IRS Form 14654 for Streamlined Domestic Offshore Procedures

IRS Form 14654 is probably the most important part of the taxpayer’s voluntary disclosure under the Streamlined Domestic Offshore Procedures (“SDOP”). In this article, I would like to explore the various parts of IRS Form 14654 and explain why this form is so important.

Please, note that IRS Form 14654 was just revised in January of 2015.

SDOP and IRS Form 14654

In June of 2014, the IRS announced the creation of a brand-new voluntary disclosure option for the taxpayers who reside in the United States – SDOP. As part of the disclosure package under SDOP, the IRS required U.S. taxpayers to submit a Certification of Non-Willfulness with respect to the taxpayers’ failure to timely disclose their foreign income and assets. At the end of August of 2014, this Certification became the new IRS Form 14654.

Purpose of IRS Form 14654

IRS Form 14654 constitutes an essential part of SDOP because this is the form used by the taxpayer to certify his non-willfulness with respect to his failure to timely and accurately report his foreign income and assets. Moreover, IRS Form 14654 also functions as a convenient summary of the calculation of the income tax liability as well as the SDOP Title 26 Miscellaneous Offshore Penalty (“Miscellaneous Offshore Penalty”). Finally, IRS Form 14654 allows the taxpayer to make a statement in support of his non-willfulness.

In order to accomplish these multiple tasks, IRS Form 14654 incorporates three different parts: income tax summary, Miscellaneous Offshore Penalty calculation, and the Certification with Explanation of Non-Willfulness.

Let’s take a closer look at each of these three parts of IRS Form 14654.

IRS Form 14654: Income Tax Summary

The very first part of the Certification is with respect to income tax liability. There is a pre-set language in IRS Form 14654 that requires the taxpayer to certify that: he is providing amended tax returns for each of the three most recent years, he filed the original tax returns previously, and he properly calculated his additional tax due with statutory interest on IRS Form 14654.

There is already a self-calculating table in the form that allows the taxpayer to quickly summarize his additional income tax liability with statutory interest per each covered year and the total amount due (which should be included on the checks written to the IRS).

IRS Form 14654: Miscellaneous Offshore Penalty Base

The second part of the certification is concerned with the taxpayer’s calculation of the Miscellaneous Offshore Penalty, or more precisely its penalty base. IRS Form 14654 provides a set of self-calculating tables to be completed by the taxpayer for all of the foreign accounts and other assets subject to the Miscellaneous Offshore Penalty. Each table requires the taxpayer to disclose the financial institution with address and description of the asset, the account number (where applicable), when the account was opened or asset acquired, and the end-of-year balance/asset value in U.S. dollars.

If additional space is needed, my experience has been that it would be best to attach to IRS Form 14654 a detailed statement disclosing all of this information. Note, the attachment should contain the taxpayer’s name, TIN and original signature.

In addition to the Miscellaneous Offshore Penalty’s penalty base calculation, IRS Form 14654 already contains the language which states that the taxpayer already filed his FBARs for the past six years and he met all of the eligibility requirements for SDOP.

IRS Form 14654: Calculation of Payments Due

The next part of the certification requires the taxpayer to summarize all of the payments due – the calculation of the Miscellaneous offshore Penalty, the total due and the total interest due. At the end of this section, the taxpayer should add all of these payments together to equal to the “Total Payment” due.

IRS Form 14654: “Comprehensive Certification” and Explanation of Non-Willfulness

Following the completion of the payment calculations section, IRS Form 14654 turns to the most important part of a SDOP case – the certification of non-willfulness with respect to income, tax payments and information returns.

The actual language for the certification of non-willfulness is already provided by the IRS on IRS Form 14654; this is a standard text that the taxpayer must agree to if he wishes to do a SDOP disclosure (i.e. this language cannot be modified). It is very important for international tax lawyers to discuss this language with their clients to make sure that they understand what they are agreeing to.

In addition to providing the standard certification text, IRS Form 14654 requires the taxpayer to provide a statement of facts and specific reasons for the original failure to report all income, pay all tax and submit all required information returns, including FBARs.

Please, note that the January of 2015 revision of IRS Form 14654 specifically allows the taxpayer to provide the explanation not only on the form itself, but also on a separate signed attachment (this clarified a previous confusion over the statement must be provided on the form only). Moreover, the new revision specifically states that the failure to provide a narrative statement of facts will result in the certification being deemed incomplete and the taxpayer will not qualify for the SDOP penalty relief.

