TAXLITIGATOR - Tax Controversy (Civil & Criminal) Report | The difficult will be done immediately, the impossible will take a little more time . . .

Posted by: Taxlitigator | June 12, 2013

Form 8300: Reporting Domestic Currency Transactions

The IRS Small Business/Self-Employed (SB/SE) Division maintains an anti-money laundering (AML) territory manager in each of its 16 Areas, together with 33 AML compliance groups and approximately 350 full-time examiners. IRS Criminal Investigation’s Suspicious Activity Report (SAR) review teams in each of their 35 field offices focus on detecting money laundering activities as well as legal and illegal source tax schemes. There are at least 100 special agents around the country fully devoted to the detection and prevention of money-laundering activities. Tax and money laundering violations are closely related and often involve similar activities. Since laundered funds are rarely reported on tax returns, money laundering is an integral part of many tax evasion schemes.

Money laundering generally involves the placement of funds where cash is converted to monetary instruments deposited in multiple accounts in various financial institutions. These funds are typically layered through a series of financial transactions in an attempt to obscure their origin. Thereafter, the funds are often used to acquire legitimate assets and businesses funding future activities. These separate stages of the money laundering process are connected by the “paper trail” generated by the financial transactions. Money launderers intentionally avoid the reporting and record keeping requirements in an effort to avoid creating the paper trail. It is believed that at least $3 trillion may be laundered annually worldwide. The ability to launder money enables those disguising the source of funds to promote, conceal, and finance their activities and to enjoy their profits without obviously unwanted government interference.

Enactment of the Currency and Foreign Transactions Reporting Act, better known as the Bank Secrecy Act (BSA) in 1970, authorized the Secretary of the Treasury to issue regulations requiring financial institutions to maintain records and file reports on certain financial transactions. The Treasury’s Financial Crimes Enforcement Network (FinCEN) was initially established to provide a government-wide, multi-source intelligence and analytical network to support the detection, investigation, and prosecution of domestic and international money laundering and other financial crimes. Subsequently, its mission was broadened to include regulatory responsibilities. FinCEN currently oversees and implements policies designed to prevent and detect money laundering while using counter-money laundering laws (such as the BSA) to enforce reporting and record-keeping requirements by banks and other financial institutions. FinCEN also provides intelligence and analytical support to other law enforcement authorities. FinCEN concentrates on combining information reported under the BSA with other government and public information which is then disclosed in the form of intelligence reports to the law enforcement community. These reports assist ongoing investigations and help plan future money laundering investigative strategies.

There are different reporting requirements for different types of transactions and for both financial and non-financial institutions. Most reports are filed electronically and coordinated at the IRS Detroit Computing Center in Michigan (although many can be hand-delivered to a local IRS office) where they are entered into the Currency and Banking Retrieval System (CBRS) creating an electronic roadmap for investigations of financial crimes and illegal activities, including tax evasion, embezzlement, and money laundering. Reports are to be entered into the CBRS within 30 days following their receipt and much of this data can be accessed by federal, state, and local law enforcement agencies (subject to disclosure restrictions) for at least 10 years thereafter.

Form 8300 (Rev. July 2012) – Report of Cash Payments Over $10,000 Received in a Trade or Business. The Form 8300 must be filed by each person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions. Transactions that require Form 8300 include, but are not limited to the sale of goods, services or real or intangible property; rental of goods or real or personal property; cash exchanged for other cash; establishment, maintenance of or contribution to a trust or escrow account; conversion of cash to a negotiable instrument such as a check or a bond; negotiable instrument purchases; reimbursement of expenses; making or repaying a loan; or the exchange of cash for other cash. The IRS routinely conducts compliance checks of various cash intensive businesses (check cashers, jewelry stores, diamond merchants, bail bondsmen, etc) in an effort to determine filing compliance. These compliance checks often provide solid leads to taxpayers failing to comply with the reporting of their income and other tax obligations.

A person must file Form 8300 to report cash paid to it if the cash payment is over $10,000; received as one lump sum of over $10,000, two or more related payments that total in excess of $10,000, or payments received as part of a single transaction (or two or more related transactions) that cause the total cash received within a 12-month period to total more than $10,000; received in the course of trade or business; received from the same payer (or agent), and received in a single transaction or in two or more related transactions. A transaction is the underlying event resulting in the transfer of cash. A related transaction includes transactions between a buyer, or agent of the buyer, and a seller that occur within a 24-hour period are related transactions. If the same payer makes two or more transactions totaling more than $10,000 in a 24-hour period, the business must treat the transactions as one transaction and report the payments. A 24-hour period is 24 hours, not necessarily a calendar day or banking day. In addition, transactions more than 24 hours apart are related if the recipient of the cash knows, or has reason to know, that each transaction is one of a series of connected transactions. If more than one cash payment is received for a single or related transaction within a 12 month period, Form 8300 must be filed within 15 days of the date payment is received causing total cash received to exceed $10,000. If the Form 8300 due date (the 15th or last day the form can timely be filed) falls on a Saturday, Sunday, or legal holiday, it is delayed until the next day that is not a Saturday, Sunday, or legal holiday.

“Cash” Defined. For purposes of the Form 8300, “cash” includes U.S. and foreign currency together with cashiers checks, traveler’s checks, money orders and bank drafts that te recipient knows or has reason to know is being used in an attempt to avoid reporting of the transaction under either IRC 6050I and 31 U.S.C. §§ 5331. Cash also includes certain monetary instruments – a cashier’s check, bank draft, traveler’s check, or money order – if it has a face amount of $10,000 or less and the business receives it in a “designated reporting transaction” as defined in Treas. Reg. section 1.6050I-1(c)(iii) (generally, a retail sale of a consumer durable, a collectible, a travel or entertainment activity) or any transaction in which the recipient knows the payer is trying to avoid the reporting of the transaction on Form 8300. A “designated reporting transaction” is generally the retail sale of any of a consumer durable, such as an automobile or boat. Property is generally a consumer durable if it is tangible personal property (not real or intangible property) that is generally suited for personal use; is expected to last at least one year under ordinary use, and has a sale price of more than $10,000 (exclusive of sales related tax obligations); a collectible (such as a work of art, rug, antique, metal, gem, stamp, or coin); or an item of travel and entertainment (if the total sales price of all items for the same trip or entertainment event is more than $10,000).

Cash does not include personal checks drawn on the account of the writer. Cash does not include a cashier’s check, bank draft, traveler’s check or money order with a face value of more than $10,000. When a customer uses currency of more than $10,000 to purchase a monetary instrument, the financial institution issuing the cashier’s check, bank draft, traveler’s check or money order is required to report the transaction by filing FinCEN Form 104, Currency Transaction Report. Cash does not include a cashier’s check, bank draft, traveler’s check or money order that is received in payment on a promissory note or an installment sales contract (including a lease that is considered a sale for federal tax purposes). However, this exception applies only if the business uses similar notes or contracts in other sales to ultimate customers in the ordinary course of its trade or business and the total payments for the sale that the business receives on or before the 60th day after the sale are 50 percent or less of the purchase price.

Cash does not include a cashier’s check, bank draft, traveler’s check, or money order that is received in payment for a consumer durable or collectible, and all three of the following statements are correct the business receives it under a payment plan requiring one or more down payments and payment of the rest of the purchase price by the date of sale, the business receives it more than 60 days before the date of the sale, and the business uses payment plans with the same or substantially similar terms when selling to ultimate customers in the ordinary course of its trade or business.

Cash does not include a cashier’s check, bank draft, traveler’s checks, or money order received for travel or entertainment if all three of the following statements are correct the business receives it under a payment plan requiring: one or more down payments and payment of the rest of the purchase price by the earliest date that any travel or entertainment item (such as airfare) is furnished for the trip or entertainment event, the business receives it more than 60 days before the date on which the final payment is due, the business uses payment plans with the same or substantially similar terms when selling to ultimate customers in the ordinary course of its trade or business.

Taxpayer Identification Number (TIN). Form 8300 must contain the correct TIN of the person or persons from whom the cash was received. If the transaction is conducted on the behalf of another person or persons, TIN of such other person must be provided. If TIN is unknown, it must be requested to avoid potential penalties. There are three types of TINs – the TIN for an individual, including a sole proprietor, is the individual’s social security number (SSN). The TIN for a nonresident alien individual who needs a TIN but is not eligible to get an SSN is an IRS individual taxpayer identification number (ITIN). An ITIN has nine digits, similar to an SSN. The TIN for other persons, including corporations, partnerships, and estates, is the employer identification number (EIN).

The TIN of a person who is a nonresident alien individual or a foreign organization is not required if that person or foreign organization does not have income effectively connected with the conduct of a U.S. trade or business; does not have an office or place of business, or a fiscal or paying agent in the United States; does not file a federal tax return; does not furnish a withholding certificate described in Treasury Regulations §1.1441-1(e)(2) or (3) or 1.1441-5(c)(2)(iv) or (3)(iii) to the extent required under Treasury Regulation § 1.1441-1(e)(4)(vii); does not have to furnish a TIN on any return, statement, or other document as required by the income tax regulations under section 897 or 1445; or in the case of a nonresident alien individual, the individual has not chosen to file a joint federal income tax return with a spouse who is a U.S. citizen or resident.

If the person providing the cash refuses to provide the TIN, the business should inform the person required to provide the TIN that he or she is subject to a penalty imposed by the IRS under Code Section 6723 if he or she fails to furnish his or her TIN; maintain contemporaneous records showing the solicitation was properly made and provide such contemporaneous records to IRS upon request; accompany the incomplete filed Form by a statement explaining why the TIN is not included. If a TIN is not received as a result of the initial solicitation (at the time of the transaction) the first annual solicitation must be made on or before December 31 of the year in which the account was opened (transaction occurred) or January 31 of the following year for accounts opened in the preceding December following the same procedures. If unable to obtain the Taxpayer Identification Number of a customer making a cash payment of over $10,000, the Form 8300 should be filed regardless. However a filer may be able to avoid penalties when the customer refuses to provide a TIN by showing that its failure to file is reasonable under circumstances more fully described in 26 CFR 301.6724-1(e). At a minimum the business should request the TIN at the time of the transaction.

Foreign Transactions. Form 8300 need not be filed if the entire transaction (including the receipt of cash) takes place outside of the United States, the District of Columbia, Puerto Rico, or a possession or territory of the United States. However, Form 8300 must be filed if any part of the transaction (including the receipt of cash) occurs in Puerto Rico or a possession or territory of the United States. Similarly, Form 8300 is not required if the currency is not received in the course of the person’s trade or business, or if received by an institution or casino otherwise required to file either FinCEN Forms 103 or 104.

Filing and Written Statement to be Provided. Form 8300 must be filed within 15 days after the date the cash is received at IRS Detroit Computing Center, P.O. Box 32621, Detroit, MI 48232. E-filing is free, and is a quick and secure way for individuals to file their Form 8300s. Filers will receive an electronic acknowledgment of each submission. A filer confirm that a filed Form 8300 was received by IRS by ending the form via certified mail with return receipt requested or calling the Detroit Computing Center at (800) 800-2877. If a customer (the buyer) about whom the Form 8300 was filed wants a copy of the form, they must contact the filer.

A person must file Form 8300 within 15 days after the date the cash was received. After a business files Form 8300, it must start a new count of cash payments received from that buyer. If a business receives more than $10,000 in additional cash payments from that buyer within a 12-month period, it must file another Form 8300 within 15 days of the payment that causes the additional payments to total more than $10,000. If a business must file Form 8300 and the same customer makes additional payments within the 15 days before the business must file Form 8300, the business can report all the payments on one form. If there are subsequent payments that are made with respect to a single transaction (or two or more related transactions), the person should file the form 8300 when the total amount paid exceeds $10,000. Each time the payments aggregate in excess of $10,000 another Form 8300 must be filed within 15 days of the payment that causes the additional payments to total more than $10,000. A business should keep a copy of every Form 8300 it files and the required statement it sent to customers for at least five years from the date filed. During FY 2011 (the period ending September 30, 2011), approximately 194,366 Forms 8300 were filed.

On Sept 19, 2012, FinCEN announced that businesses are now able to electronically file their Form 8300 using the Bank Secrecy Act (BSA) Electronic Filing (E-Filing) System. E-filing is free, and is a quick and secure way for individuals to file their Form 8300s. Filers will receive an electronic acknowledgment of each submission. Form 8300 can be filed electronically or by mailing the form to the IRS at: Detroit Computing Center, P.O. Box 32621, Detroit, MI 48232.

In addition to filing Form 8300 with the IRS, the business must furnish to each person whose name is required to be included in the Form 8300 a single annual written statement by January 31 of the year following the transaction. There is no particular form for the statement but it must include the name, address, contact person, and telephone number of the business filing the Form 8300, the aggregate amount of all reportable cash the business was required to report to the IRS from the person receiving the statement, and that the business provided this information to the IRS. The statement may only be furnished during January of the following year, not at the time of the reported transaction. Furthermore the statement must be a single statement aggregating the value of the prior year transactions.

A copy of the Form 8300 may be given to the customer as the written statement if the business filed only one Form 8300 for the identified person during that calendar year at issue. Because the single Form 8300 contains the name, address, contact telephone number of the filer, the aggregate amount of reportable cash received (since there is only one transaction, or series of related transactions, the one Form represents the entire aggregate transactions) and informs the notice that the payment(s) are being reported to the IRS, the Form 8300 would be acceptable as written notification. However, if during the calendar year, the filer has transactions with the customer which were included on more than one Form 8300, furnishing copies to the notice of multiple Forms 8300 does not meet the notice requirement because it is not a “single” statement. In this situation, the Form 8300 filer should provide a single written statement for all of the transactions. Although using a copy of the Form 8300 as a statement may be convenient, it may not be advisable because of the sensitive information contained on the form; for example, Employer Identification Number or Social Security Number.

Suspicious Transactions. There may be situations where the business is suspicious about a transaction. A transaction is suspicious if it appears that a person is trying to prevent a business from filing Form 8300; if it appears that a person is trying to cause a business to file a false or incomplete Form 8300, or if there is a sign of possible illegal activity. The business should report suspicious activity by checking the “suspicious transaction” box (box 1b) on the top line of Form 8300. Businesses are also encouraged to call the IRS Criminal Investigation Division Hotline at 800-800-2877 or the local IRS Criminal Investigation unit. If a business suspects that a transaction is related to terrorist activity, the business should call the Financial Institutions Hotline at 866-556-3974. A business may voluntarily file a Form 8300 in those situations where the transaction is $10,000 or less and suspicious. If a business filed a Form 8300 on an individual and checked the suspicious transaction box and a Form 8300 was not otherwise required, the business does not have to inform the individual by January 31 about the fact that it filed Form 8300 because reporting of the suspicious transaction in this instance is voluntary. A business is only required to provide a statement to individuals if the filing of the Form 8300 is required. A business is prohibited from informing the buyer that the suspicious transaction box was checked.

Potential Penalties and Sanctions. Meeting the proper filing and furnishing requirements is very important, since there are potential civil and criminal penalties for failure to file Form 8300. Penalties for violation of the Form 8300 filing and furnishing requirements of Code Section 6050I have been increased by the Small Business Jobs and Credit Act of 2010, which amended Code Sections 6721 and 6722. The amendments apply with respect to Forms 8300 required to be filed and related notices required to be furnished on or after January 1, 2011.

Failure to File – Code Section 6721(a)(1), providing the penalty for failure to file a timely and correct Form 8300, is amended to raise the penalty from $50 to $100. The aggregate annual limitation (ceiling) has been raised in the case of businesses with gross receipts exceeding $5 million from $250,000 to $1,500,000. For businesses with gross receipts not exceeding $5 million the aggregate annual limitation has been raised from $100,000 to $500,000. Code Section 6721(b)(1), which applies when the failure is corrected on or before 30 days after the required filing date, is amended to raise the penalty from $15 to $30. The aggregate annual limitation has been raised in the case of businesses with gross receipts exceeding $5 million from $75,000 to $250,000. For businesses which correct the violation on or before 30 days after the required filing date and also have annual gross receipts not exceeding $5 million, the aggregate annual limitation is raised from $25,000 to $75,000.

Failure to File Intentional Disregard – Code Section 6721(e)(2)(C), the intentional disregard penalty for failure to file a timely and correct Form 8300, provides a penalty of the greater of $25,000 or the amount of cash received in such transaction not to exceed $100,000. There is no aggregate annual limitation (ceiling) for intentional disregard of Form 8300.

Failure to Furnish – The “Failure to Furnish” penalty, Code Section 6722(a)(1), has been raised from $50 to $100 per violation. The aggregate annual limitation has been raised from $100,000 to $1,500,000. In the case of a business having gross receipts not more than $5 million, the aggregate annual limitation is $500,000. If the violation is corrected on or before 30 days after the required furnishing date, Code Section 6722(b)(1), the penalty has been reduced from $50 to $30 and the aggregate annual limitation has been increased from $100,000 to $250,000. In the case of a business which corrects the failure on or before 30 days and has gross receipts not more than $5 million, the aggregate annual limitation is $200,000.

Failure to Furnish Intentional Disregard – Code Section 6722(e), intentional disregard of furnishing requirements, increased the penalty from the greater of $100 or 10 percent of the aggregate amount of the items required to be reported correctly to the greater of $250 per failure or 10 percent of the aggregate amount of the items required to be reported correctly, with no annual aggregate limitation.

