Don’t Be Turned Down for Streamlined Procedures When Trying to Resolve FBAR Reporting Problems
If you are thinking about enrolling in the Streamlined Domestic Offshore Procedures (SDOP) or Streamlined Foreign Offshore Procedures (SFOP) in order to resolve delinquent or unresolved FBAR reporting, you will need to be ready to write your “complete story.”
That’s because the IRS has updated its FAQs on the SDOP and SFOP to require that a narrative statement of facts – or “complete story,” as the IRS calls it — be included in each applicant’s documentation. For a breakdown of the new FAQs (published at the beginning of 2016), please see a detailed article I wrote titled New IRS FAQs for OVDP, SFOP and SDOP May Affect Claims of Non-Willfullness.
The question is, therefore, what does “the complete story” actually mean? And how should one go about writing it?
The Building Block of Your Story is Non-Willfulness
Non-willfulness, or the fact that you did not knowingly break the rules, is one of the key factors that the IRS looks at when determining penalties. If you broke the rules unintentionally, or non-willfully, then generally you can expect to receive more lenient treatment. If you broke them willfully then you can expect the IRS to take a less favorable view of the situation, obviously.
The IRS is Looking for Non-Willful Violations in Your Story
Non-willfulness is the prerequisite for entering the SDOP or SFOP. That almost always means that you either did not know about the rules at all or had a flawed understanding of them at the time.
It’s a delicate subject, of course, because now (as you are applying) you do have a better understanding of the rules. Or at least you know that you violated them in the past. After all, that’s why you are writing the statement, right?
When the IRS examiner is reviewing your statement, he or she will be judging the connection between the past and present, between non-willfulness then and the desire to set things right now.
Write your Narrative Statement to Demonstrate Your Non-Willfulness to the IRS
When our firm prepares statements of fact for our clients, we stick to the following framework that includes these six things:
- Write logically using clearly worded section titles and proper formatting.
At the end of the day, this statement of facts, like any written document, should be understood by its readers. The readers in this situation happen to be IRS examiners. They have a particular knowledge base and set of criteria to work with, but they won’t be able to use it (at least not in your favor) if they can’t understand what you’re trying to communicate.
For example, when presenting general background information, we always mark it as an introduction. When describing longer ideas, like employment histories, we try to break them into logical sections, by job role, for example.
- Provide a description of how you acquired or came to own the foreign assets in question.
It should be clear that you acted in good faith at all times by, for example, saving for retirement with non-U.S. mutual funds because those were the most commonplace in your country of residence at the time. (And not as a way to avoid U.S. tax requirements.)
- Describe Your “Ah Ha!” Moment
We include a report of how, exactly, the client misunderstood their reporting obligations in the past and when they realized that there was a problem to be solved. (That’s the “aha” moment.)
For example, most of our clients knew that they needed to report “something” and made efforts to do so. The rules, however, are quite complex and can be a challenge for “civilians” to get 100% right. Improperly filled in forms, misreported assets and general confusion are natural consequences. The key, though, is that the irregularities were unintentional.
- Include a Summary of the Law Surrounding the Issues in the Statement
This summary, which changes from case to case depending on the facts, is the basis for the next point.
- Provide a Legal Analysis of Your Story in Light of the Relevant Law
Here we lay out in specific legal terms why exactly our client is non-willful and why they qualify for the SFOP/SDOP.
- Tie the whole story together in a few words with a concise conclusion
This section is critical, because it brings everything together, and because it is at the end of the document, it is fresh in the examiners’ heads as they switch from “reading mode” to “assessment mode.”
Why You Should Include “extras” the IRS Even Though the IRS Doesn’t Ask
Bear in mind that the IRS is really just asking points #2 and #3 from our list indicated above. We include more points because we want to make it easy for the IRS to see our clients’ non-willfulness. Our years of experience have shown us that clients get much better results following these guidelines.
Think about it for a second. The IRS examiners reading SFOP / SDOP statements of fact are normal people with jobs to do, just like you and me. If they get a statement that makes their job difficult, if they have to struggle to see a pattern and work hard to find a legal argument for non-willfulness, there’s a decent chance they won’t see the points you are trying to make.
On the other hand, if the examiner gets a statement that makes their job easy, if it clearly shows the pattern of non-willfulness and makes the legal argument itself, the examiner will usually see the non-willfulness and decide in your favor.
Your “Complete Story” Should Include All the Facts on Both Sides of the Table
As you can see from our outline above, we include the facts from both sides: our clients’ stories as well as the IRS’ laws. We do that to ensure that there is really only one possible outcome from the SFOP / SDOP statement of facts: the one in our client’s favor.