

• Published date: 02 September 2022
• Subject Matter: Tax, Income Tax
• Law Firm: Holland & Knight
• Author: Ms Andrea Darling De Cortes, Chad Vanderhoef and Alexander R. Olama

Highlights

• The Internal Revenue Service (IRS) introduced the Streamlined Filing Compliance Procedures (Streamlined Program) for remediating noncompliance for certain non-willful taxpayers with favorable tax and penalty terms.
• As demonstrated in Flint v. United States, the IRS is not bound to accept a taxpayer's self-certification that noncompliance was not willful. Despite tenets of the Streamlined Program, the IRS may open an examination and assess additional tax and civil penalties, as well as investigate potential criminal liability.
• Flint demonstrates the importance of determining whether a taxpayer's U.S. tax and reporting noncompliance was the result of willful or non-willful conduct, which can be difficult given court decisions that have eroded traditional notions of willfulness.

In Flint v. United States, 2022 WL 3593826 (Fed. Cl. 2022), the court held that the executors of an estate could not recover a six-figure "Title 26 miscellaneous offshore penalty" (MOP) the decedent paid to the Internal Revenue Service (IRS) pursuant to an IRS program for non-willful taxpayers known as the Streamlined Filing Compliance Procedures (Streamlined Program) in lieu of other penalties the IRS may have assessed.

Although the Flint case involved breach of contract and illegal exaction claims, it demonstrates that the IRS is not bound to accept a taxpayer's self-certification of non-willfulness and may open an examination and determine additional tax, civil penalties and even criminal liability.

The Flint case also shows that taxpayers should heed to the IRS's warning that they should consult with professional or legal advisers and consider other IRS remedial programs (including the IRS Criminal Investigation Voluntary Disclosure Practice) when they are concerned their failure to report income, pay tax and submit required information returns was due to willful conduct and who therefore seek assurance that they will not be subject to substantial monetary penalties and/or criminal liability.

Streamlined Program in a Nutshell

On Sept. 1, 2012, the IRS introduced the Streamlined Program for remediating noncompliance targeted to certain nonresident U.S. taxpayers who had not previously filed U.S. income tax returns. The commencement of the Streamlined Program was predicated on the IRS's recognition that there should be a less burdensome administrative program available for taxpayers who were mistaken and not willful in their failure to timely file certain income and information returns. Several updates to the Streamlined Program have been implemented, with the most recent 2014 program extending the Streamlined Program to U.S. taxpayers who meet specific non-residency requirements (Streamlined Foreign Offshore Procedure, or SFOP) and to certain U.S. taxpayers who reside inside the U.S. (Streamlined Domestic Offshore Procedures, or SDOP).

Under both the SFOP and SDOP, non-willful taxpayers who are not already under IRS civil or criminal audit are able to remediate their U.S. tax and reporting noncompliance with reduced filing obligations and favorable tax and penalty terms. With the SFOP, taxpayers are generally required to file three years of U.S. federal income tax and relevant international information returns, pay U.S. federal income tax and interest on any previously unreported income for the same period, and file six years of foreign bank account reports (commonly known as FBARs) to report a financial interest or signature authority over foreign financial accounts. No penalties are imposed. With the SDOP, taxpayers have similar filing requirements...