An adjustment to the penalties for inflation will be made every five years following 2012. A person may be subject to criminal penalties for the willful failure to file Form 8300; willfully filing a false or fraudulent Form 8300; stopping or trying to stop a Form 8300 from being filed; or setting up, helping to set up, or structuring a transaction in a way that would make it seem unnecessary to file Form 8300 (i.e., breaking up a large cash transaction into small cash transactions). Any person required to file Form 8300 who willfully fails to file, fails to file timely, or fails to include complete and correct information is subject to criminal sanctions as a felony under Code Section 7203. Sanctions include a fine up to $25,000 ($100,000 in the case of a corporation), and/or imprisonment up to five years, plus the costs of prosecution. Any person who willfully files a Form 8300, which is false with regard to a material matter, may be fined up to $250,000 ($500,000 in the case of a corporation), and/or imprisoned up to three years, plus the costs of prosecution pursuant to Code Section 7206(1) and Section 3571 of Title 18 of the U.S. Code.

Form 8300 Assistance. Help in completing Form 8300 (PDF) is available Monday – Friday, 8 a.m. to 4:30 p.m. Eastern time, at 866-270-0733 (toll-free inside the U.S.). The form is available online at IRS.gov and Financial Crimes Enforcement Network website or by telephone at 800-829-3676. Questions regarding Form 8300 can be sent to 8300QUESTIONS@irs.gov.Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business) explains key issues and terms related to Form 8300. Publication 1544 can be downloaded in English or Spanish. For technical questions or assistance on electronically filing Form 8300, please contact the BSA E-Filing Help Desk at 866-346-9478 or via email at BSAEFilingHelp@fincen.gov.

Other Similar Currency and Financial Reporting Requirements. For decades, unreported funds have been laundered through various financial institutions. There would generally be no paper trail within the financial institution other than bank account records, if the money was deposited. Further, there was historically no requirement for banks to report most currency transactions. The BSA authorized the Secretary of the Treasury to issue regulations requiring financial institutions to maintain records and file reports on certain financial transactions. With the enactment of the BSA came the later introduction of the Currency Transaction Report (CTR), Report of International Transportation of Currency or Monetary Instruments (CMIR) and Report of Foreign Bank and Financial Accounts (FBAR, Form TD F 90-22.1). As a result of the BSA, currency transactions began to have a family tree – with all the branches firmly and clearly attached.

Thousands of financial institutions are currently subject to BSA reporting and record keeping requirements, including depository institutions (e.g., banks, credit unions and thrifts); brokers or dealers in securities; money services businesses (e.g., money transmitters; issuers, redeemers and sellers of money orders and travelers’ checks; check cashier’s and currency exchanges); and casinos and card clubs.

Each year billions of unreported funds are laundered through banks and nonbanking financial institutions, such as money servicing businesses, in an effort to make the money appear legitimate or to evade taxes. The IRS’s Anti-Money Laundering team coordinates its efforts with all affected governmental agencies to identify, detect and deter money laundering in furtherance of tax evasion, a criminal enterprise, terrorism, tax evasion or other unlawful activity.

An effective tool for documenting financial crime has been information obtained from banks and other non-banking financial institutions. The family tree of currency transactions began to spread its roots beyond the BSA (1970) with the Anti-Drug Abuse Act of 1986 (which had substantive amendments to Title 31) and the USA Patriot Act in 2001. These Acts require banks and other financial institutions to become even more involved in solving financial crimes by filing various reports with the government including CTRs and SARs. The IRS conducts ongoing outreach efforts with the banking industry and non-banking financial institutions to ensure awareness with the money laundering statutes. The IRS has created relationships across the financial sector, and with other federal and state authorities to combat abusive tax schemes, terrorist financing and money laundering. Various other currency reporting forms and their reporting requirements include:

• Currency Transaction Report (CTR), FinCEN Form 104 (formerly IRS Form 4789) – The CTR must be filed by financial institutions engaging in a currency transaction in excess of $10,000. Transactions (i.e., deposits and withdrawals) do not offset each other. Each financial institution other than casinos (which must instead file FinCEN Form 103 CTRC) must file Form 104 (CTR) with respect to any deposit, withdrawal, exchange of currency or other payment or transfer, by, through or to the financial institution which involves a currency transaction of more than $10,000. Multiple transactions must be treated as a single transaction if made by or on behalf of a single person and if they result in either currency received or disbursed (without offset) by the financial institution totaling more than $10,000 during any single business day. The term “currency” includes coins and paper money of the United States or any other country. The term “transaction in currency” refers to the physical transfer of currency other than through a transfer of funds by means of a bank check, draft, wire transfer or other written order. The CTR must be filed, within 15 days after the transaction, with the IRS Detroit Computing Center, Attn: CTR, P.O. Box 33604, Detroit, MI 48232-5604. The failure to file a CTR, failure to supply information or filing a false or fraudulent CTR is subject to various civil and criminal penalties set forth in 31 U.S.C. §§ 5321, 5322 and 5234. During FY 2011, approximately 14,826,316 CTRs were filed.

The Currency Transaction Report (CTR) came into existence with the passage of the Currency and Foreign Transactions Reporting Act, better known as the BSA in 1970. However, by 1975, only 3,418 CTRs had been filed in the United States. Due to the concern by financial institutions about the Right to Financial Privacy, when the CTR was initially introduced, questionable transactions of less than $10,000 were only reported to the government if a suspicious bank teller called an agent and provided the information. On October 26, 1986, with the enactment of the Money Laundering Control Act, the Right to Financial Privacy was no longer an issue. As part of this Act, financial institutions could not be liable for releasing suspicious transaction information to law enforcement authorities. As a result, CTRs were revised to include a “check box” for suspicious transaction (which remained in effect until April 1996 when the SAR was introduced).

• Suspicious Activity Report (SAR), Treasury Form TD F-90.22.47 – Financial institutions operating in the United States, including insured banks, savings associations, savings association service corporations, credit unions, bank holding companies, non-bank subsidiaries of bank holding companies, Edge and Agreement corporations, and U.S. branches and agencies of foreign banks are required to file an SAR where they know, suspect, or have reason to suspect insider abuse involving any amount (where the institution was used to facilitate a criminal transaction), violations aggregating $5,000 or more where a suspect can be identified, violations aggregating $25,000 or more regardless of a potential suspect, or transactions aggregating $5,000 or more that involve potential money laundering or any violation of the Bank Secrecy Act. SARs must also be filed when transactions are structured as part of a plan to violate federal laws and financial reporting requirements (e.g., classic structuring transactions). The SAR must be filed no later than 30 days after initial detection with the IRS Detroit Computing Center, P.O. Box 33980, Detroit, MI 48232-0980. During FY 2011, approximately 1,446,273 SARs were filed.

• Report of International Transportation of Currency or Monetary Instruments – FinCEN Form 105 (Formerly Customs Form 4797) if funds are accompanied by an individual or if funds are mailed, shipped or received. Each person who physically transports, mails, or ships, or causes to be physically transported, mailed, shipped or received currency or other monetary instruments in an aggregate amount exceeding $10,000 on any one occasion from the United States to any place outside the United States, or into the United States from any place outside the United States must file FinCEN Form 105 (CMIR). A transfer of funds through normal banking procedures not involving the physical transportation of currency or monetary instruments is not required to be reported. The term “monetary instruments” includes coin or currency; traveler’s checks in any form, negotiable instruments (checks and notes) in bearer form, endorsed without restriction, made out to a fictitious payee or otherwise in a form where title passes upon delivery; signed incomplete instruments where the payee is omitted; and bearer stock or securities. Recipients of mailed currency must file the report within 15 days with the Customs Officer in charge at any port of entry or with the Commissioner of Customs, Attn: Currency Transportation Reports, Washington, D.C. 20229; shippers must file the report with the Commissioner of Customs on or before the date of mailing or shipping; travelers must file the report at the time of entry to or departure from the limited status with the Customs Officer in charge. Civil and criminal penalties, including the possible seizure and forfeiture of the funds involved are set forth in 31 U.S.C. § 5321 and 31 C.F.R. 103.57; 31 § U.S.C. 5322 and 31 C.F.R. 103.59; 31 U.S.C. § 5317 and 31 C.F.R. 103.58; and 31 U.S.C. § 5322.

• Report of Foreign Bank and Financial Accounts (FBAR) – Treasury Form TD F-90.22.1. The FBAR must be filed by each U.S. person (citizens or residents of the U.S. and domestic corporations, partnerships, estates and trusts) who has a financial interest in or signature authority, or other authority over any financial accounts, including bank securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. A “financial interest” includes legal or beneficial interests held for such person or others (including non-U.S. persons), joint interests held with others, interests held as the agent, nominee or attorney or in some other capacity on behalf of a U.S. person, and indirect interests held through a corporation, partnership or trust where such person holds at least a 50% interest in the assets or income of such entity. The FBAR must be filed by June 30 of the next calendar year with the Department of Treasury, P.O. Box 32621, Detroit, MI 48232-0621. During FY 2011, approximately 618,134 FBARs were filed (up from 276,386 in 2009).

• Suspicious Activity Report Casino and Card Clubs (SARC) – FinCEN Form 102 (previously TD F 90-22.49). SARCs must be filed with respect to transactions or attempted transactions conducted or attempted by, at, or through a casino, involving or aggregating at least $5,000 in funds or other assets where the casino/card club knows, suspects, or has reason to suspect that the transactions or a pattern of similar transactions involve funds potentially derived from illegal activities. SARCs must also be filed when transactions are part of a plan to violate federal laws and transaction reporting requirements (e.g., classic structuring transactions). The SARC must be filed no later than 30 days after initial detection with the Detroit Computing Center, P.O. Box 32621, Detroit, MI 48232-5980.

• Currency Transaction Report Casino (CTRC) – FinCEN Form 103 (previously IRS Forms 8362). The CTRC must be filed by a casino to report currency transactions aggregating in excess of $10,000 in a gaming day within 15 days after the transaction. Each casino must file FinCEN Form 103 with the IRS Detroit Computing Center for each deposit, withdrawal, exchange of currency or gambling tokens or chips, or other payment or transfer, by, through or to such casino which involves aggregate transactions in currency of more than $10,000. The CTRC must be filed, within 15 days after the transaction, with the IRS Detroit Computing Center, ATTN: CTRC, P.O. Box 32621, Detroit, MI 48232. Civil and/or criminal penalties may be assessed for the failure to file a CTRC or supply information or for filing a false or fraudulent CTRC are set forth in U.S.C. §§ 5321, 5322 and 5324.

• Registration of Money Services Business (RMSB) – FinCEN Form 107 (previously Treasury Form TD F – 90.22.55). Each “money services business”(MSB), except one that is a money services business solely because it serves as an agent of another money services business, must register with the Treasury by filing Form 107. Generally, a MSB includes currency dealers, check cashers who cash checks for a customer exceeding $1,000 in a single day, issuers or sellers of travelers checks or money orders, and money transmitters. See 31 CFR 103.11(n) and (uu) for further definitions of a MSB. Form 107 must be filed within 180 days after the business is established and the registration must be renewed every two years. Form 107 is filed with IRS Detroit Computing Center, Attn: Money Services Business Registration, P.O. Box 33116, Detroit, MI 48232-0116. During FY 2011, approximately 20, 315 Forms 107 were filed.

• Suspicious Activity Report by MSB (SARM) – FinCEN Form 109 (previously Treasury Form TD F – 90.22.56). Form 109 must be e-filed within 30 days after initial detection by a MSB of transactions or attempted transactions conducted or attempted by, at, or through a MSB, involving or aggregating funds or other assets of at least $2,000 in funds or other assets where the MSB knows, suspects, or has reason to suspect that the transactions or a pattern of similar transactions involve funds potentially derived from illegal activities. Form 109 must also be filed when transactions are part of a plan to violate federal laws and transaction reporting requirements (structuring) or when the transaction has no business or apparent lawful purpose and the MSB knows of no reasonable explanation for the transaction following an examination of the available facts. When transactions are identified from a review of records of money orders or travelers checks that have been sold or processed, an issuer of money orders or traveler’s checks is required to report a transaction or a pattern of similar transactions that involves or aggregates funds or other assets of at least $5,000. The Form 109 should be e-filed through the BSA E-Filing System but may be mailed to the Enterprise Computing Center – Detroit, Attn: SAR-MSB, P.O. Box 33117, Detroit, MI 48232-5980.

• Suspicious Activity Report by the Securities & Futures Industries (SAR-SF)- FinCEN Form 101. SAR-SF must be filed with respect to transactions or attempted transactions conducted by, at, or through a broker-dealer, involving aggregates funds or other assets of at least $5,000 where the broker-dealer knows, suspects, or has reason to suspect that the transaction involves funds potentially derived from illegal activities or intended or conducted in order to hide or disguise funds or assets derived from some illegal activity. SAR-SF must be filed when transactions are designed, whether through structuring or other means, to evade filing requirements. They must also be filed when the transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the broker-dealer knows of no reasonable explanation for the transaction following an examination of the available facts. SAR-SF must also be filed when the transaction involves the use of the broker-dealer to facilitate criminal activity. The SAR-SF must be filed no later than 30 days after initial detection with the Detroit Computing Center, Attn: SAR-SF P.O. Box 33980, Detroit, MI 48232.

• Designation of Exempt Person Treasury FinCEN Form 110 (previously Treasury Form TD F – 90.22.53). Form 110 is used by bank or other depository institution to designate an eligible customer as an exempt person from currency transaction reporting rules (mostly regular business customers with routine needs for currency). Form 110 should be filed no later than 30 days after the first transaction to be exempted and must be renewed every two years. The Form 110 should be e-filed through the BSA E-Filing System but may be mailed to the IRS Detroit Computing Center, P.O. Box 33112, Detroit, MI 48232-0112.

Reporting Suspected Tax Fraud. Reports of suspected tax fraud can be made by phone, mail or at a local IRS walk-in office. Contact can occur by phone to the IRS toll free at 1-800-829-0433. International callers may call their U.S. Embassy or call 215-516-2000 (not a toll-free number). Contact can occur by mail to the IRS Service Center where tax returns are filed. Informants are not required to provide their identity and their identity can be kept confidential. Informants may also be entitled to a reward. (See IRS Publication 733.) For those living outside the United States, the IRS has full-time permanent staff in 7 U.S. embassies and consulates.

Voluntary Compliance Counts ! Taxpayers (and those who ought to be taxpayers) seem to continually underestimate the desire, ability and resourcefulness of the government. The events of September 11, 2001 have enhanced the government’s already strong desire to ensure the reporting of monetary transactions within the United States. As a result of their electronic matching programs, the government can better identify those attempting to evade their information reporting requirements. With Congress and numerous others demanding a reduction in the Tax Gap, searching for those who ignore reporting of currency-related transactions has become a high priority among various government agencies. Those who choose not to comply face potentially significant civil and criminal sanctions that should not be ignored. Now is the time to advise clients of their reporting obligations. Penalties will always be less severe, if any, for those who timely, voluntarily and completely come into compliance.

Leave a Comment

Posted in Uncategorized | Tags: 8300, AML, bank secrecy act, BSA, CTR, FBAR, Fincen, Form 8300, irs, irs audit, irs examination, tax fraud, Tax gap

Posted by: Taxlitigator | September 18, 2012

New Filing Compliance Procedures for Non-Resident U.S. Taxpayers

The IRS recently announced a Streamlined Filing Procedure (SFP), that became effective September 1, 2012, intended to entice current non-residents and dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns back into filing and reporting compliance. Since 2009, many non-residents began participating in various IRS offshore voluntary disclosure programs providing a reduced penalty structure and certainty that criminal prosecution will not occur for previous tax indiscretions. The current Offshore Voluntary Disclosure Program (OVDP) was announced in IR-2012-5 on January 9, 2012 and generally requires submission of income tax returns and Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1, for eight tax years.

The 2012 OVDP is patterned after the 2011 Offshore Voluntary Disclosure Initiative but increases the maximum “FBAR-related” penalty from 25% to 27.5% of the highest account value at any time during the previous eight tax years. The 2012 OVDP does not have a stated expiration date but can be terminated by the IRS at any time as to specific classes of taxpayers or as to all taxpayers. In all, the IRS has seen 33,000+ voluntary disclosures from the 2009 and 2011 offshore initiatives. Outside of these programs, numerous U.S. taxpayers have continued to make voluntary disclosures or otherwise come into compliance with the filing and reporting requirements. Others have waited for what they perceive to be a better opportunity to come into compliance.

U.S. Citizens and Resident Aliens Living Abroad. The U.S. remains one of the few countries that tax their citizens and residents on a worldwide basis, as opposed to a determination based on the source of the income related items. U.S. citizen and resident aliens (Green Card holders) are subject to substantially the same rules for filing income, estate, and gift tax returns and paying estimated tax whether living in the United States or abroad – their worldwide income is subject to U.S. income tax and reporting requirements, regardless of where they reside. However, numerous U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or FBARs and have tended to avoid the offshore initiatives due to the applicable penalty regime associated with their foreign accounts and assets which, given their residence in a foreign country, are often located in their chosen country of residence. Perhaps foreign by U.S. standards but most often located in the country of their residence.