The explanation of non-willfulness is undoubtedly the most important part of IRS Form 14654, because here the taxpayer has a unique opportunity to establish his legal case for non-willfulness. If this explanation is not deemed satisfactory to the IRS, the taxpayer may face willful FBAR penalties, civil fraud penalties and potentially even criminal penalties (see note below on the certification under the penalty of perjury).

In fact, the explanation of non-willfulness is so crucial to the taxpayer’s SDOP case, that I strongly recommend that the taxpayer refrains from completing the Streamlined certification himself or letting his accountant to do it. This is the job only for the taxpayer’s international tax attorney.

IRS Form 14654: Signature under the Penalties of Perjury

The last part of certification requires the taxpayer to sign the Form under the penalties of perjury. By signing IRS Form 14654, the taxpayer is certifying (1) that he is eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed; (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate.

Contact Sherayzen Law Office for Help with IRS Form 14654 and Your Voluntary Disclosure Under the Streamlined Domestic Offshore Procedures

If you wish to do the voluntary disclosure of your foreign accounts under the Streamlined Domestic Offshore Procedures, contact Sherayzen Law Office for professional help. Despite the fact that SDOP only appeared last June and IRS Form 14654 was created at the end of August of 2014, our international tax law firm has already completed SDOP disclosures for a number of our clients, and we can also help you.

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In a previous article, I explained why FATCA Letters mark a critical event for the voluntary disclosure process of a US taxpayer with undisclosed foreign accounts. While I mentioned that the content of a FATCA letter is usually more or less the same, I emphasized that the actual format of a FATCA letter may differ dramatically from bank to bank. With this article, I am starting a series of article devoted to various FATCA letter formats adopted by various banks around the world. Today, I wish to concentrate on the HSBC FATCA Letter.

HSBC FATCA Letter: General Format

HSBC FATCA Letter follows what I call a “reference format”. Unlike the “comprehensive format” usually followed by FATCA letters issued by Swiss banks, the reference format of the HSBC FATCA Letter means that the HSBC FATCA Letter is fairly concise but it references (hence the name) various forms that need to be completed by the HSBC customers.

Basically, this means that the HSBC FATCA Letter itself does not ask any questions, but it acts as kind of a checklist for various supplementary forms that need to be completed by the account holder in order to provide the bank with the information necessary for its own FATCA compliance. Failure to provide such information would result in the bank classifying the US taxpayer as a “recalcitrant account holder”.

An interesting aspect about the format that the HSBC FATCA Letter follows is that some (but not all) of the supplementary forms were developed and modified by the bank for the sole purpose of FATCA compliance. Thus, there are two types of supplementary forms that are referenced by HSBC FATCA letter: US standard forms (W-8, W-9, et cetera) and proprietary forms developed by the HSBC itself (SW, S1, S3, et cetera).

HSBC FATCA Letter: US Supplementary Forms

Similar to every FATCA letter issued by other banks around the world, HSBC FATCA letter references the main relevant forms developed by the US government – Form W8 (usually, W8BEN) and Form W9. Form W9 is of course the critical form that must be provided to a foreign bank in order to verify the US taxpayer’s social security number. Form W8, on the other hand, provides the critical information for the foreign bank for the purpose of tax withholding under relevant tax treaties. It also allows the bank to indirectly confirm the account holder’s non-US tax status.

HSBC FATCA Letter: Proprietary Forms Developed by HSBC

HSBC FATCA letter references a variety of forms developed or modified by HSBC according to FATCA requirements. The most common documents are S1, S2 and S3. Form S1 is basically asks for a government-issued ID establishing non-US status. Form S2 is a copy of Individual Certification of Loss of Nationality (again for establishing the Non-US Citizenship status) which is very relevant in the limited 9(though, rapidly growing) situation where a US taxpayer gives up his US citizenship.

Form S3 is one of the most important forms referenced by the HSBC FATCA letter. Officially titled as “Explanation of a US address and/or US Phone Number”, Form S-1 requires a fairly intrusive explanation of whether the account holder has US phone number and US telephone address, and why. What is very interesting about Form S3 issued by HSBC is that it requires the taxpayer to make a detailed determination whether the substantial presence test has been met. It even contains a fairly detailed explanation of the test itself.

