A. Background

Since 2012, US citizens1 living in Canada (and elsewhere outside the US) have had two options to address income tax non-compliance issues: the Offshore Voluntary Disclosure Program (“OVDP“) and the Streamlined filing procedure (“Streamlined“). The more comprehensive OVDP program offers criminal amnesty after pre-clearance, extensive disclosures, and a mandatory penalty payment. Streamlined presents a less onerous path of fewer filings and reduced (or eliminated) penalty. Originally, Streamlined was available only to nonresident taxpayers as defined by the terms of the program.2 On June 18, 2014, the IRS announced modifications to the streamlined filing procedure.3 One modification was the establishment of the “Streamlined Domestic Offshore Procedures.” This program opens the Streamlined filing procedures to US resident taxpayers, and was intended for US resident taxpayers who had failed to disclose offshore assets, but whose failure to disclose had been “non-willful.”4 Our firm wrote about these modifications which can be viewed here.

A second modification was the introduction of a “non-willfulness” requirement for both domestic and offshore streamlined filers. In their streamline submissions, taxpayers must certify that their failure to comply with their (offshore or domestic) obligations was “due to non-willful conduct.” The IRS has issued forms for this certification. Foreign streamline filers useForm 14653. Domestic streamline filers use Form 14654.

On paper, the “non-willful” analysis for domestic filers and offshore filers seems identical.5 However, differences between offshore and domestic streamline filers mean that the “non-willful” standard will apply differently for the two groups. Domestic streamline filers by definition have filed US taxes. They are certifying that their otherwise compliant tax filings were incomplete due to non-willful conduct. Taxpayers residing outside of the United States use the streamline filing procedure to address an overall failure to file US tax returns during a period of non-US residency.6 For these foreign taxpayers, this difference will be reflected in the application of the “non-willful” standard to US and non-US taxpayers.

B. Willfulness in general

Although defined in the negative, the non-willful standard is related to the meaning of “willful” as it appears in both the Internal Revenue Code (“IRC“) and the Bank Secrecy Act (“BSA“). Many provisions of both the IRC and the BSA criminalize or penalize acts or failures to act only if such acts or failures are “willful.” The US Supreme Court has explained that in requiring a willful violation, “Congress… softened the impact of the common law presumption [of knowledge of the law] by making specific intent to violate the law an element of certain criminal tax offenses.”7 Congress and the courts recognize the complexity of the tax law, which cannot realistically be subject to the centuries old precedent that ignorance of a [violated] law does not excuse the violation.

Courts have struggled to determine the precise contours of this more limited “willful” standard. The US Supreme Court observed that willful is “a word of many meanings” with a construction “influenced by its context.”8 In the context of the IRC and the BSA, the US Supreme Court has interpreted a willful violation to be the “intentional violation of a known legal duty.” This means that a willful violation exists if the taxpayer/defendant: 1) knows there is a law prohibiting their (in)action and 2) intends to violate that prohibition.

C. Current application

Domestic Streamline filers have complied with some but not all of their filing obligations. That partial compliance can make it more difficult to claim ignorance of the unmet obligations. The most obvious example is line 7a of Schedule B, which asks a direct “yes” or “no” question about ownership of foreign bank accounts. There are other issues as well. Consulting on US tax issues, deliberately sending assets offshore and signing a US return under penalties of perjury have all been scrutinized by the courts.9 The context will differ in each case, but in general completing a Schedule B and obtaining professional advice are standard features of a domestic taxpayer’s experience.

However, for taxpayers in Canada (and elsewhere outside the United States), “non-willfulness” is not used to distinguish between different obligations. Rather, the issue for these taxpayers is whether they were aware of their general obligation to file US tax returns. This issue was addressed by the US Supreme Court in Cheek.

Cheek was a US resident and a commercial airline pilot charged with willfully failing to file income tax returns for six years. Cheek claimed that his failure to file was not “willful” because during the relevant years he had believed that that the IRC was unconstitutional. He had reached this conclusion through attending a number of “tax protestor” seminars and conducting his own research. Cheek argued he could not “knowingly” violate a law which he believed to be unconstitutional (i.e. not apply). The US Supreme Court agreed, stating very clearly that a taxpayer “cannot be aware that the law imposes a duty on him” if he “is ignorant of [the law], misunderstand[s] the law, or believe[s] the law does not apply to him.”10 Importantly, the US Supreme Court ruled that even a subjective misconception of applicable law can negate a finding of willfulness.

The complexity of US tax law and other factors make it even easier for the US citizen in Canada11 to be confused or misinformed about their US tax obligations.12 This confusion is obviously far more reasonable than subscribing to tax-protestor perspective. Under the Cheek reasoning, this is a crucial factor in assessing “non-willfulness.” US citizens resident in Canada are unlikely to present the issues of partial compliance exhibited in the US-domestic context. Taxpayers and their advisors should be mindful of this distinction in considering recent judicial and administrative developments.

In summary, taxpayers who are non-residents of the US should carefully consider the advantages currently available under the current streamlined procedures. It is also important to realize that as time goes on, the analysis of these factors may produce different results. It is crucial that taxpayers take advantage of favorable factors while they are still available.