Streamlined Filing Compliance Procedures for Current Non-Resident, Non-Filer Taxpayers. The Streamlined Filing Procedure(SFP)is available for non-resident U.S. taxpayers who, since January 1, 2009, have resided outside of the U.S. and have not filed a U.S. tax return. It is designed for taxpayers that otherwise present a low compliance risk and requires current, non-resident, non-filer taxpayers to file delinquent tax returns, with appropriate related information returns, for the previous three years and to file delinquent FBARs for the previous six years. All submissions will be reviewed by the IRS to determine the appropriate level of compliance risk represented by the submission. For low compliance risk taxpayers, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risks will be notified they are not eligible for the SFP and might be subjected to a more thorough review and possibly a full examination, which might expand beyond three tax years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Tax, interest and penalties, if appropriate, will be imposed in accordance with U.S. federal tax laws based on a review of the submission. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13 (December 2011). In addition, retroactive relief is available through the SFP for a failure to timely elect income deferral on Form 8891 regarding certain retirement and savings plans where deferral is permitted by relevant treaty (this relief is also available under the 2012 OVDP). The proper deferral elections with respect to such arrangements are to be made with the submission.

Compliance risk determination. Based on information contained in the SFP submissions and additional information that may be required, the IRS will determine the level of compliance risk presented by the submission. Low risk will be predicated on simple returns with little or no U.S. tax liabilities. Absent high risk factors, if the submitted returns and SFP submission reflect less than $1,500 in tax due in each of the years, they will automatically be treated as low risk.

Generally, the risk level will increase as the income and assets of the taxpayer rise; if there are indications of sophisticated tax planning or avoidance; if there is material economic activity in the U.S.; if any of the returns submitted under the SFP claim a refund; if the taxpayer has not declared all of their income in their country of residence; if the taxpayer is under audit or investigation by the IRS; if FBAR penalties have previously been assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter; if, since January 1, 2006, the taxpayer has held a financial interest or authority over a financial account(s) located outside their country of residence or in an entity or entities located outside their country of residence; if employed by a U.S. based entity or if there is U.S. source income. Look for the IRS to continue releasing additional information regarding the specific factors the IRS used to assess the level of compliance risk and how information regarding those factors should be presented in the submission.

Participating in the SFP. Taxpayers wishing to use the new procedure will be required to submit: (1) delinquent income tax returns marked “Streamlined”, with appropriate related information returns, for the previous three tax years, (2) delinquent FBARs for the previous six years, and (3) any additional information regarding compliance risk factors required by future instructions. Taxpayers will also be required to submit a Questionnaire ( http://www.irs.gov/pub/irs-utl/non-resident_questionnaire.pdf ) that should accelerate the IRS review process .Payment of any federal tax and interest due must accompany the SFP submission.

Failure to file and failure to pay penalties may be imposed in accordance with U.S. federal tax laws and FBAR penalties may be imposed in accordance with U.S. law for returns determined to be high risk. Reasonable cause statements may be requested during review or examination of SFP submissions that are determined to be high risk. Taxpayers claiming reasonable cause for failure to file tax returns, information returns, or FBARs will be required to submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for previous failures to file. See IRS Fact Sheet FS-2011-13 (December 2011) for examples of reasonable cause.

Taxpayers seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position; for relevant Canadian plans, a Form 8891 for each tax year and description of the type of plan covered by the submission; and a statement describing the events that led to the failure to make the election, the events that led to the discovery of the failure, and if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.

The SFP does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the 2012 OVDP, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. However, the IRS has announced that once a taxpayer makes a submission under the SFP, participation in the 2012 OVDP is no longer available. It should also be noted that taxpayers who are ineligible to participate in the OVDP are also ineligible to participate in the SFP.

Options Remaining for Taxpayers With Offshore Interests. The ongoing IRS focus on offshore enforcement efforts and related disclosure programs has significantly raised awareness regarding tax filing and information reporting obligations among U.S. taxpayers. The IRS has prepared several documents explaining these requirements, including the U.S. Citizens and Resident Aliens Abroad page on IRS.gov (http://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad ). Taxpayers should consult with their professional legal and tax advisors in determining which of the following options might be the most appropriate given their facts and circumstance.

(1). Taxpayers who have properly reported all taxable income but recently discovered that they should have been filing FBARs in prior years to report a personal foreign bank account or to report signature authority over bank accounts owned by an employer – Taxpayers who reported, and paid tax on, all their taxable income for prior years but did not file FBARs, should file the delinquent FBAR reports according to the instructions (send to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621) and attach a statement explaining why the reports are filed late. The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns.

(2). Taxpayers who only have certain delinquent information returns, but no tax due. A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported, and paid tax on, all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate IRS Service Center according to the instructions for the form and attach a statement explaining why the information returns are filed late. (The Form 5471 should be submitted with an amended return showing no change to income or tax liability.) The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.

(3). Non-resident U.S. taxpayers with delinquent returns with low risk factors (including tax owed less than $1,500/year). Non-resident U.S. taxpayers should review the Streamlined Compliance Procedures above and consider filing delinquent tax returns, including delinquent information returns, for the past three years; delinquent FBARs for the past six years; and additional required information regarding compliance risk. Payment of any federal tax and interest due must accompany the submission.

(4). Taxpayers with undisclosed foreign accounts and unreported income. The 2012 OVDP offers a civil settlement structure in which taxpayers pay an offshore penalty in lieu of a number of other penalties that may be assessed in cases of offshore noncompliance. The OVDP also offers protection from criminal prosecution. In order to participate in the OVDP, taxpayers must first request acceptance into the program from IRS Criminal Investigation. Once pre-cleared for acceptance, taxpayers must submit certain information including eight years of amended tax returns, FBARs, and information returns as well as information about their offshore accounts. In addition, taxpayers must submit full payment of the tax and interest due, and certain penalties. Taxpayers who have entered OVDP who disagree with the application of the offshore penalty given the unique facts and circumstances of their case may elect to opt out of the civil settlement structure of the program. In such situations, the IRS can be expected to conduct an examination to determine if the potential offshore related penalty or some other resolution is appropriate.

The SFP review factors discussed above will likely have differing impacts on the degree of risk involved and the resolution of each submission. Hopefully, there will be a positive recognition of the act of participation in the SFP that will result in a fair and reasonable resolution of each submission. Encouraging non-compliant taxpayers to come forward enhances future compliance. Fair treatment of those coming forward encourages others to follow the same or a similar path into compliance. Efforts to enhance overall future compliance should forever be a guiding principle of our system of tax administration.

U.S. taxpayers having undisclosed interests in foreign financial accounts and assets must consult competent professionals before deciding to participate in the SFP, the 2012 OVDP, or some other action designed to come into compliance with their filing and reporting requirements. We do not live in a perfect world and, for the most part, the foregoing options are not perceived as perfectly fair resolutions by everyone involved but each provides an opportunity to get back into the system. Some will come into compliance. Others may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. Others may be prosecuted for non-compliance. All should exercise their best efforts to fully understand the various options and potential consequences before making any decision regarding the disclosure (or not) of interests in foreign financial accounts and assets.

Leave a Comment

Posted in Uncategorized | Tags: criminal tax, FBAR, foreign account, irs, irs audit, irs examination, offfshore voluntary disclosure, OVDI, OVDP, tax, tax dispute, tax enforcement, tax penalty, voluntary disclosure

Posted by: Taxlitigator | June 27, 2012

IRS Provides Updated Guidance re FBAR Voluntary Disclosure Program

For years, the IRS has been pursuing – with mixed success – the disclosure of information regarding undeclared interests of U.S. taxpayers (or those who ought to be U.S. taxpayers) in foreign financial accounts. On June 26, 2012 the IRS released IR-2012-64/65 and updated Frequently Asked Questions (FAQs) providing updated guidance regarding the currently pending offshore voluntary disclosure program (the initial terms of the 2012 OVDP were set forth in IR-2012-5 released on January 9, 2012). The OVDP follows on the success of the 2009 Offshore Voluntary Disclosure Program (the 2009 OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (the 2011 OVDI), which were announced many years after the 2003 Offshore Voluntary Compliance Initiative (OVCI) and the 2003 Offshore Credit Card Program (OCCP). Such initiatives typically offer reduced penalties in exchange for taxpayers voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions. In part, the success of such initiatives often depends on the perception that they will be followed by strong government tax enforcement efforts.

Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the United States must file a report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by noting the account on their income tax return and by filing Form 90-22.1, the FBAR. Willfully failing to file an FBAR can be subject to both criminal sanctions (i.e., imprisonment) and civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account— for each year since 2004 for which an FBAR wasn’t filed.

Generally, taxpayers who have undisclosed offshore accounts or assets and meet the requirements of IRM 9.5.11.9 are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and the 2012 OVDP penalty regime. The OVDP is available to taxpayers who have both offshore and domestic issues to disclose. The Voluntary Disclosure Practice requires an accurate, and complete voluntary disclosure. Consequently, if there are undisclosed income tax liabilities from domestic sources in addition to those related to offshore accounts and assets, they must also be disclosed in the OVDP. The 2012 OVDP is patterned after the 2011 OVDI but increases the maximum “FBAR-related” penalty from 25% to 27.5% of the highest account value at any time during the most recent eight tax years. The terms of the OVDP, are subject to change at any time.

For calendar year taxpayers the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. The eight-year period does not include current years for which there has not yet been non-compliance. Thus, for taxpayers who submit a voluntary disclosure prior to April 15, 2012 (or other 2011 due date under extension), the disclosure must include each of the years 2003 through 2010 in which they have undisclosed foreign accounts and/or undisclosed foreign entities. Fiscal year taxpayers must include fiscal years ending in calendar years 2003 through 2010. For taxpayers who disclose after the due date (or extended due date) for 2011, the disclosure must include 2004 through 2011. For disclosures made in successive years, any additional years for which the due date has passed must be included, but a corresponding number of years at the beginning of the period will be excluded, so that each disclosure includes an eight-year period.

For taxpayers who establish that they began filing timely, original, compliant returns that fully reported previously undisclosed offshore accounts or assets before making the voluntary disclosure, the voluntary disclosure period will begin with the eighth year preceding the most recent year for which the return filing due date has not yet passed, but will not include the compliant years. For example, a taxpayer who had historically filed income tax returns omitting the income from a securities account in Country A, who began reporting that income on his timely, original tax and information reporting returns for 2009 and 2010 without making a voluntary disclosure, and who files a voluntary disclosure in January 2012, the voluntary disclosure period will be 2003 through 2008.

The 2012 OVDI does not have a stated expiration date but can be terminated by the IRS at any time as to specific classes of taxpayers or as to all taxpayers. On June 26, 2012, the IRS released FAQ #21 providing that taxpayers will become ineligible to participate in the OVDP when: (i) the IRS or the Department of Justice obtain information under a John Doe summons, treaty request or similar action that provides evidence of a specific taxpayer’s noncompliance with the tax laws or Title 31 reporting requirements, (ii) if a taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law, see 18 U.S.C. § 3506, of any such appeal and/or other documents relating to the appeal on the Attorney General of the United States at the time such notice of appeal or other document is submitted, or (iii) the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution – in such announcements, the IRS will provide notice of the prospective date upon which eligibility for the specific taxpayer group terminates making the taxpayer ineligible to participate in the OVDI.

Taxpayers under IRS criminal investigation are not eligible to participate in the OVDP. Also, if the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to participate in the 2012 OVDP.

In 2003, following significant publicity regarding the use of foreign accounts and credit card arrangements by U.S taxpayers, the IRS offered significant penalty relief for taxpayers participating in the OVCI which coincided with strong tax enforcement efforts under the OCCP. Eligible OVCI taxpayers were required to file amended or delinquent returns for three tax years (1999-2001) but could choose to bring tax years 1996-1998 into the OVCI (and would not be examined for any earlier years). Approximately 1,321 taxpayers from 48 countries participated in the OVCI identifying approximately 400 offshore promoters. The IRS agreed to not assert any 75% civil fraud penalties and the Financial Crimes Enforcement Network (FinCEN) agreed to not assert any civil penalties for the failure to timely file a Report of Foreign Bank and Financial Accounts (FBAR).

The 2009 OVDP brought in at least 14,700 U.S. taxpayers (disclosing accounts in more than 60 countries) through the front door of IRS Criminal Investigation and untold thousands through a process of quietly amending returns and filing delinquent FBARs with the government. For eligible taxpayers who ventured through the front door, the OVDP provided the certainty of no criminal prosecution and civil penalty relief – they were required to pay back-taxes from 2003 to 2008, interest and a 20-25% penalty on the delinquent taxes. The IRS also imposed a 20% “FBAR-related” penalty equal to the highest aggregate value of the financial account between 2003 and 2008. In limited situations, the FBAR-related penalty could be reduced to 5% of the account value or $10,000 per tax year.

The 2011 OVDI, brought in an additional 12,000 eligible taxpayers who filed original and amended tax returns and agreed to make payments (or good faith arrangements to pay) for taxes, interest and accuracy-related penalties. The 2011 OVDI FBAR-related penalty framework required a 25% “FBAR-related” penalty equal to the highest value of the financial account between 2003 and 2010. Only one 25 percent offshore penalty is to be applied with respect to voluntary disclosures relating to the same financial account. The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose. Potentially applicable penalties are identified in a series of Frequently Asked Questions available at irs.gov. Participants in the 2011 OVDI also had to pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Subject to certain limitations, financial transactions occurring before 2003 were generally irrelevant for those participating in the OVDI.

Under the 2012 OVDP, taxpayers who are foreign residents and who were unaware they were U.S. citizens may qualify for a reduced 5% FBAR-related penalty (FAQ 52). Others qualified for the 5% penalty if they: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account-holder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it is presumed that they were.

Taxpayers whose highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2012 OVDP is less than $75,000 qualified for a 12.5% FBAR-related penalty (FAQ 53). IRS examiners have no authority to negotiate a different FBAR-related penalty.

If a taxpayer has failed to file an FBAR to report an account over which the taxpayer has signature authority but no beneficial interest (e.g., an account owned by his employer), the IRS will not impose the offshore penalty (FAQ 38). The taxpayer may cure the FBAR delinquency for the account the taxpayer does not own by filing the FBAR with an explanatory statement before being contacted regarding an income tax examination or a request for delinquent returns. The answer might be different if: (1) the account over which the taxpayer has signature authority is held in the name of a related person, such as a family member or a corporation controlled by the taxpayer; (2) the account is held in the name of a foreign corporation or trust for which the taxpayer had a Title 26 reporting obligation; or (3) the account was related in some other way to the taxpayer’s tax noncompliance. In these cases, if the taxpayer is determined to have a direct or indirect beneficial interest in the account(s), the taxpayer will be liable for the 27.5% offshore penalty if there is unreported income on the account. On the other hand, if there is no unreported income with respect to the account, no penalty will be imposed.

In the case of co-owners of an account, each taxpayer who participates in the OVDP will be liable for the penalty on their respective percentage of the highest aggregate balance in the account. The burden will be on the disclosing taxpayer claiming ownership of less than 100% of the account to establish the extent of their ownership. Their voluntary disclosure is effective as to their personal liability only – it does not protect the other co-owners. The IRS may examine any co-owner who does not make a voluntary disclosure. Co-owners examined by the IRS remain subject to all potential penalties.

If there are multiple individuals with signature authority over a trust account, each person involved must file delinquent the FBARs. However, only one 27.5% offshore penalty will be applied with respect to voluntary disclosures relating to the same financial account. The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose.

FBARs for each year are due to be received by June 30 of the next year, without extension. Taxpayers who reported and paid tax on all their taxable income but did not file FBARs, should not participate in the 2012 OVDP but should merely file the delinquent FBARs with the Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621 (and attach a statement explaining why the reports are filed late). Under the 2012 OVDP, the IRS will not impose a penalty for the failure to file the delinquent FBARs if there were no underreported tax liabilities and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns. (FAQ 17).

Non-resident taxpayers should review the New Filing Compliance Procedures for Non-Resident U.S. Taxpayers set forth in IR-2012-65 released on June 26, 2012. Effective September 1, 2012, current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns will be required to file 1) delinquent tax returns, with appropriate related information returns, for the past three years, (2) delinquent FBARs for the past six years, and (3) any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission. More information about the application process including where submissions should be sent, will be provided prior to September 1, 2012.

Retroactive relief for failure to timely elect income deferral on certain foreign retirement and education savings plans where deferral is permitted by a relevant treaty will be available for these nonresident taxpayers. The proper deferral elections with respect to such arrangements must be made with the OVDP submission. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit: (i) a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position; (ii) for relevant Canadian plans, a Forms 8891 for each tax year and description of the type of plan covered by the submission; and a statement describing: (a) the events that led to the failure to make the election, (b) the events that led to the discovery of the failure, and (c) if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.

IRS OVDP examiners do not have discretion to settle cases for amounts less than what is properly due and owing. However, because the 27.5% offshore penalty is a proxy for the FBAR penalty, other penalties imposed under the Internal Revenue Code, and potential liabilities for years prior to the voluntary disclosure period, there may be cases where a taxpayer making a voluntary disclosure would owe less if the special offshore initiative did not exist. The IRS has stated that under no circumstances will taxpayers be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. (see FAQ 50). For example, if a taxpayer had $100,000 in an offshore bank account in only one year and foreign income-producing real estate with a fair market value of $1,000,000, only the bank account would be subject to the FBAR penalty. Consequently, the maximum FBAR penalty would only be $100,000 (that is, the greater of $100,000 or 50% of the amount in the foreign account), which is substantially less than the offshore penalty of $302,500 (27.5% of $1,100,000). If this FBAR penalty, plus tax, interest and all other applicable penalties, are less than what is due under this offshore initiative, the taxpayer will only pay the lesser amount. The understanding of potentially applicable penalties may differ greatly in the eyes of a taxpayer as compared to an examiner. Anyone considering an offshore voluntary disclosure submission must carefully examine all potential civil penalties and evaluate the risk of criminal prosecution.