Contact Sherayzen Law Office for Help with HSBC FATCA Letter

If you have undisclosed bank accounts with HSBC (whether Hong Kong, India, or any other country except the United States itself), you should immediately begin the exploration of your voluntary disclosure options before HSBC discloses your account to the IRS.

This is why you will need the professional help of Mr. Eugene Sherayzen, an experienced international tax lawyer who already has helped hundreds of US taxpayers around the world with respect to their US tax compliance. We can also help you!

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Non-Residency Requirement of the Streamlined Foreign Offshore Procedures

One of the key issues facing U.S. taxpayers who wish to use the Streamlined Foreign Offshore Procedures is meeting the non-residency requirement. If the non-residency requirement is not met (and assuming the regular delinquent FBAR submission procedure is not applicable), the U.S. taxpayer faces the less pleasant choice of either following the Streamlined Domestic Offshore Procedures with a 5% penalty, entering the 2014 Offshore Voluntary Disclosure Program with its 27.5% penalty or pursuing an altogether distinct choice of the statutory reasonable cause exception (also known as Modified Voluntary Disclosure or Noisy Disclosure).

In this article, I will focus on outlining the non-residency requirement under the Streamlined Foreign Offshore Procedures. This article is for the educational purposes only; my strong recommendation is to retain an international tax attorney to determine whether your situation meets this non-residency requirement.

General Framework of the Non-Residency Requirement

In order to make sure that you are applying the correct legal test, you need to understand the dual framework of the non-residency requirement. The IRS draws a sharp distinction between two groups of U.S. taxpayers. The first group consists of U.S. citizens, U.S. lawful permanent residents (i.e. the green card holders), and estates of U.S. persons or lawful permanent residents.
The second group consists of the U.S. taxpayers who are not U.S. citizens, U.S. lawful permanent residents, or estates of U.S. persons or lawful permanent residents. A large swath of people (primarily foreign workers and investors) fall under this category. For example, people who came here on the H-1, L and E visas as well as people who are in the process of obtaining their U.S. permanent residency.

Distinct non-residency requirement will be applicable to each group of taxpayers.

Non-Residency Requirement for U.S. citizens, Green Card Holders and Their Estates

In order to meet the non-residency requirement under the Streamlined Foreign Offshore Procedures, individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents:

1. In any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed,

2. Should not have had a U.S. abode, and

3. Should have been physically outside the United States for at least 330 full days.

Neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States. The IRS made it clear that IRC section 911 and its regulations apply for the purposes of determining whether the non-residency requirement was met for the purposes of the Streamlined Foreign Offshore Procedures.

Non-Residency Requirement for Individuals Who are Not U.S. citizens or Lawful Permanent Residents

The key issue for the second group of individuals is understanding 26 U.S.C. 7701(b)(3). In order to meet the non-residency requirement under the Streamlined Foreign Offshore Procedures, individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent:

1. In any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed,

2. Should not have met the substantial presence test under IRC Section 7701(b)(3).

Under 26 U.S.C. §7701(b)(3), an individual meets the substantial presence test if the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier) equals or exceeds 183 days.

The IRS kindly provided this example:

Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States. Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013. The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011. Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.

Contact Sherayzen Law Office for Legal Help with Your Undisclosed Foreign Accounts

If you have undisclosed foreign accounts, contact Sherayzen Law Office. Our experienced international tax law firm has helped numerous clients throughout the world with various types of voluntary disclosures from Modified Voluntary Disclosure to 2009 OVDP, 2011 OVDI, and 2012 OVDP. Our clients can be found on virtually all continents and in all major regions of the world.

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Quiet Disclosure: The Russian Roulette of FBAR Disclosures

There used to be a time when quiet disclosures with respect to offshore income and accounts were routinely recommended by accountants and even attorneys. Even as the tide turned against non-compliant U.S. taxpayers with offshore accounts in 2008-2009 with the spectacular IRS success in the UBS case and the announcement of the 2009 Offshore Voluntary Disclosure Program, these tax professionals persisted in advising their clients to follow the “quiet” course of action. Amazingly enough, even in March of 2014, I still see clients who have been advised to conduct quiet disclosures without adequate assessment of risks that such course of action entails.

In this article, I will argue that the era of quiet disclosures is over and a non-compliant taxpayer who embarks on this course is assuming the risks comparable to engaging in a game of a Russian Roulette with the IRS.