OVDP examiners will compare the amount due under the OVDP to the tax, interest, and applicable penalties (at their maximum levels and without regard to issues relating to reasonable cause, willfulness, mitigation factors, or other circumstances that may reduce liability) for all open years that a taxpayer would owe in the absence of the OVDP penalty regime. The taxpayer should only be obligated to pay the lesser amount. If the taxpayer disagrees with the result, the taxpayer may “opt-out” of the OVDP and the case be referred for an examination of all relevant years and issues.

There are many considerations before a taxpayer should determine whether to pursue a voluntary disclosure of prior tax indiscretions. When reviewing the OVDP and the OVDI, many made decisions based on whether they could be considered a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice? (If so, the determination to participate was relatively quick and easy). Was there a possibility of reducing that prospect by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDP/OVDI? What would be the potentially applicable penalties upon a examination of such returns and FBARs? Could the government actually carry their burden of demonstrating that the taxpayer “willfully” violated the FBAR filing requirements? Since the OVDI asserted an offshore penalty based on foreign financial accounts and asset valuations, for many with smaller financial account values the aggregate offshore penalty determination, even for multiple years, was actually less outside the OVDI.

The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming nonexistent. Foreign account information is flowing into the IRS under tax treaties with other countries, through submissions by whistleblowers, from others who participated in the 2009 OVDP, the 2011 OVDI or the 2012 OVDP who have been required to identify their bankers and advisors. Additional information will become available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (Form 8938 and new IRC § 6038D) become effective.

There are ongoing rumors regarding ongoing “John Doe” summons activity seeking to force foreign financial institutions to deliver account-holder information to the U.S. government as well as possible indictments of foreign financial institutions. Recently, several foreign institutions in Europe, Israel, and Asia have advised their account holders to consult U.S. tax advisors regarding the IRS voluntary disclosure program and their U.S. tax reporting relating to their foreign financial accounts. It is reasonable to assume that such institutions will take whatever action is necessary to avoid being indicted, beginning with the delivery of information regarding account holders to the U.S. government.

It is likely that the U.S. will require foreign financial institutions doing business in the United States to disclose account holders having relatively small accounts and earnings. There have been rumors of discussions regarding accounts having a high balance of the equivalent of $50,000 at any time between 2002 and 2011. U.S. persons having interests in foreign financial accounts should not find comfort in a belief that their foreign financial institution will somehow refrain from disclosing very small accounts in the current enforcement environment. Those who think too long may be sorely surprised at the high level of ultimate cooperation of their institution with the U.S. government.

Taxpayers having undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the 2012 OVDI. Others may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. Although the 2012 OVDI penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayers projected future earning power that could be generated from the funds held offshore. Participating taxpayers receive the ability to use the previously undisclosed funds in any manner they desire. Many have benefitted by repatriating foreign funds with limited earning potential into a depressed U.S. economy with a suffering real estate market and numerous business opportunities.

The IRS has provided yet another opportunity for formerly non-compliant taxpayers to come into compliance. If discovered before any voluntary disclosure submission, the results can be devastating. Waiting is simply not a viable option . . .

Leave a Comment

Posted in Uncategorized | Tags: 8938, audit, canadian retirement account, Departnment of justice, examination, FBAR, irs, offshore, OVDI, OVDP, rrsp, tax, taxes, voluntary disclosure

Posted by: Taxlitigator | May 23, 2012

The IRS Whistleblower Program: Making Money the Old Fashioned Way!

The IRS Whistleblower Office processes financial awards to people who provide information about the tax indiscretions of others. If the IRS uses information provided by the whistleblower, based on recently finalized Treasury Regulations the whistleblower can receive up to 30 percent of the additional tax, penalty and other amounts collected or refund denied!

Statutory Limitations. There are currently two basis types of whistleblower awards. Pursuant to Code §7623(b), if the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the noncompliant taxpayer is an individual, their annual gross income must exceed $200,000^[i]. There is no limit on the dollar amount of the award. A reduced award amount of up to 10% is available in cases based principally on disclosure of specific allegations resulting from: (i) judicial or administrative hearings, (ii) from a governmental report, hearing, audit or investigation, or (iii) from the news media^[ii]. The award is reduced if the whistleblower “planned and initiated” the non-compliance and the award is to be denied if the whistleblower is convicted of criminal conduct arising from their role in planning and initiating the non-compliance.^[iii] Awards are subject to appeal to the U.S. Tax Court.^[iv]

If the thresholds in Code §7623(b) are not satisfied, Code §7623(a) authorizes, but does not require, the IRS to pay for information relating to violations of the internal revenue law that result in recovery of tax.^[v] The maximum award is 15 percent of up to $10 million. In addition, these awards are discretionary and the whistleblower cannot dispute the outcome of the claim in Tax Court.

Filing a Whistleblower Claim. All whistleblower claims must be submitted under penalty of perjury on Form 211, Application for Award for Original Information whether submitted under Code §7623(b) or Code §7623(a). Form 211 should be mailed to Internal Revenue Service, Whistleblower Office, SE:WO, 1111 Constitution Ave., NW, Washington, D.C. 20224. The claim must include a declaration under penalty of perjury stating “I declare, under penalty of perjury, that I have examined this application and my accompanying statement and supporting documentation and aver that such application is true, correct and complete, to the best of my knowledge.” It must also include Explanation of how the information that forms the basis of the claim came to the attention of the claimant, including the date(s) on which this information was acquired, and a complete description of the claimant’s present or former relationship (if any) to the person that is the subject of the claim (e.g., family member, acquaintance, client, employee, accountant, lawyer, bookkeeper, customer). If the claimant identifies multiple person(s) as the subject of a claim, describe his or her relationship to each person.^[vi] A whistleblower that wishes to report possible instances of tax fraud by another individual, and does not want an award, should complete IRS Form 3949 A, Information Referral, or provide the information via a letter.

Evaluating the Whistleblower’s Claim. An analyst in the Whistleblower Office will initially consider the information provided by the whistleblower. Effective January 1, 2012, the Informant Claims Examination Unit (ICE) was realigned from IRS Campus Compliance in the Small Business/Self Employed Operating Division to the Whistleblower Office. The ICE Unit was the focal point for the IRS informant program prior to the 2006 legislation that created the Whistleblower Office, and continued to manage the process for claims that did not appear to meet the $2 million “amount in dispute” threshold established for the mandatory award program by those amendments. The Whistleblower Office has worked with Campus Compliance and the ICE Unit to promote consistent treatment of claims, including a requirement that the Director of the Whistleblower Office, currently Steve Whitlock, approve all awards. Receipt, control, evaluation and award processing are now incorporated in a single organization, streamlining management responsibility and program accountability.

Claims involving at least $50,000 of unreported income per year are routed to IRS Criminal Investigation (CI) for review.^[vii] A threshold requirement for any award Code § 7623 is that the information must lead to judicial or administrative action – an audit or investigation resulting in the collection of proceeds. In the case of a large corporate taxpayer whose returns are audited each year, an administrative action can mean the creation of a new issue under the Audit Plan or a change in the way information about an issue is collected or analyzed, which would not otherwise have occurred without the information provided by the whistleblower. In other cases, an administrative action can mean placing a taxpayer under audit who was not already under audit.

An action is based on the information provided by the whistleblower if the IRS would not have acted but for the receipt of the information from the whistleblower. Action by the IRS may include the initiation of an examination or investigation that would not otherwise have been undertaken, or the modification of a pending or planned examination or investigation as a result of information provided by the whistleblower. All relevant factors, including the value of the information furnished in relation to the facts developed by the investigation of the violation, will be taken into account by the Director in determining whether an award will be paid, and, if so, the amount of the award.^[viii] Generally, a related action is (i) any action involving the taxpayer from the original action and that is based on, either directly or indirectly, the same information on which the original action is based, and (ii) in cases in which the information provided identifies a promoter, preparer, or other similar person and describes underpayments of tax or violations of the tax laws by one or more taxpayers that directly relate to the promoter’s activities, any action (involving any taxpayer) that is directly based on the information provided.^[ix]

Processing the Claim. The process, from submission of complete information to the IRS until the proceeds are collected, may five to seven years, and longer when there are protracted appeals or collection actions.^[x] The requirement that claims be paid from collected proceeds generally means that payment will not be made until there is a final determination of tax liability (including taxes, penalties, interest, additions to tax and additional amounts) owed to the government and such amounts have been collected by the IRS. A final determination of tax does not occur until the statutory period for filing a claim for refund expires or there is an agreement between the taxpayer and the IRS that there has been a final determination of tax for a specific period and a waiver of the right to file a claim for refund is effective. Therefore, the IRS may not make payments for several years after the whistleblower has filed the claim.

Common examples of when a final determination of tax liability can be made include, but are not limited to at the administrative level when the IRS and the taxpayer enter into a closing agreement wherein the taxpayer conclusively waives the right to appeal or otherwise challenge a deficiency or additional tax liability determined by the Service; if a taxpayer petitions United States Tax Court; when a decision becomes final within the meaning of Code §7481; and after the expiration of the statutory period for a taxpayer to file a claim for refund and to file a refund suit based on the claim against the Untied States, or if a refund suit is filed, when the judgment in that suit becomes final. A finding of fraud in a tax case carries some significant additional implications for penalties, fines and a possible period of incarceration for the taxpayer.

“Collected proceeds” are the monies the IRS obtains directly from a taxpayer(s) which are based upon the information the whistleblower has provided. Effective February 22, 2012, Treasury Regulations §301.7623-1 defines “amounts collected and collected proceeds” as including: tax, penalties, interest, additions to tax, and additional amounts collected by reason of the information provided; amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided. Significantly, the final Treasury Regulations did not a reduction in loss carryforwards resulting in increased future tax liabilities within the term “collected amounts.” Criminal fines, which must be deposited into the Victims of Crime Fund, cannot be used for payment of whistleblower award.^[xi]

A whistleblower award is dependent upon both the initiation of an administrative or judicial action and collection of tax proceeds. If the IRS does not proceed, notwithstanding receipt of information and an otherwise valid claim, there can be no whistleblower award.”^[xii]

Calculating the Amount of the Claim. For claims filed after December 20, 2006 where the amount in dispute exceeds $2 million (and in the case of an individual taxpayer, the taxpayer had gross income exceeding $200,000 for at least one taxable year in question), awards will be paid in proportion to the value of information furnished voluntarily with respect to proceeds collected, including taxes, penalties, interest, additions to tax and additional amounts. The amount of the award will be at least 15% but no more than 30% of the collected proceeds in claims filed in which the Whistleblower Office determines that the information submitted by the whistleblower substantially contributed to the IRS’ detection and recovery of taxes, penalties, interest, additions to tax, and additional amounts.

For claims filed on or after July 1, 2010 where the amount in dispute does not exceed $2 million (and in the case of an individual taxpayer, the taxpayer did not have gross income exceeding $200,000 for at least one taxable year in question), awards will be paid under the discretionary authority of Code §7623(a). Whistleblowers will not have an opportunity to review and comment on the award recommendation nor will they be entitled to seek Tax Court review of the Whistleblower Office determination.

For claims filed under Code §7623(b)(1), an individual who provides information that leads to an administrative or judicial action resulting in the collection of taxes, penalties interest, additions to tax and additional amounts shall receive an award of at least 15% but not more than 30% of the collected proceeds resulting from such action (including any related actions), or from any settlement in response to such action, in cases in which the IRS determines that the information submitted by the whistleblower substantially contributed to the IRS’ detection and recovery of tax. The amount of any award under Code §7623(b) (1) depends on the extent of the whistleblower’s substantial contribution to the action.

The starting point for the Whistleblower Office’s analysis will be the statutory minimum of 15 percent of collected proceeds.^[xiii] The Whistleblower Office will apply various factors below to the facts of a case to determine whether the case merits a larger award percentage. The factors are described as positive or negative factors, but the analysis may not be reduced to a simple mathematical equation. The factors are not exclusive and are not weighted. In the particular circumstances of a case, one factor may out-weigh several others and result in a unique or exceptional award determination. Negative factors can offset positive factors, but cannot result in an award that is less than the statutory minimum. The absence of negative factors does not mean that the award percentage will be larger than 15%. The Whistleblower Office will determine awards of 15%, 18%, 22%, 26% or 30%. The Whistleblower Office will begin its analysis at the starting point of 15%. The Whistleblower Office may increase the award percentage based on its analysis of the presence and significance of positive factors and may decrease that enhanced award percentage based on its analysis of the presence and significance of negative factors.

Positive factors include: (i) prompt action by the whistleblower to inform the Government or the taxpayer of the tax noncompliance may, depending on the acts, be a positive factor. For example, providing the Government with an opportunity to address the tax noncompliance early can help mitigate the impact of the noncompliance; (ii) the whistleblower submitting information that identifies an issue of a type previously unknown to the Government or a taxpayer behavior that the Government was unlikely to identify or was especially difficult to detect through the exercise of reasonable diligence; (iii) submissions in which the whistleblower thoroughly presents the details of the noncompliance in a clear and organized manner may, depending on the facts, be a positive factor saving examination resources of the IRS; (iv) the whistleblower (and/or his/her representative) provided exceptional cooperation and assistance during the audit, investigation, or trial, including useful technical or legal analysis of the taxpayer’s records; (v) the whistleblower identified assets of the taxpayers that could be used to pay the taxpayer’s liability or assets not otherwise known to the IRS; (vi) the whistleblower identified connections between transactions, or parties to transactions, which enabled the IRS to understand tax implications that might not otherwise have been revealed; and (viii) and the impact of the report on the behavior of the taxpayer. For example, the whistleblower’s report may, directly or indirectly, cause the taxpayer to correct an improper position.^[xiv]

Negative factors include: (i) the whistleblower delayed reporting after learning the relevant facts, and the delay had an adverse impact on the ability of the IRS to pursue the issues raised. Delayed reporting can allow the noncompliant activity to be repeated, increasing the magnitude of the noncompliance and, in some cases, compromising the ability of the Government to assess and collect; (ii) the whistleblower’s role in the underpayment of tax reported, such as when a whistleblower actively and knowingly participates in carrying out the tax noncompliance. If the whistleblower directly or indirectly profits from the noncompliance, this may also be considered a negative factor; (iii) a whistleblower puts the tax case at risk. For example, a whistleblower’s premature disclosure to the taxpayer of the existence or scope of IRS planned enforcement activity may be a negative factor if the whistleblower disclosed information regarding the IRS interest in a matter in such a way that permitted the affected taxpayer(s) to impede IRS access to relevant information and thus impeded the exam or audit; (iv) whistleblowers will normally be given specific instructions regarding permissible and impermissible activities; violation of these instructions may be a negative factor in determining the award percentage if it causes the IRS to expend additional resources it would not otherwise have spent.^[xv]

Under Code §7623(b)(3), the Whistleblower Office may appropriately reduce an award determination made under either Code §§7623(b)(1) or (b)(2) if the whistleblower planned and initiated the actions that led to the tax underpayment or actions described in Code §7623(b)(2). The applicable range for this category is 0-30%. The whistleblower need not have been the only person involved in planning and initiating for Code §7623(b)(3) to apply. The Whistleblower Office will use the same framework as for the 0-10% and 15-30% ranges, whichever applies, to reach what would be the award result if the whistleblower had not triggered the application of Code §7623(b)(3) by planning and initiating the actions that led to the tax underpayment. The Whistleblower Office will then evaluate the whistleblower’s role in planning and initiating the actions that led to the underpayment and, based on this evaluation, categorize the whistleblower’s role as a planner and initiator as significant, moderate, or minimal.^[xvi]

The Whistleblower Office will reduce the awards of (1) significant planners and initiators by 66% to 100%, (2) moderate planners and initiators by 33% to 66%, and (3) minimal planners and initiators by 0 to 33%. No award will be paid if the informant is convicted of criminal conduct arising from the role played in the planning and initiating of the actions that led to the underpayment of tax. Planning and initiating factors applicable to Code §7623(b)(3) determinations include: (i) was the whistleblower the sole decision maker, one of several contributing planners and initiators, or an advisor to a decision maker?; (ii) the nature of the whistleblower’s planning and initiating activities. What did the whistleblower do – was it reasonably legitimate tax planning or objectively unreasonable, were steps taken to hide the actions at the planning stage, was there any identifiable misconduct (legal, ethical, etc.) that was either not criminally prosecuted, for whatever reason, or did not result in a criminal conviction (which results in a zero award)? (iii) the extent to which the whistleblower knew or should have known that tax noncompliance was likely to result from the course of conduct; (iv) the extent to which the whistleblower acted in furtherance of the noncompliance, including efforts to conceal the true nature of the transaction; and (v) the whistleblower’s role in identifying and soliciting others to participate in the actions reported, whether as parties to a common transaction or as parties to separate transactions.^[xvii]

Multiple Claims or Joint Claimants. When multiple and independent claims are submitted with respect to the same proceeds, the Whistleblower Office Director may evaluate the contribution of each individual to the assessment and collection of the proceeds and may make an award to each individual commensurate with his or her contribution to the action(s) that resulted in the collection of proceeds.^[xviii] In such a case, the Director shall determine whether the IRS as a result of the information previously submitted by any other individual would have obtained the information submitted by each individual. If the Director determines that multiple individuals submitted information that would not have been obtained based on a prior submission, the Director shall determine the amount of each individual’s award based on the extent to which each individual substantially contributed to the action(s). The aggregate award payment in cases involving multiple and independent claims shall be within the range of 15% to 30% of collected proceeds, unless one of the reduction of award percentage provisions applies.

When multiple individuals jointly submit a claim, the Director shall pay an award in equal shares to the joint claimants, unless the joint claimants specify a different allocation in a written agreement, signed by all joint claimants and notarized and submitted with the claim. The aggregate award payment in cases involving joint claimants shall be within the range of 15% to 30% of collected proceeds, unless one of the reductions of award percentage provisions applies.

Tax Treatment of Awards. All awards will be subject to current federal tax reporting and withholding requirements. The whistleblower will receive a Form 1099 or other form as may be prescribed by law, regulation, or publication.

Confidentiality and Disclosure for Whistleblowers. Although the IRS will attempt to protect the identity of the whistleblower, the specific nature of later government inquiries often serves to help the noncompliant taxpayer identify the whistleblower. The identity of the whistleblower will only be disclosed within the IRS on a “need to know” basis in the performance of their official duties in accordance with Code §6103.^[xix] To the extent that the IRS Whistleblower Office determines that an individual is a “whistleblower” under Code §7623, such individual shall be deemed to be a confidential informant whose identity shall be protected in accordance with Code §6103(h) (4). Any contact made between the IRS and the whistleblower will not be a third-party contact under Code §7602(c). IRS personnel are required to treat the identity of the whistleblower and the whistleblower’s information as highly confidential and to exercise extreme security precautions. Also, if the whistleblower is an essential witness in a judicial proceeding, it may not be possible for the government to avoid the identity of the whistleblower.

Once a claim is submitted, the whistleblower may be told only the status and disposition of the claim – not the action taken in the taxpayer case. A claim can be denied if: (i) the IRS already had the information from another source, (ii) an audit or investigation is conducted but leads to no finding of taxpayer liability, (iii) a finding or liability is made but the taxpayer is successful in an administrative or judicial appeal, or (iv) a finding of liability is made and sustained but there is no collection because the taxpayer has no known assets that the government can collect. Information about the taxpayer is covered by privacy laws and Code §6301, which impose strict limits on what the IRS is able to disclose.

Whistleblowers who are Current Employees of the Taxpayer. It is generally assumed that a current employee whistleblower has access to information that may be subject to a privilege that has not been affirmatively waived by the taxpayer. Accordingly, the IRS is particularly sensitive to the privilege issues that may be present in current employee situations. These cases may also raise other issues, such as Constitutional issues and confidentiality issues, which could limit the IRS’s ability to use information received from the informant in any subsequent litigation. To ensure that any adjustments dependent on information received from current employee informants cannot be successfully challenged on evidentiary grounds, the IRS will coordinate a taint review with Operating Division Counsel in current employee cases.^[xx]

To avoid potential limitations on the evidentiary use of information received from a current employee, the IRS should act as a passive recipient of information in every case in which an informant is a current employee of a taxpayer and is providing information regarding the taxpayer/employer. This means that IRS personnel must not encourage, or acquiesce in, any actions taken by the informant. Further, IRS personnel should, however, be ready and willing to accept any and all information from a current employee informant at the initial meeting between the IRS and the informant. Debriefing procedures applicable to civil cases are discussed at IRM 25.2.2.6.

On a case-by-case basis, the IRS may also initiate limited follow-up contacts, including debriefings, with a current employee informant to clarify information previously received from the informant. Operating Division Counsel should be present to provide support with respect to all follow-up contacts and debriefings.

A current employee informant may submit additional information to the IRS following the initial submission of information. Generally, the IRS may receive and use this “supplemental” information for the sole purpose of clarifying previously submitted information. Supplemental information includes information that reasonably relates to the previously submitted information, based on an analysis of all the facts and circumstances relating to the information and the IRS’s contacts with the informant, but does not include information that relates to new issues. The IRS must coordinate the analysis with Operating Division Counsel. If Counsel advises that the IRS should not use the information, based on its analysis of the legal risks, then the appropriate IRS Executive will determine whether or how to proceed.

Whistleblowers who are Current Representatives of a Taxpayer. The IRS will not accept any information from a whistleblower regarding a taxpayer (or related taxpayers) when the whistleblower is also that taxpayer’s representative in any administrative matter pending before the IRS, e.g., an income tax examination, or in any litigation involving issues in which the IRS has any interest (Tax Court and refund litigation, collections suits, summons enforcement actions, etc.).^[xxi] If a taxpayer’s representative makes a direct or indirect overture about becoming a whistleblower, e.g., either orally or by filing a Form 3949A, Information Referral, or Form 211, Application for Reward for Original Information, there should be no further interaction with that person as the taxpayer’s representative and the representative must be informed of this outcome immediately. It is the responsibility of the whistleblower to attempt to explain the reason for being excluded from the matter as the taxpayer’s representative under these circumstances. In addition, IRS employees should have no further interaction or contact with, or receive any further information from, the current representative as a whistleblower. The same rules apply and the same results are reached if an individual’s status as a whistleblower regarding a taxpayer (or related taxpayers) predates that individual’s appearance as the taxpayer’s representative in any administrative matter pending before the IRS or in litigation.

Appeal Rights. The Whistleblower Office will communicate the final claim determination, in writing to the claimant. Final determinations regarding awards under Code §7623(b) may, within 30 days of such determination, be appealed to the United States Tax Court.^[xxii] The IRS does not have the authority to extend the 30-day time period for filing an appeal. Decisions under Code §7623(a) may not be appealed to the Tax Court. A letter from the IRS Whistleblower Office denying a claim on the grounds that no award could be made under Code §7623(b) constitutes a determination conferring jurisdiction upon the Tax Court.^[xxiii]

Recently, the Tax Court permitted a whistleblower to pursue his claim anonymously by requiring redaction of all identifying information — both for the whistleblower and for the company referenced in the award claim.^[xxiv] The whistleblower, a senior executive in an unnamed company, filed an informant claim with the IRS after allegedly witnessing the company significantly underpay its tax liability through noncompliance with the tax code. The IRS reviewed the informant’s claim but concluded that there were no grounds to make an award under Code §7623(b). In timely petitioning the Tax Court to review the award claim denial, the whistleblower also filed a motion asking for a protective order that would either seal the record or allow him to proceed anonymously. Although the whistleblower had left the company he claimed was tax noncompliant, he argued that revealing his identity in court would create psychological and financial harm, including potential harmful employment repercussions. While the Tax Court’s general approach is that litigation within its domain is a matter of public record, the court also has “broad discretionary authority,” both as a statutory matter and under internal rules, to offer privacy protection.

In a footnote, the Tax Court warned all whistleblowers should not expect anonymity because each request to proceed anonymously must stand upon its own. Some noted that the Tax Court was making it too easy as a general rule of law to claim the need for anonymity to avoid negative career repercussions in making a whistleblower claim. Congress could have included specific protections for whistleblowers in Code §7623, yet chose to remain silent on the issue. As such, it might be that Congress intended whistleblowers to bear the privacy risks inherent in asking for review of their whistleblower claims in a public forum.

Annual Report to Congress. Treasury must conduct a study annually and report to Congress on the use of Code §7623, including an analysis of the use of such section during the preceding year and the results of such use.^[xxv] For FY 2010 (the year ending September 30, 2010), the IRS received 431 submissions that appear to meet the Code §7623(b) criteria, identifying 5,429 taxpayers that appeared to meet the $2 million of tax, penalties, interest, and additions to tax threshold.^[xxvi] Only 9 of 97 full paid claims in FY 2010 involved collections of more than $2 million. For the fiscal year 2007, there were 49 submissions identifying 587 taxpayers; for 2008 there were 378 submissions identifying 1366 taxpayers; and for 2009 there were 470 submissions identifying 2150 taxpayers. Many of the individuals submitting this information claim to have inside knowledge of the transactions they are reporting, and often provide extensive documentation to support their claims.

At the beginning of FY 2010, the Whistleblower Office staff of 17 included ten analysts with decades of experience in a broad array of IRS compliance programs. After reviewing case intake levels and expected workload as the first award determinations were made under Code §7623(b), the IRS authorized a staff increase to 21 in August 2010. Recruiting for the additional staff was in progress as of the end of FY 2010.

Through FY 2010, all awards the IRS paid have been based on information received before December 20, 2006, the date of the amendment of Code §7623. Therefore, the IRS paid all of the awards, including those paid in 2010, based on the prior law, what is now Code §7623(a). Thus, the applicable award percentages were those established in prior IRS policy, not the higher percentages set by Code §7623(b). The number and amount of awards paid each year can vary significantly, especially when a small number of high-dollar claims are resolved in one year (as was the case in 2006 and 2008).

One factor contributing to lower award payments in FY 2009 was a change in the IRS definition of the point at which proceeds in a tax case are available to make an award payment. In the past, the IRS monitored the tax case to ensure that it collected proceeds before processing the award claim. Where the taxpayer filed an administrative or judicial appeal, the IRS did not pay claims until the court finally resolved the appeal. After consultation with the Office of Chief Counsel, the IRS determined that it should not pay claims even when the taxpayer has not filed an appeal until the period for filing an appeal has lapsed. The general rule is that a taxpayer may file a claim for refund within two years of the last payment, unless he or she has waived that right. Thus, beginning in July 2009, the IRS monitors cases for both collection and the lapse of the period for filing a claim for refund. As a result, the IRS did not pay some claims that it would have otherwise paid in FY 2009 until FY 2010 or FY 2011.

[i]. IRC Section 7623(b)

[ii]. Internal Revenue Manual (IRM) 25.2.2.2 (06-18-2010)

[iii]. IRC Section 7623(b)(3)

[iv]. IRC Section 7623(b)(4)

[v]. IRC Section 7623(a) and 26 CFR 301.7623-1

[vi]. IRM 25.2.2.3 (06-18-2010)

[vii]. IRM 25.2.1.2 (12-23-2008)

[viii]. IRM 25.2.2.2 (06-18-2010)

[ix].IRM 25.2.2.2 (06-18-2010)

[x]. See IRS Whistleblower Office, Fiscal Year 2010 Report to the Congress on the Use of Section 7623.

[xi]. IRM 25.2.2.12 (06-18-2010)

[xii]. Cooper v. Commissioner, 136 T.C. 597, 600 (2011)

[xiii]. IRM 25.2.2.9.2 (06-18-2010)

[xiv]. Id.

[xv]. Id.

[xvi]. Id.

[xvii]. Id.

[xviii]. Id.

[xix]. IRM (IRM) 25.2.1.2 (12-23-2008).

[xx]. IRM Exhibit 25.2.2-6 Memorandum from Steven T. Miller, Deputy Commissioner for Operations Support, February 17, 2010

[xxi]. Id.

[xxii]. Before 2006 there was no express statutory provision for judicial review of tax whistleblower claims. See Colman v.United States, 96 Fed. Cl. 633, 638 (2011) (stating that the pre- 2006 tax whistleblower law “cannot serve as the substantive law on which to predicate” jurisdiction of the Court of Federal Claims).6 This situation changed with the enactment of section 7623(b)(4), which provides that the Tax Court shall have jurisdiction with respect to any determination regarding an award under section 7623(b)(1), (2), or (3). See DaCosta v. United States, 82 Fed. Cl. 549, 553-555 (2008) (holding that claims under section 7623(b) are within the exclusive jurisdiction of the Tax Court).

[xxiii]. Cooper v. Commissioner, 135 T.C. 70, 73 (2010).

[xxiv]. Whistleblower 14106-10W v. Commissioner, 137 T.C. No 15 (December 8, 2011).

[xxv]. IRM 25.2.2.14 (06-18-2010)

[xxvi]. See IRS Whistleblower Office, Fiscal Year 2010 Report to the Congress on the Use of Section 7623

Leave a Comment

Posted in Uncategorized | Tags: badges of fraud, FBAR, fraud, irs audit, tax, tax dispute, tax fraud, tax penalty, voluntary disclosure

Posted by: Taxlitigator | March 10, 2012

Practice Tips From the Tax Trenches

Although often struggling with deadlines and sometimes recalcitrant clients, a tax practice should be an enjoyable, rewarding experience. Tax practitioners provide their clients with an objective, knowledgeable review of financial information that is ultimately presented to the government in the form of a tax or information return. If the client has provided timely, complete responses to the practitioners requests for information, the process should be fairly smooth and straightforward. Unfortunately, there is a reason many people become clients and it is not because they routinely coordinate all relevant information necessary to the preparation of a return nor do they routinely provide such information in a timely manner.

The 2009-2013 IRS Strategic Plan includes an objective of ensuring that “all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law.” Possibly more than in any other profession, tax practitioners are required to participate in extensive, ongoing training and education to keep pace with highly complex, ever-changing statutory and case authorities. Cases issued in the morning might impact positions in returns filed later that afternoon. IRS has recently been issuing various internal memoranda focusing its filed operations on the possible imposition of practitioner penalties during the course of examining a tax return. Since a purpose in proposing and assessing return preparer penalties is to encourage accountability, affect behavior, and increase voluntary compliance, examiners are now generally required to comment on preparer penalties as a material part of the examination process.

In a tax practice, everything is fine . . .until it isn’t! Problems tend to arise at the most inopportune moments, such as at the height of tax season or during an examination of a tax return. Issues often arise as a result of:

(1). Inappropriate reliance on (i) information provided by the taxpayer, (ii) unreasonable factual assumptions (Did you act in good faith?) or (iii) positions in returns prepared by others.

(2). Inability to control client expectations. Often the client is overly aggressive and unwilling to consider an objective view of the facts in a manner that could compromise the professional relationship between the client and the accountant. There must be an objective analysis of relevant facts leading to any position set forth in a return or provided to the government during an examination.

(3). Failure of the client to understand the nature and scope of your inquiry. Remote relationships with clients are difficult, at best. A clients interpretation of your question may well differ from yours. Communicating by phone or electronically precludes the knowledge gained by looking someone in the eyes when asking direct, important questions.

(4). Failure to expect the unexpected. Preparation is a key to success. Are you prepared to handle the issues presented? Lack of diligence in representation, before and during the examination of a return, will adversely affect the outcome of any examination. Failure to inquire about additional facts, to discover contrary legal authorities, to review large, unusual or questionable items in the return, to review prior year returns and potentially applicable IRS Audit Technique Guidelines or to identify sensitive issues or “patterns” over multiple years can be the difference between a reasonable resolution and someone going to Club Fed (i.e., prison).

(5). Lack of reasonable cooperation or the failure to provide timely responses during an examination. Practitioners should attempt to cooperate with the examiner in a timely manner. An audit need not be adversarial and the practitioner must maintain appearance of reasonableness throughout the entire process. The examination should not be prolonged simply because the taxpayer is unable to satisfy any resulting deficiency. Practitioners can be subjected to discipline for unreasonably delaying the examination process.

(6). Government interviews of an unprepared taxpayer or return preparer. Is an interview of the taxpayer or return preparer necessary and unavoidable? Government interviews of the taxpayer or return preparer can create awkward moments during an examination, especially if there has been a lack of preparation. If necessary, interviews should be limited in scope and duration.

(7). Failure to anticipate conflicts of interest. There are many potential conflicts of interest that can arise during return preparation or the examination process. The practitioner is often unaware a spouse may be considering a divorce or a business relationship may be falling apart. Conflicts can often be avoided by receipt of a timely, knowing and intelligent waiver. However, if things get tough, someone is likely to contest the “knowing” and “intelligent” waiver. Was counsel involved in the waiver process? Did one party feel economically compelled to sign the waiver?

(8). General lack of experience or competency to handle the issues presented. Were you competent to prepare the return or handle the representation? Being an effective practitioner does not mean you can be all things to all people. Know your limitations and consult your colleagues when you are unsure of any issue. In a profession, professionals help other professionals. Respect those who reach out for assistance and pity those who are embarrassed to do so.

(9). Failure to properly disclose questionable positions within a return. Have potentially questionable issues been properly disclosed in a return? Form 8275 and Revenue Ruling 2010-15 represent an opportunity to explain, in single syllable words, why the potentially questionable position is not questionable. Disclosures must be adequate and easily understood by anyone reviewing the return. They should not be subject to being interpreted as misleading or incomplete.

(10). Inadvertent waiver of potential privileges. Privileges are only important when needed the most. Practitioners should have a general awareness of all potentially applicable privileges. When in doubt, ask a colleague for advice.

(11). Termination of the client relationship and the failure to return client records. Terminating your relationship with a difficult or non-responsive client can be a rewarding experience. When terminating a client relationship, consider returning all client records and remember to notify the government that any outstanding authorizations to receive client information or represent the client have been terminated. Arguing over the return of client records to receive payment for delinquent fees might be rewarded with an unwarranted claim for malpractice. Your other clients deserve your attention and a redirection of your efforts to such clients will be more rewarding over time. Cut your losses and move on . . .or consider referring the difficult client to your business competitors.

(12). Inadequate internal office supervision. Enough said.