Definition of “Quiet Disclosure”

The definition of what constitutes “quiet disclosure” has changed over time; at some point, there were tax professionals who used it in such as a broad manner as to include something that we would not consider as quiet disclosure today but rather “reasonable cause disclosures” (also known as “modified voluntary disclosures” or “noisy disclosures”).

Today, the term generally refers to disclosures where a taxpayer would file amended returns, pay any related tax and interest (oftentimes, the payment of accuracy-related penalties is included in such a disclosure) for previously unreported offshore income, and file the current year’s information returns without otherwise notifying the IRS.

Note the two critical aspects of this definition that differentiate quiet disclosures from any other types of voluntary disclosures. First and foremost – “without otherwise notifying the IRS”. This is the “quiet” aspect of the disclosure. At no point is the taxpayer notifying the IRS about his non-compliance; he just simply hopes to pay the tax with interest without attracting IRS attention to his prior non-compliance.

The second critical aspect of quiet disclosures is compliance with current year’s information returns (such as FBARs, Forms 5471, et cetera), but not prior years’ information returns. Filing prior years’ information returns would imply providing IRS with evidence of prior non-compliance and, without adequate explanation, a set of penalties may be imposed on the taxpayer. This is why, in a quiet disclosure, the non-compliant taxpayer only files the current year’s FBAR.

Current International Tax Enforcement of FBAR Compliance; Impact of FATCA

It is my argument that, in the current international tax enforcement environment, the quiet discloser strategy is likely to have a counter-productive effect and may actually lead to disastrous results later. So, what is so different about today’s world versus the one in 2007?

Two words summarize the difference: “UBS” and “FATCA”. The IRS victory in the UBS case in 2008 marked a radical change to the worldwide tax compliance and completely overthrew the traditional conception of the bank secrecy laws (at least, with respect to U.S. taxpayers). The IRS proved that it can get to U.S. taxpayers wherever they have their accounts despite the sovereign objections of other countries; most shockingly, the IRS proved it in a country the name of which was synonymous with “bank secrecy” for centuries. This is one of the reasons why the 2009 OVDP, 2011 OVDI and the current 2012 OVDP programs proved to be such a success.

If the UBS case seriously crippled the bank secrecy laws in Switzerland, the enaction of the Foreign Account Tax Compliance Act (“FATCA”) by the U.S. Congress in 2010 dealt a death blow to the bank secrecy laws worldwide with far reaching consequences. FATCA not only swept away the bank secrecy considerations in Switzerland, but the great majority of other jurisdictions such as Liechtenstein, Monaco, Jersey Islands, Lebanon, Panama, the various Carribean islands, and other places where bank secrecy laws protected non-compliant U.S. taxpayers.

Moreover, by turning foreign banks into U.S. reporting agents who voluntarily report information on all of their U.S. accounholders, the IRS is gradually achieving its long-term goal of worldwide tax compliance with only a fraction of the costs that would otherwise be necessary if the IRS were to investigate each bank in the world individually (something that the IRS simply would not have the resources to do).

In such a tax enforcement environment, it is dangerously naive to expect prior FBAR non-compliance would not be discovered by the IRS – an assumption that forms the core of the quiet disclosure strategy.

Swiss Program for Banks; Willful and Criminal Penalties

In addition to the tectonic shifts in the international tax compliance as a result of the UBS Case and FATCA, the U.S. government pushed the concept of the “voluntary compliance” to the extreme through the U.S. Department of Justice (“DOJ”) Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”). In essence, this is a voluntary disclosure program for the Swiss Banks, where the Swiss Banks have to disclose information with respect to U.S. taxpayers in exchange for the DOJ”s promise not to sue them.

There is one particular aspect of the Program that I want to emphasize because of its relevance to the quiet disclosure strategy – the disclosure of U.S. accountholders goes back to August 1, 2008. This means that if a U.S. taxpayer with unreported Swiss accounts from 2008 made a quiet disclosure in the tax year 2009, his former non-compliance will be exposed by the Program.

Not only that, but, at this point, his prior non-compliance is likely to be considered willful and the prospect of gigantic willful civil and criminal penalties becomes almost imminent (especially, if his ability to enter the OVDP is hindered for one reason or another). See, for example, this passage from the FAQ instructions to OVDP: “When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM, the IRS may recommend criminal prosecution to the Department of Justice” (see FAQ 16).