(13). Unauthorized use of return information. Return preparers who “knowingly or recklessly” make “unauthorized disclosures or use” of “information furnished in connection with the preparation of an income tax return” are subject to criminal sanctions (i.e., imprisonment!). “Preparers” include those engaged in preparing or assisting in preparing tax returns, including those who provide auxiliary services such as developing software to prepare or e-file a return. “Tax Return Information” includes everything received to prepare the return plus computations, worksheets, and printouts created by the preparer. If uncertain, review Revenue Procedure 2008-35 and Treas. Reg. §301.7216-1, et. seq. for further information and pro forma taxpayer consent forms. Code §7216 was implemented for a purpose. Don’t let that purpose be you.

Tips From the Tax Trenches. Many experienced, sophisticated practitioners continue to be involved with community and professional organizations and feel free to inquire of their colleagues when facing difficult or unusual issues in their practice. If asked, those within the tax profession will almost always provide extremely valuable insight and advice on issues that could be extremely important for you, your client, and your reputation. If you do not have the experience or know the answer, find a competent colleague who should be willing to assist you.

If an examination problem seems overwhelming, consider contacting the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.. You can contact TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to determine whether you are eligible for assistance. You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service – Your Voice at the IRS. You can file Form 911, Request For Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf. For more information, go to http://www.irs.gov/advocate.

Engagement letters should specify the scope and terms of the engagement. Services rendered should be within the scope of the engagement as clearly set forth in the engagement letter. If additional services are to be provided, additional engagement letters should be obtained. If a client relationship is terminated for any reason, written confirmation of the termination should be promptly provided to the client and the opposition. If the government has been involved, the government should also be clearly advised of the termination of the client relationship.

When having returns prepared for a Schedule C taxpayer or a taxpayer involved in a cash intensive business (restaurant, bar, etc.), require the preparation of a simple bank deposit analysis. The analysis should add the deposits for the twelve month period under consideration and for the month immediately preceding and following the period involved. That figure should then be divided by 14 and multiplied by 12 to determine an approximation of an amount deposited during the year. If the total deposits bear no relation to reported gross receipts, further inquiry may be warranted which might include a more in-depth bank deposits analysis, a cash expenditures analysis, a net worth analysis and/or a mark-up analysis.

When involved in the preparation of returns for a taxpayer having other return filing requirements (sales tax returns, etc.), request copies of all other relevant returns for the tax period(s) at issue. Often, businesses prepare certain returns internally and seek to have others prepared by their outside tax advisors. “Gross Receipts” on sales tax returns for the same tax period as an income tax return should be somewhat comparable. If you haven’t received copies of all related returns, ask for them.

Be familiar with IRS Audit Technique Guides (ATG) when providing tax advice, preparing tax returns, preparing for an audit or examination, and when preparing a client for an interview by the government. There are many publicly available ATGs that have been prepared by the IRS. The ATGs coupled with the government’s specialization of examiners is designed to improve compliance by focusing on taxpayers as members of particular groups. Each ATG instructs the agent on typical methods of auditing a particular group of taxpayer, including typical sources of income, questions to be asked of the taxpayer and their representative during the audit, etc. These groups have been defined by type of business (i.e., gas stations, grocery stores, etc.), technical issues (passive activity losses), types of taxpayer (i.e., returns lacking economic reality), or method of operation (i.e., cash businesses). A practitioner should not proceed with an audit without being generally familiar with any potentially relevant IRS ATGs. Often, it may be beneficial to review relevant ATGs earlier in the process…perhaps while preparing the return.

The administrative process should not be abused merely because of the taxpayer’s desire to delay the determination and collection of any potential liability. It is generally advisable to attempt to resolve any civil tax dispute at the earliest opportunity. A lengthy audit may be costly from the perspective of the expenditure of time and effort involved, as well as the taxpayer’s degree of frustration with the normal administrative process. Further, a prolonged audit is more likely to uncover potentially sensitive issues that could generate increased tax deficiencies, penalties, or the possibility of criminal sanctions. Collection-related issues should be sorted out through an installment payment arrangement that would be negotiated through the normal collection process following conclusion of the audit process.

It is often a good practice to provide an extension of the applicable statute of limitations during the course of any audit or examination. However, it is also good practice to have extensions signed by the client, rather than the client’s authorized representative (even though authorized by the power of attorney). Years later, the client may not recall having authorized you to extend the statute of limitations. If their signature is on the extension (Form 872), the situation will not likely escalate. Further, it is almost always preferred to sign a limited extension with a specified expiration date (Form 872) rather than an indefinite extension for an unspecified term (Form 872-A).

It is often advisable to submit a request under the Freedom of Information Act (FOIA) following the unagreed resolution of a federal tax examination. It should also help tailor your discussions at the next administrative level while providing insight into what the next government representative assigned to the case will be reviewing. The process is relatively simple and inexpensive. Relevant information regarding the submission of a FOIA request is readily available at http://www.irs.gov by searching “FOIA.”

A question often presented is whether the taxpayer and others should consent to interviews by the government, force the issuance of Summonses or invoke various Constitutional protections. Certainly, if there are extremely sensitive (i.e., potentially criminal) issues, the taxpayer should not consent to an interview and should invoke their Fifth Amendment privilege against self-incrimination. It is always preferable for a taxpayer to avoid providing incriminating information when compared with the possibility of propelling a civil tax examination into a criminal tax investigation/ prosecution.

The government typically seeks to interview taxpayers near the commencement of an examination. Unfortunately, at that time, the practitioner typically does not have sufficient information to determine whether there are potentially sensitive issues that might arise during an interview of the taxpayer. If possible, it is often preferable to postpone a taxpayer interview if the practitioner is otherwise able to provide prompt responses to relevant inquiries. If it occurs, the interview should occur toward the end of the examination, possibly with an understanding that if the taxpayer submits to an interview and answers the questions, the government will proceed to close the examination. However, the practitioner must take extreme caution, since such an understanding is not likely a basis for challenging the use of statements from the interview in a subsequent proceeding.

If a taxpayer interview is necessary and otherwise unavoidable (it is always avoidable in a potentially criminal sensitive issue case), the interview should occur far into the audit process such that the representative can appropriately assist the taxpayer in preparing for the interview. The representative should attempt to obtain as much information about the issues, the information within the agent’s possession and the government’s position with regard to the issues, before agreeing to submit the taxpayer to an interview. Under any situation, the representative must prevent presentation of false or misleading information or the presentation of false statements by the taxpayer or the taxpayer’s representative. Presentation of false statements or documents significantly enhances the potential for penalties and a possible criminal investigation/prosecution (that may include an investigation of the representative!).

Although there are various “badges of fraud,” civil revenue agents are more inclined to consider a criminal referral if there is a substantial unexplainable understatement of taxable income, fictitious or improper deductions, accounting irregularities (occurring in more than one year), acts or conduct of the taxpayer relating to false statements, attempts to hinder the examination, destruction of books and records, transfers of assets for purposes of concealment, or patterns of consistent failure to report or under-reporting of income. Certain behavior patterns on the part of the examiner may indicate that they are considering a criminal referral – excessive time devoted to the audit; extensive copying of basic financial records, bank records, accountant work papers, etc.; or attempts to determine the taxpayer’s net worth over a period of several years.

Do not inadvertently exceed the scope of your license or experience. At a minimum, a non-lawyer representative should strongly recommend that a client consult counsel with admonition that discussions held between a client and a non-lawyer may have to be disclosed in the event of a criminal investigation or prosecution. Section 7525 of the Internal Revenue Code does not protect information provided to the non-lawyer representative from disclosure in a criminal investigation or prosecution.

Throughout, treat all government representatives with respect and act like the professional that you want others to know and respect. Do not mislead, affirmatively or otherwise, anyone at anytime. Always maintain the appearance of reasonableness…even in times where the government may appear to be anything but reasonable. If you have problems with an agent during the course of an examination, ask to speak to their manager. If you have problems, it is likely that other representatives have previously had similar discussions with the agent’s manager. While the manager may appear to be supporting the agent when meeting with you, it is also likely that the manager will have a direct conversation with the agent outside your presence and that your future interactions with the agent will be significantly improved.

Be All You Can Be. A busy tax practice can be surrounded by minefields. Use your best efforts and remember that a tax return is not an offer to negotiate with the government. Document your advice in writing, limit the nature and scope of services to be provided in your engagement letter, establish a system of checklists (and follow the system), and use your best judgment. If the client is unwilling to accept and follow your advice, strongly consider terminating the engagement. Life is short and the headaches of trying to convince someone to do the right thing may simply not be worth your effort. If you encounter an undeserving or possibly disrespectful client, let them go and move on with your practice. Ninety-eight percent of the problems come from 2% of the clients. You cannot be all things to all people…regardless of the effort and personal sacrifice. Lastly and perhaps most importantly, your client is not your friend . . .if you feel the need for friends, get a dog!

Leave a Comment

Posted in Uncategorized | Tags: examination, irs, irs audit, tax, tax tips

Posted by: Taxlitigator | January 11, 2012

FBAR Offshore Voluntary Disclosure Initiative (OVDI)

Taxpayers who have failed to report earnings on foreign bank accounts have until August 31, 2011 to do so without imposition of criminal penalties and with reduced civil penalties. The reduced penalties apply to taxpayers who comply with the Internal Revenue Service’s Offshore Voluntary Disclosure Initiative (2011 OVDI), but only if the taxpayers do so before the IRS is aware of their prior tax-related indiscretions. This is the second IRS initiative focused on undeclared interests in foreign financial accounts. In 2009, the IRS Offshore Voluntary Disclosure Program (2009 OVDP) offered a more taxpayer friendly resolution than the 2011 OVDI for taxpayers who contacted the IRS before October 15, 2009.

United States citizens and residents are taxable on their worldwide income and are subject to the full jurisdiction of the laws of the United States.^[i] Under the Bank Secrecy Act^[ii], United States citizens, residents or persons in and doing business in the United States must file an information report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by acknowledging the account on Schedule B of their income tax return and by filing Form TD 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR). Having a legal or beneficial interest in a foreign financial account does not violate United States. However, intentionally failing to report the earnings on the account and to file an FBAR may be a violation.

Many United States taxpayers and their advisors have long been unaware of or have simply ignored the FBAR information reporting requirements. Willfully failing to file an FBAR can be subject to both criminal sanctions, including imprisonment, and civil penalties equivalent to the greater of $100,000 or 50% of the highest balance in an unreported foreign account per year for each year since 2004 for which an FBAR was not filed. Line 7a of Schedule B of Form 1040 generally asks the taxpayer for a somewhat unsophisticated “yes” or “no” answer to the question: “At any time during the [tax year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” The instructions to Schedule B provide a general description of the FBAR and how to obtain a copy of the FBAR^[iii]. Schedule B and the instructions provide the government with what some consider an important “willfulness” link between an income tax return and the FBAR filing requirements since taxpayers are deemed to know the information contained in their income tax return.^[iv]

On February 8, 2011, IRS Commissioner Douglas H. Shulman announced the 2011 OVDI and stated: “As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. As I’ve said all along, the goal is to get people back into the United States tax system . . . Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. This new disclosure initiative is the last, best chance for people to get back into the system . . . .Tax secrecy continues to erode . . . We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase . . .”^[v]

Under the 2011 OVDI, eligible taxpayers must contact the IRS Criminal Investigation (CI) by August 31, 2011 and request participation in the program. Taxpayers must file all original and amended income tax returns (generally including tax years 2003 through 2010) and pay taxes (or make good faith arrangements to pay taxes), interest and 20 percent accuracy-related penalties on the income tax deficiencies. If applicable, delinquency penalties for the failure to file returns or pay the tax may also be required. Financial transactions occurring before 2003 are mostly irrelevant for those participating in the 2011 OVDI.

The 2011 OVDI penalty framework requires a 25 percent offshore penalty equal to the highest value of the financial account and assets between 2003 and 2010. Only a single 25 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account and assets. Taxpayers with beneficial ownership interests in the account and making the voluntary disclosures may allocate the offshore penalty in any manner they choose. The applicable 2011 OVDI penalties are identified in a series of Frequently Asked Questions (FAQ) available by searching “OVDI” at irs.gov.

The 2011 OVDI limits potential penalties to those specifically stated within the 2011 OVDI. Taxpayers who wish to participate must submit a pre-clearance request, including identifying information (name, date of birth, taxpayer identification number and address) and Power of Attorney, if represented, by fax to the IRS CI Lead Development Center at (215) 861-3050. If the taxpayer is already within the CI database (due to an ongoing IRS examination of the taxpayer or perhaps a related entity, thereby already giving the IRS information pertaining to the taxpayer’s foreign account), an untimely effort to participate in the 2011 OVDI will not be successful. As such, a taxpayer would be unwise to initially provide CI with any information beyond the taxpayer’s name, date of birth, taxpayer identification number and address until the CI has made an initial determination that the taxpayer may be eligible to participate.

Following receipt of a request to participate in the 2011 OVDI, CI will notify taxpayers or their representatives via fax whether or not the taxpayer has been cleared to make a voluntary disclosure using the Offshore Voluntary Disclosures Letter^[vi]. Presently, such notifications are being received within approximately 10 days following submission of the request to participate in the 2011 OVDI. Taxpayers or representatives with questions regarding their 2011 OVDI pre-clearance can call (215) 861-3759 or contact the nearest Criminal Investigation Office. Pre-clearance is merely the initial phase and does not guarantee a taxpayer acceptance into the 2011 OVDI.

Within 30 days following notification of pre-clearance by CI, a taxpayer must submit a completed Offshore Voluntary Disclosures Letter to the IRS Criminal Investigation, Attn: Offshore Voluntary Disclosure Coordinator, 600 Arch Street, Room 6404, Philadelphia, PA 19106. The IRS will review the Offshore Voluntary Disclosures Letter and notify the taxpayer or representative by mail whether the voluntary disclosure has been preliminarily accepted or declined. If notified that their voluntary disclosure has been preliminarily accepted, the taxpayer has until August 31, 2011 to submit the remaining information and make payment with respect to the taxpayer’s full Voluntary Disclosure Package^[vii] for all applicable years to IRS, 3651 S. I H 35 Stop 4301 AUSC, Austin, TX 78741 ATTN: 2011 Offshore Voluntary Disclosure Initiative.

In the Offshore Voluntary Disclosures Letter, the taxpayer must identify or provide the reason the offshore account was created; the source of deposited funds; an estimated annual range of the highest aggregate value for the accounts/assets; an estimated potential annual unreported income from the account; the foreign financial institutions and foreign advisors relating to the account; other affiliated account-holders; and an explanation of meetings with others regarding the account or assets. Similar information provided by participants in the expired 2009 OVDP continues to serve the government well in ongoing civil and criminal investigations of foreign financial institutions and advisors. In turn, each investigation uncovers additional leads to other institutions and advisors who have assisted United States taxpayers avoid their reporting obligations. Information provided under the 2009 OVDP and the 2011 OVDI will continue to provide the government with a target rich environment for many years.

Taxpayers who are foreign residents and who were unaware they were United States citizens may qualify for a reduced 5 percent offshore penalty instead of the mandatory 20 percent offshore penalty^[viii]. The 5 percent offshore penalty will also apply to taxpayers who: (i) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (ii) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (iii) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (iv) can establish that all applicable United States taxes have been paid on funds deposited to the account (only account earnings have escaped United States taxation). Funds deposited before January 1, 1991 will be presumed to have been appropriately taxed if no information is otherwise available.^[ix] This presumption might work against taxpayers pursuing the 5 percent reduced offshore penalty for accounts that include post-1990 deposits where information is not available.

If the highest aggregate account balance in each of the years covered by the 2011 OVDI is less than $75,000, the taxpayer will qualify for a 12.5 percent offshore penalty.^[x] The highest aggregate account balance includes the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income. IRS examiners will have no authority to negotiate a different offshore penalty.

FBARs for 2010 are due on June 30, 2011, without extension. Taxpayers who reported and paid tax on all their taxable income but did not file FBARs should not participate in the 2011 OVDI but should merely file the delinquent FBARs with the Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621 (and attach a statement explaining why the reports are filed late). The IRS will not impose a penalty for the failure-to-file the delinquent FBARs if there are no under-reported tax liabilities and the FBARs are filed by August 31, 2011.^[xi]

Under the 2011 OVDI, taxpayers are not required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes.^[xii] A similar provision in the 2009 OVDP has caused considerable frustration among taxpayers and their representatives. The understanding of potentially applicable penalties may differ greatly in the eyes of a taxpayer as compared to an IRS examiner. Anyone considering a 2011 OVDI submission must carefully examine all potential civil penalties and evaluate the actual risk of criminal prosecution.

Criminal prosecutions generally require a voluntary, intentional violation of a known legal duty. For many taxpayers, the actual risk of criminal prosecution might not be realistic. Many taxpayers with foreign bank accounts are immigrants or descendants of immigrants who are unfamiliar with the filing and reporting requirements. The determination of whether the government might be able to demonstrate a voluntary, intentional violation of a known legal duty to appropriately report an interest in a foreign account or asset must be carefully considered before determining whether to participate or not in the 2011 OVDI. Taxpayers and their advisors should ask whether the prospect of a criminal prosecution can somehow be reduced or eliminated by filing amended or delinquent returns and FBARs in lieu of a direct participation in the 2011 OVDI.

Potential civil penalties associated with undisclosed interests in foreign accounts and assets can far overshadow the current value of such accounts and assets. This raises several questions: Is there some method of reducing the potentially applicable penalty exposure without participating in the 2011 OVDI? Could filing amended or delinquent returns and FBARs in lieu of a direct participation in the 2011 OVDI reduce these civil penalties? What would be the potentially applicable penalties upon an examination of such returns and FBARs? In any such examination, would the government take retribution since the taxpayer effectively declined participating in the 2011 OVDI? Will the government pursue non-compliant taxpayers through the required judicial process following assessment of an FBAR penalty?^[xiii]

In answering these questions, it is important to consider that the ability of a United States taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming nonexistent. Information regarding undisclosed interests in foreign financial accounts and assets flows into the government on an almost daily basis. Financial mercenaries (a.k.a. “whistleblowers” or informants) are lurking within substantially every foreign institution. Tax treaties and information exchange agreements, information developed through submissions and interviews of 2009 OVDP participants and those who will participate in the 2011 OVDI, information provided by foreign institutions and advisors (whether indicted or not) continues to generate additional leads to taxpayers and their advisors. Additional information will become available as the Foreign Account Tax Compliance Act and Foreign Financial Asset Reporting^[xiv] become effective in the next few years.

The 2011 OVDI emphasizes maximum penalties by eliminating examiner discretion. It specifically includes foreign assets, real estate, foreign entities, etc. in the offshore penalty calculation, especially if assets are acquired with funds subject to United States taxation. Contents of foreign safe deposit boxes may be subjected to the offshore penalty together with other foreign assets acquired with funds that were subject to United States tax but on which no such tax was paid. The offshore penalty would apply regardless of whether the assets are producing current income. Assuming that the assets were acquired with after tax funds or from funds that were not subject to United States taxation, if the assets have not yet produced any income, there has been no United States taxable event and no reporting obligation to disclose.

It is not possible to know exactly what will happen to taxpayers who decide to risk detection by the IRS and the imposition of substantial civil penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. Full examinations? For how many tax years? Taxpayer and return preparer interviews? Maximum civil penalties? Criminal investigations? Will Congress later enact a strict-liability death penalty for non-compliant taxpayers?

The ability to properly advise a client regarding participation in the 2011 OVDI requires an understanding of the potentially applicable foreign-related penalties for non-participants, the historic IRS and Department of Justice voluntary disclosure practice and policies and a healthy respect for the ongoing governmental international tax enforcement efforts within a shrinking global community. Also, the representative must be aware that relevant processes and procedures seem to change frequently . . . and without notice.

Many taxpayers will decide to participate in the 2011 OVDI and comply with the tax reporting laws now that they are aware of the FBAR and other foreign account reporting requirements. Others may wish to take advantage of an opportunity to repatriate stagnant foreign funds or simply move on with their lives. The IRS is committed to enforcement concerning offshore accounts and can be expected to continue to enhance these efforts. Through these enforcement efforts, along with the changing environment concerning bank secrecy, the IRS will undoubtedly uncover the otherwise undisclosed foreign accounts of many overly optimistic taxpayers. Nevertheless, the IRS simply will not be able to locate the vast majority of foreign account holders through enforcement efforts alone. But each non-compliant taxpayer that the IRS detects will no doubt forever regret missing the opportunity to participate in the “the last, best chance . . . to get back into the system.”

[i]. 26 U.S.C. §61, et. seq.

[ii]. See 31 U.S.C §§5311-5330 and 31 CFR Chapter X (Effective March 1, 2011; formerly 31 CFR Part 103 through February 28, 2011).

[iii]. http://www.irs.gov/pub/irs-pdf/f90221.pdf.

[iv]. The Internal Revenue Manual [IRM 4.26.16.5.3 (07-01-2008)] specifically provides that the mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness. However, taxpayers should exercise caution in asserting a lack of willfulness when the wrong box has been checked on Schedule B. All relevant facts and circumstances must be fully developed and carefully considered.

[v]. IRS Commissioner Douglas H. Shulman, February 8, 2011 (IR-2011-14)

[vi]. The 2011 Offshore Voluntary Disclosures Letter is available at http://www.irs.gov/pub/irs-utl/2011-ovdi-irs-ci-letter-01-31-2011.doc

[vii]. The 2011 Offshore Voluntary Disclosures Package includes various documents and forms identified at http://www.irs.gov/newsroom/article/0,,id=235584,00.html

[viii]. FAQ 52 of the 2011 OVDI

[ix]. Id.

[x]. FAQ 53 of the 2011 OVDI

[xi]. FAQ 17 of the 2011 OVDI

[xii]. FAQ 50 of the 2011 OVDI

[xiii]. The period of limitation on collection of FBAR penalties is found in 31 U.S.C. §5321(b)(2). The government may commence a civil action to recover a civil penalty assessed under subsection (a) at any time before the end of the two year period beginning on the later of: (i) The date the penalty was assessed; or (ii) The date any judgment becomes final in any criminal action under 31 U.S.C. §5322 in connection with the same transaction with respect to which the penalty is assessed. The date the FBAR penalty is assessed is the date that the IRS designated official stamps IRS Form 13448. See IRM 4.26.17.5.5.2 (01-01-2007)

[xiv]. 26 U.S.C. § 6038D

Leave a Comment

Posted in Uncategorized | Tags: FBAR, irs, irs audit, offshore, OVDI, penalty, tax enforcement, tax penalty, voluntary disclosure

Posted by: Taxlitigator | January 11, 2012

Non-Filers Beware: Who’s That Knocking at Your Door ?

The IRS continues to enhance its ongoing enforcement efforts and expedited reporting between the IRS and the state taxing agencies will have a significant future impact on taxpayers who, for whatever reason, have failed to timely file their tax returns. The government can better identify taxpayers who have underreported or not reported income or have otherwise failed to file returns. As a result, hunting for non-filers will likely become the trophy sport for the IRS!

Non-Filers. A “non-filer” is a taxpayer (or someone who the government believes ought to be a taxpayer) who does not file their return before the deadline to file the next year’s return. A “late filer” is taxpayer who misses the deadline for the year in question, but files the return within the following year. Many non-filers analyze optional strategies given the probability of audit and detection and the extent of penalties, if discovered. Others claim to be trapped into non-filing status because of past decisions. Typically, non-filers fall into three categories:

i) Procrastinators – Know they should file but need assistance and/or prompting. They will typically respond and always indicate that they will cooperate. However, information is generally slowly provided in a piecemeal fashion.

ii) Uncooperative Non-Filers – They refuse to acknowledge and respond to correspondence and/or phone calls and state up front that they will not cooperate.

iii) Tax Protestors – Advocate and/or use tax protestor’s schemes (i.e. refusal to file because of alleged constitutional reasons).

The IRS has identified at least 10 million delinquent returns and is pursuing a cross-functional National Non-Filer Strategy to identify non-compliant taxpayers and design methods to encourage their compliance. Before contacting a non-filer, the IRS will often attempt to identify the non-filer’s occupation, location of bank/savings accounts, sources of income, age, current address, last file returned, adjusted gross income of last file returned, taxes paid on last file returned – amounts and methods of payment (withholding, estimated tax, pre-payments), number of years delinquent, and the non-filer’s standard of living. They will search public records for evidence of additional unreported income, tax assessor and real estate records for assets held by the non-filer, and records of professional associations and business license bureaus for information on businesses being operated by the non-filer. They will also search various state records to disclose corporate charter information including principals of any businesses that have failed to file returns.

Determining the specific occupation of the non-filer can lead to additional sources of information, such as labor unions, professional societies, trade associations, etc.. IRS will also determine whether there is a history of non-filing (multiple non-filed years provide a pattern of behavior), whether there have been repeated contacts by the IRS, indications that the non-filer had knowledge of filing requirements (i.e. professional with an advanced education, person who works directly in the tax field), whether there are a large number of cash transactions (i.e. purchases by cash, cash deposits as evidenced by currency transaction reports, etc.) and whether there are indications of significant unreported income (i.e. substantial interests and dividends earned, investments in IRA accounts, stock and bond transactions, high mortgage interest paid, etc.).

If a non-filer is contacted by the government, the examiner will determine the cause (does the non-filer lack records, ability to pay, lack of education, etc.) and may offer necessary information or assistance (preparation of returns, payment arrangement information, etc.) to secure full cooperation. If the non-filer is uncooperative (won’t respond or refuses to cooperate), third party contacts and Summonses will be issued. If the examiner discovers subsequent acts of tax evasion (false statements, refusal to make records available, etc.), they will consider whether the case should be referred for a criminal investigation. The examiner will also be alert to attempts by the non-filer to conceal or transfer assets to evade collection of tax later assessed. In these cases, a jeopardy (immediate) assessment may be considered.

During non-filer examinations, the examiner will determine if related returns (corporate, partnership, employment tax, and excise tax returns) have been filed as required. They will also search for spin-off cases involving relatives, employees, employers, subcontractors, partners, and even return preparers! If a non-filer is involved in a family business, the examiner should determine if all family members have filed returns. If the non-filer is involved in a partnership, the IRS should determine if partnership returns have been filed and determine if all partners have filed returns. For delinquent corporate returns, they should determine if all shareholders have filed returns.

The IRS may independently prepare a tax return and the related assessments under Internal Revenue Code § 6020 (b). These assessments are generally based on very limited information, such as that gathered from Forms W-2 and 1099. For these cases, IRS assesses the maximum potential tax owed based on gross receipts since they don’t have access to potential deductions, exemptions or credits available to the taxpayer. By failing to file a return, a taxpayer may also lose a refund of any amounts withheld. The failure to file and pay self-employment tax by self-employed individuals could cause them to be ineligible for social security retirement or disability benefits.

The role of IRS Criminal Investigation (IRS-CI) in the National Non-Filer Strategy is generally the enforcement of the tax laws for individuals who are not responsive to outreach efforts. IRS-CI has developed and investigates high impact investigations of non-filers in various occupations and industries, as well as those who file non-processable returns or employ frivolous arguments which the courts have repeatedly rejected. The majority of people who come forward and file returns prior to being notified by IRS are not pursued through a criminal investigation. However, a non-filer should not wait since the “first knock on the door” may be that of a special agent from IRS-CI.

Voluntary Disclosure. Practitioners often struggle with the issue of whether a taxpayer can avoid a criminal tax investigation by making a disclosure to the IRS. A “voluntary disclosure” is generally the process of voluntarily reporting previously undisclosed income (or false deductions) through an amended return or the filing of a delinquent return. A taxpayer’s timely, voluntary disclosure of a significant unreported tax liability is an important factor to the IRS in considering whether the matter should be referred to the U.S. Department of Justice for criminal prosecution. Properly resolving this issue can mean the difference between a taxpayer being criminally excused of a tax crime or being convicted on the basis of admissions derived from the voluntary disclosure itself.

Certainly, the IRS has a somewhat limited capacity to perform criminal investigations. However, a significant amount of time is not required to criminally investigate and prosecute a non-filer, particularly one who files delinquent or amended returns following an IRS inquiry. Without adequate representation, the perceived light at the other end of the voluntary disclosure tunnel….may be the IRS train coming straight at the taxpayer!

The IRS voluntary disclosure policy creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for internal guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. A timely voluntary disclosure will not guarantee immunity from criminal prosecution, but a true voluntary disclosure will normally result in the IRS not even recommending a criminal prosecution to the Department of Justice.

A voluntary disclosure must be truthful, timely and complete, and the taxpayer must demonstrate a willingness to cooperate (and must in fact cooperate) with the IRS in determining the correct tax liability. The taxpayer must make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. Additionally, the policy only applies to income earned through a legal business – – so called “legal source” income.

To be timely, the disclosure must be received before: (i) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; (ii) the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance; (iii) the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or (iv) the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

A voluntary disclosure does not occur until IRS has actually been contacted. As such, it is imperative that the disclosure occur as quickly as possible. A voluntary disclosure cannot be made anonymously. Any plan by a taxpayer, or their representative, to resolve a tax liability, file a correct return, or offer payment of taxes for an anonymous client is not to be considered a voluntary disclosure. IRS will rarely recommend prosecution if there has been a timely voluntary disclosure. Since returns filed pursuant to a timely voluntary disclosure have significant audit potential, they should be “bulletproof” in correctly reflecting the taxpayer’s income and expense items. Due to various federal-state information sharing agreements, any applicable state returns should obviously be contemporaneously filed or amended with the federal returns. Returns for related entities should also be contemporaneously filed or amended. If a return filed pursuant to a voluntary disclosure is less than accurate, the taxpayer is compounding – – not helping the problem.

How many returns must be filed or amended? While there is certainly no well-established rule as to how many returns must be filed in making a voluntary disclosure, the general consensus is probably six tax years since the applicable statute of limitations for most tax related crimes is six years. The disclosure should eliminate any government concern that there might be any potential issues with respect to a particular tax year for which the applicable statute of limitations for criminal prosecutions has not already expired. Additional returns could be in order since the statute of limitations for a criminal prosecution is tolled for the period of time a taxpayer is outside of the United States or is a fugitive from justice.

Typically, in a civil context, it is also the IRS policy to enforce the filing of returns for the prior 6 tax years. In considering whether shorter or longer periods should be civilly enforced, the IRS will determine the prior history of non-compliance, the possible existence of income from illegal sources, the effect on voluntary compliance, the anticipated revenue in relation to the time and effort required to determine the tax due, and special circumstances existing in the case of a particular taxpayer, class of taxpayer, or industry, which may be particular to the class of tax involved. The objective of the National Non-Filer Strategy is to bring non-filers back into the tax system by securing a substantially correct delinquent return.

Counsel must determine whether to contact the IRS before submitting a voluntary disclosure and actually filing the delinquent or amended tax returns. Some practitioners prefer to submit a Freedom of Information Act (FOIA) request seeking income information already in the possession of the IRS before filing the returns. Some simply choose to file the delinquent or amended returns, with payment, with the appropriate IRS service center (now referred to as a “campus”) by certified mail, return receipt requested. Filings are often sent in separately for each tax year spaced out over a brief time period. Such filings occur during the typical tax return filing season – around April 15 and October 15 for individual returns. When you run with the bulls….

“Do The Right Thing.” Tax laws cannot be administered by solely relying on enforcement because the government simply does not have resources to react after-the-fact to compliance concerns. Instead, taxpayers must be educated about their obligations and encouraged to “do the right thing.” Complex tax rules tend to be the oil fields into which the “perennial loophole seekers punch holes looking for a gusher.” The best strategy is full compliance with the filing and reporting requirements…don’t wait to find a stranger knocking on the door!

Leave a Comment

Posted in Uncategorized | Tags: delinquent tax return, irs audit, nonfiler, tax enforcement, tax return

Posted by: Taxlitigator | January 11, 2012

Examining the FBAR / Offshore Account Information Document Request (IDR)

Questions regarding the depth of an offshore account examination for those who, for whatever reason, did not participate in the 2009 OVDP or the 2011/2012 OVDI are now beginning to be answered in various IRS examinations around the country. A voluntary disclosure would not likely be considered timely following receipt of a notice of an IRS examination. These examinations are highly focused on the source of funds deposited into the foreign financial account, earnings on the account and the reasoning behind the taxpayer not previously pursuing a voluntary disclosure. A non-taxable nature of the funds deposited (such as an inheritance or deposits before the taxpayer became a U.S. person) does not seem to slow the momentum of these examinations.

The initial IDR issued in connection with the commencement of a examination involving previously undisclosed offshore financial accounts will seem overwhelming to even the most seasoned tax practitioners. Predictably, the IRS appears to have somewhat standardized their IDR in these matters by requesting everything imaginable with respect to the taxpayer under examination and all related entities. For the year under examination, a typical offshore account IDR will request that the taxpayer provide:

A. TAX RETURNS.

1. Provide copies of all Tax Returns and Information Return Forms filed:

a. Form-l040, U.S. Income Tax Return for Individuals including all schedules and attached informational returns for the year.

b. Forms 1099 received by the taxpayer for the year.

c. Forms 1099 issued by the taxpayer for the year.

d. Forms 1065. U.S. Partnership Return of Income including all schedules and attached informational returns for the year.

e. Forms 1120 and 1120S, U.S. Corporate Income Tax Returns including all schedules and attached informational returns for the year for each corporation, of which taxpayer owned or exercised control over more than 50 percent of the total combined voting power of all classes of stock or more than 50 percent of the total value of the stock of the corporation.

f. Form 1120F, U.S. Income Tax Return of a Foreign Corporation including all schedules and attached informational returns for the year 2008 for each corporation of which the taxpayer owned or exercised control over more than 50 percent of the total combined voting power of all classes of stock or more than 50 percent of the total value of the stock of the corporation.

g. Form 1041, U.S. Income-Tax Return for Estates and Trusts, including all schedules and attached information returns for which the taxpayer was the administrator, executor, fiduciary, trustee, grantor, or a beneficiary for year.

h. Form l040NR (used for foreign trusts), U.S, Nonresident Alien Income Tax Return. including all schedules and attached information returns for which the taxpayer was the administrator, executor, or beneficiary for the year.

i. Form 3520A, Annual Information Return of Foreign Trust With a U.S. Owner for year 2008 for which the taxpayer is treated as an owner.

j. Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts for the year for which the taxpayer is or is treated as an owner.

k. Form 1042, Annual Withholding Tax Return for U.S. Sourced Income of Foreign Persons for the year.

l. Form 1042S, Foreign Persons U.S. Source Income Subject to withholding for the year.

m. Form 5471, Information Return of a Person With Respect to Certain Foreign Corporations for the year.

n. Form 5471. Information Return of a. 25-percent Foreign-Owned Corporation or a Foreign Corporation Engaged, in a U.S. Trade or Business for the year.

o. All amended tax returns and informational returns.