It is important to note that there are very good reasons to believe that the “Swiss Program for Banks” scenario is likely to be repeated elsewhere with uncertain look-back periods.

FBAR Quiet Disclosure Is Likely to Lead to Untenable Willful FBAR Non-Compliance in the Event of IRS Discovery

Now, we are approaching the core reasoning behind my earlier argument that quiet disclosure is similar to playing a Russian roulette. We have already established that the possibility of the IRS discovery of prior non-compliance has become increasingly likely under FATCA. We have also determined that willful failure to file an FBAR under the quiet disclosure strategy may lead to the imposition of willful civil and, possibly, criminal penalties. Finally, we also considered that a third-party disclosure (most likely, a bank that discloses under FATCA or the Program) is likely to prevent the taxpayer from entering the OVDP.

The effect of putting these three propositions together is obvious and explosive at the same time: engaging in a quiet disclosure policy may result in the discovery of prior FBAR non-compliance, such non-compliance is likely to be considered by the IRS as willful, and the taxpayer is likely to lose the safe harbor of the OVDP. The end result may be absolutely disastrous: FBAR willful civil penalties of up to $100,000 per account per year with potential FBAR criminal penalties (huge monetary penalties and incarceration).

The IRS has stated this openly in its FAQ instructions to the OVDP: “Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making ‘quiet’ disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years” (see FAQ #15).

Contact Sherayzen Law Office of Professional Help With Your Offshore Voluntary Disclosure of Foreign Assets and Foreign Income

If you have undisclosed foreign account or other assets, do not fall prey to the Russian Roulette quiet disclosure solution.

Rather, you should contact the international tax law firm of Sherayzen Law Office. We are a team of experienced tax professionals who have an expertise in the voluntary disclosure of offshore assets and income. We can help you.

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IRS 2013 Budget Proposal Emphasizes International Tax Enforcement

Every year, the President has to submit a budget request to U.S. Congress for federal agencies, including the Internal Revenue Service. In February of 2012, the IRS posted the following information regarding its budget.

Administration’s fiscal year (FY) 2013 budget request for the Internal Revenue Service is approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level.

A significant portion of the increase from FY 2012 represents the Administration’s request to restore lost revenue resulting from reductions in IRS funding made over the past two years. This request is designed to provide the resources necessary to administer and enforce the current tax code, implement recent changes to the law to update the Code and serve the American taxpayer in a timely manner.

In FY 2011, the IRS collected $2.415 trillion in taxes, representing 92 percent of federal government receipts. The IRS processed more than 144.7 million individual returns during the 2011 filing season and issued almost 110 million refunds totaling $345 billion.

The IRS consistently achieves a high return on investment for its activities while running a fiscally disciplined operation. In FY 2013, the IRS expects to identify nearly $71 million in cost savings from increased use of electronic return filing, reductions in non-case related travel and streamlining operations.

Enforcement Program

IRS Enforcement Program is projected to receive the lion’s share of the increase. The FY 2013 budget includes $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion in revenue annually at full performance, once new hires are fully trained and develop broader experience by FY 2015. This is a 4.3-to-1 return on investment. The return on investment is even greater when factoring in the deterrence value of these investments and other IRS enforcement programs, which is conservatively estimated to be at least three times the direct revenue impact.

The enforcement budget also includes $200 million in additional examination and collection programs that will generate more than $1.1 billion in additional annual enforcement revenue by FY 2015. Investments such as these in IRS enforcement programs are especially important to further the IRS’ mission of improving tax compliance.

International Tax Compliance Emphasized by the IRS

International tax compliance is specifically emphasized by the IRS. The IRS will continue to address offshore tax evasion by individuals through a combined “carrot and stick” approach – special offshore voluntary disclosure program and increased examinations and prosecutions.

International tax compliance will also concern domestic businesses operating abroad and foreign businesses owned by U.S. taxpayers. In order to ensure business entity compliance, the IRS will provide additional international technical specialists to increase coverage of complex international transactions.

Contact Sherayzen Law Office for Tax Help with International Tax Compliance Issues

If you have any issues regarding international tax compliance with U.S. laws and regulations, contact Sherayzen Law Office. Our experienced international tax firm will review the facts of your case, analyze the available options, propose a concrete plan of action with respect to your U.S. tax compliance issues, and implement this plan (including drafting and completing the necessary tax documents and forms).