B. BANK RECORDS

1. For each bank account, in any name, whether foreign or domestic, over which the taxpayer had signature other authority and/or over which the taxpayer exercised control, during the year, produce all documents in the taxpayer’s possession, custody, or control including, but not limited to:

a. account applications (regardless of date; in english)

b. monthly or periodic statements (in english)

c. wire transfer authorizations and confirmations

d. deposit slips’ and deposited items

e. credit and debit memos and advices

f. cancelled checks

g. check registers

h. passbooks

l. loan applications (regardless of date)

j. promissory notes

k.. certificates of deposit

1. letters of credit

m. cashiers checks

n. money orders

o. safe deposit box rental agreements (regardless of date)

p. safe deposit box visitation ledgers

q. all correspondence/emails (in english) from the inception of the account through today

r. memorandum files maintained by the bank or other financial institution or any of their officers or employees, reflecting communications between the bank and the taxpayer or others acting on the taxpayer’s behalf and documenting actions taken pursuant to directions received from the taxpayer or on the taxpayer’s behalf, reflecting any thoughts or decisions of the bank or its employees or officers regarding the account

s. documents verifying the origin of all funds used to open the accounts or deposited to these accounts (regardless of date).

2. For the year, provide all period statements for each bank account, whether foreign or domestic, under any name, over which the taxpayer had signature or other authority or over which the taxpayer exercised control.

3. For each bank account, whether foreign or domestic, under any name, over which the taxpayer had signature or other authority and/or over which the taxpayer exercised control during the year produce the Know Your Customer Account information given to the bank and/or financial institution by the taxpayer and/or on the taxpayer’s behalf including. but not limited to, all account set up documents (regardless of the year), such as signature cards, opening deposit slips, passport copies, certificates of beneficial ownership, letters of reference, certificates of clean funds and/or other source of funds documentation.

4. For each Certificate of Deposit, Time Deposit, or equivalent account at a bank or financial institution. whether foreign or domestic, over which the taxpayer had signature authority or other authority or over which the taxpayer exercised control at any time during the year produce statements of certificate of deposit, records reflecting purchase of the certificate, earnings, records reflecting redemption or other disposition of the certificate. In addition, provide documents verifying the origin of all funds used to open these accounts or deposited to these accounts at any time.

5. For all transfers of funds during the year between all bank accounts, financial accounts, and other accounts over which the taxpayer had signature or other authority, or over which the taxpayer exercised control during the year, provide the following:

a. list of transfers

b. documents showing the source of the funds transferred (e.g.; copy of check- back and front, wire transfer authorizations, bank statement, source of cash deposit)

c. documents showing the deposit of the funds transferred (e.g., bank statement)

d. advice memos, correspondence or other direction the taxpayer sent or received regarding the transfers, withdrawals and deposits.

6. All documents relating to foreign and domestic credit, debit, ATM or charge accounts over which the taxpayer had or other authority or over which the taxpayer exercised control for the year, including, but not limited to:

a. original cards (The IRS will make a copy of each card and return it to the taxpayer)

b. card applications (regardless of date)

c. agreements (regardless of date)

d. customer relationship records or other similar record identifying persons with signatory authority or other authority over the account (regardless of date)

e. monthly or periodic charge statements

f. charge receipts

g. cash advance confirmations

h. payments or funds transferred for balances due

i. electronic payment and/or transfer records

7. For each foreign bank account, in any name, over which the taxpayer had signature other authority and/or over which the taxpayer exercised control, during the year, produce all documents from such bank informing you that your account information was subject to an exchange of information request with the United States government. If you received such a notice, state whether you signed a waiver or consent permitting disclosure of your account information to the IRS.

C. BROKERAGE OR SECURITIES ACCOUNTS

1. For each brokerage or securities account, in any name, whether foreign or domestic, over which the taxpayer had signature, dealer or other authority or which the taxpayer controlled, either directly or through nominees, agents, powers of attorney, letters of direction, or any device whatsoever, during the year produce all documents in the taxpayer’s possession, custody or control or to which the taxpayer had right of access for the period January 1 through December 31 of the year, including but not limited to:

a. account application (regardless of date)

b. signature cards (regardless of date)

c. monthly or periodic account statements

d. annual account statements

e. wire transfer authorizations and confirmations

f. all correspondence, including but not limited to, letters, memoranda, telegrams, telexes, e-mail, and letters of instruction,

g. memorandum files maintained by the brokerage firm or any of their officers or employees, reflecting communications between the firm, their officers, or employees and the taxpayer or others acting on the taxpayer’s behalf, documenting actions taken pursuant to directions received from the taxpayer or on the taxpayer’s behalf, and reflecting any thoughts or decisions of any person regarding the account

h. documents verifying the origin of all funds deposited in the account

i. know-your-customer KYC) files or other similar records maintained for anti-money laundering purposes (regardless of date), including but not limited to account set up documents, identification documents such as passports, driver’s licenses, opening deposit slips, certificates of beneficial ownership, letters of reference, certificates of clean funds and other source of funds documentation

D. OWNERSHIP

1. For each entity or structure, foreign or domestic (including but not limited to all foundations, stiftungs, anstalts, and/or other legal entities) in which the taxpayer exercised control and/or held an ownership interest, legal interest, fiduciary interest, and/or beneficial interest at any time during the year, provide all documents relating to each entity or structure, including but not limited to:

a. organizational documents, deeds of incorporation. by-laws, registrations (regardless of date)

b. ownership documents including those reflecting the taxpayer’s percentage of legal ownership. percentage of beneficial ownership, and all changes in ownership (regardless of date)

c. operational and business documents

d. financial statements

2. For each entity or structure identified, provide all books and records for the year, including, but not limited to:

a. monthly or periodic bank statements, general ledgers

b. articles of incorporation

c. memoranda of association

d. stock record book

e. minute book

f. partnership agreements

g. trust instruments and other formation documents

h. documents designating beneficiaries

i. documents designating trustees

j. documents designating protectors

k. documents designating partners

1. documents designating percentage ownership

m. contracts and agreements

n. records of brokerage or other investment accounts

o. records of assets and liabilities

p. powers of attorney, letters of wishes, letters of direction, or other similar documents granting authority to agents to act on behalf of the entity

q. correspondence files

r. documents under “mail to be kept at the bank” agreements

s. safe deposit boxes

t. correspondence to or from the legal entity

u. organizational charts

v. orders to change representation or for cancellation of the ega entity

w. internal notes and memoranda referencing any aspect of the legal entity, founder, and/or beneficiary(s)

x. last will and testament and all estate planning documents, whether superceded or not, of the founder and al beneficiaries

3. For each entity or structure identified, provide all documents distributed, sent, and/or transmitted by or to any legal, fiduciary and/or beneficial owners to and from professionals

(e.g., attorneys, accountants, bankers, trust advisors, etc.) including, but not limited to contracts, agreements, advisories, schedules, letters, memoranda, notes and instructions.

4. For each entity or structure identified, provide the name, address and telephone number of the person(s)controlling the assets of the entity or structure during the year.

5. All written contracts, agreements, letters, memoranda, notes, statements, and all other documents of the year pertaining to the assignment and transfer of ownership interest in and rights to use of real, personal or intangible property by or for the taxpayer or the taxpayer’s benefit.

6. All powers of attorney giving the taxpayer authority to act on behalf of any person or entity, foreign or domestic, during the year.

7. All powers of attorney executed by the taxpayer giving another the authority to act on the taxpayer’s behalf or on behalf of any person or entity, whether foreign or domestic over which the taxpayer exercises control, during the year.

8. All certificates of beneficial ownership, stock certificates, including bearer shares or other similar evidences of ownership in owned by the taxpayer at any time during the year with respect to any foreign trust, corporation, foundation, international business company, or similar entity.

9. Provide all records, returns, information related to foreign joint venture profit participation from inception to current.

E. NON-TAXABLE SOURCES OF INCOME.

1. All records pertaining to any non-taxable sources of income, including, but not limited to, proceeds of loans, gifts, inheritances, insurance settlements, tax refunds, and tax-exempt interest the taxpayer received for year.

a. For each loan whether commercial or private, made or obtained by the taxpayer or on the taxpayer’s behalf during the year or which was in existence during the year, provide all documents evidencing the terms and performance of the transaction, including, but not limited to:

1. loan applications (regardless of date)

2. loan agreements and contracts (regardless of date)

3. loan amortization schedules (regardless of date)

4. promissory notes

5. grant deeds, deeds of trust, mortgages, or other security

6.documents showing disbursement of the loan proceeds (e.g., wire transfer authorization)

7. records of receipt of principal and interest

8. records of payment of principal and interest

F. TRAVEL

1. All of the taxpayer’s original U.S. passports, both current and expired.

2. All of the taxpayer’s original foreign passports, both current and expired.

3. All records of foreign travel during the year, including, but not limited to, commercial transportation, private leasing, and vehicles/aircraft/boats owned by the taxpayer.

G. PROFESSIONALS

1. All financial statements prepared by the taxpayer, for the taxpayer, or on the taxpayer’s behalf for any purpose during and/or for the year.

2. Provide the name, address, telephone number of each private banker, broker, trust advisor, investment or other financial advisor. advisor on privacy matters, lawyer and accountant from whom the taxpayer received advice or services during the year.

3. All business cards for attorneys, paralegals, consultants, accountants, and/or other professionals in the taxpayer’s possession and/or within the taxpayer’s control during year.

4. All records relating to any payments in the year 2008 by or for the benefit of the taxpayer or any non-publically traded entity, foreign or domestic, in which the taxpayer held a direct or indirect ownership or beneficial interest or over which the taxpayer exercised control. either directly or through a nominee, agent, power of attorney, letter of direction, letter of wishes, or any device whatsoever, for:

a. management fees

b. consulting fees

c. research and development fees

d. legal fees

e. brokerage fees

f other personal service fees

g. salaries or wages

h. insurance premiums

i. royalties

j. lease or rental fees

k. loan fees

l. interest

The foregoing records should include, but are not limited to:

a. contracts or agreements

b. invoices

c. cancelled checks

d. wire transfers

e. letters of credit

f. all correspondence

5. Identify all professional, social and civic organizations the taxpayer has been a member of from January 1 of the year to present. Include in your response the following:

a. name, telephone number and current address of the organization

b. dates of membership

c. offices held (and dates)

d. membership number or other identifying numbers (e.g., State Bar Numbers, CPA ID numbers)

6. If the taxpayer is a member of an organization with and oversight committee or disciplinary board, identify any complaints filed against you. including;

a. name and address of the complainant (if anonymous, so indicate)

b. date of complaint

c. copy of your written response

d. disposition or result of investigation

e. date and location of any hearing, including the tribunal you appeared before

f. copy of your written response

g. disposition or result of investigation

In responding to the foregoing offshore Account IDR, the following instructions are provided:

INSTRUCTIONS FOR THIS REQUEST-READ CAREFULLY

1. The term “document(s) is used in the broadest sense and includes all attachments. Document(s) includes any written, typed, photo static, recorded or otherwise visually reproduced communications or presentations, whether comprised of letters, words, numbers, pictures, sounds, symbols, or any combination thereof. Document(s) refers to all written, printed, typed, graphically, visually or aurally reproduced material of any kind, or other means of preserving thought or expression, and all tangible things from which information can be processed or transcribed. Further, “documents” include, but are not limited to:

a. Items designated as internal, confidential, ”not to be disclosed” or private;

b. All electronic mail (e-mail), whether on an electronic disk and/or any other system or device which saves emails, attachments, links; and

c. Videotapes, audiotapes, CDs, cassettes, DVDs, films, flash drives (memory sticks, etc.), microfilm, computer files, computer discs, computer programs and other electronic media.

2. If a document has been prepared in several copies, or additional copies have been made, and the copies are not identical (or, by reason of subsequent modification or notation, are no longer identical), each non-identical copy is a separate “document.”

3. The taxpayer has “possession, custody, or control” if the taxpayer has actual or constructive possession of the document and/or can access the document upon inquiry and/or through a legal right to obtain the document including, but not limited to, responsive documents in the possession, custody, or control of taxpayer’s lawyer(s),accountant(s), banker(s), advisor(s), and/or trust advisor(s).

4. All responsive documents in the taxpayer’s possession, custody or control should be provided, as well as all documents, in the possession, custody, or control of the taxpayer’s agents, employees, and/or representatives, including but not limited to , responsive documents in the possession, custody or control of taxpayer’s lawyer(s), accountant(s), advisors, and/or trust advisor(s).

5. If any responsive document was, but is no longer, in taxpayer’s possession, custody or control, state what disposition was made of it, the reason for such disposition and who has possession or control of the document.

6. The term “taxpayer” means the individual under audit. The term “taxpayer” also means all foreign or domestic entities or structures over which the individual taxpayer exercises control including, but not limited to, corporations, partnerships, associations, limited liability companies, trusts, estates, foundations, escrows, charitable foundations, banks, and nominees.

7. A taxpayer can “exercise control” by acting directly or indirectly. Indirect control includes, but is not limited to, the use of nominees, agents, powers of attorney, protectors, advisors, trusts, letter of wishes, by-laws, letters of direction, or any device whatsoever.

8. The taxpayer has “signature or other authority” over an account if the taxpayer can control the disposition of money or other property in the account by delivery of a document containing the taxpayer’s signature-either alone or with the signature of other person(s) and/or with code word(s) and/or code name(s)-to the bank or other person with whom the account is maintained, or if the taxpayer can exercise comparable authority over the account by direct or indirect communication with the bank or other person with whom the account is maintained, either orally or by some other means.

9. If the taxpayer claims a “privilege’ for any document responsive to any request, or any part of such document, specify:

a. name and title of the author;

b. date appearing on such document or, if undated, the date or approximate dates such document was created;

c. name and title of each addressee and of each recipients of the document and/or copies thereto;

d. subject matter of the document;

e. name and address of each persons having present possession, custody, or control of such document and/or copies thereof;

f. privilege or protection claimed; and

g. number of the request(s) to which production of the document would otherwise be responsive.

10. If you do not have-one or more of the requested items or do not know the answer to one or more of the questions asked, but you know who does, please state the name, address, and phone number or other contact information for each such person in your response to the request or question.

Detailed responses to detailed requests for information often generate additional detailed requests for information. As such, offshore account IDRs typically conclude with the admonition that additional years and items can be added as audit issue(s), and additional records or documents may be requested as the examination progresses. Further, taxpayer’s are cautioned to retain all potentially relevant and previously requested records or documents until the examination is concluded.

Taxpayers having previously undisclosed interests in foreign financial accounts should immediately consider methods of becoming compliant. There is no better time to prepare for a later examination than when the documents are being drafted and executed. Files for relevant documents and schedules should be coordinated with a view towards accelerating any later examination. If the transaction has any unique concerns, those issues should be well documented. It is sometimes difficult to later recall why documents were drafted in a certain manner or with unique provisions.

During the examination, the IRS may require responses within a relatively short timeframe (often less than 30 days since most such examinations are being worked as part of a larger examination project focused on foreign financial institutions and their accountholders). If documents are not readily available, make that fact known in advance.

The standardized offshore account IDR may cause the practitioner to wonder about their ability to effectively respond as well as their ethical responsibilities. Upon request by the IRS, practitioners must promptly submit non-privileged records & information to the IRS, notify the IRS of the location of requested records & information in possession of others, and make reasonable inquiries of the taxpayer regarding the location of requested records & information in possession of others.^[i] Further, a practitioner may not unreasonably delay the prompt disposition of any matter before the IRS. ^[ii]

Competent counsel must be consulted before the examination begins since sensitive tax issues permeate an examination of any taxpayer having previously undisclosed interests in a foreign financial account or foreign assets. How can any practitioner promptly and effectively respond to an offshore account IDR that requests everything imaginable with respect to the domestic and foreign activities of what are likely high wealth taxpayers having numerous domestic and foreign related entities? Neither the taxpayer nor the IRS have any desire to unnecessarily prolong the examination process. Initially, the practitioner should coordinate a meeting with the examiner to determine whether it might be possible to streamline the examination process, being careful about obvious sensitive issues. Is it possible to determine whether the examination will be resolved in a purely civil manner without a referral for criminal investigation? That may be the purpose of the examination.

The practitioner’s duty of representation to the client must be balanced with the effort to reasonably cooperate with the examination process. The practitioner should attempt to reasonably limit the scope of the inquiry and limit the information provided so as to avoid the waiver of any potential privileges. If matters are privileged, the correspondence and relevant files should be appropriately labeled. Be aware of any potential privileges that may apply and make sure not to inadvertently waive any privilege. Separate files should be maintained for relevant documents that might be requested by the IRS as well as documents that contain potentially confidential, privileged information. It is important to know exactly which documents are deemed important to the IRS. Copies of documents provided during the course of the examination should be made in duplicate – one copy for the IRS and an extra copy to be maintained in a separate audit file specifically identifying documents provided during the course of the examination.

It is generally advisable to attempt to resolve any examination at the earliest opportunity. However, the design of foreign account examinations mostly precludes any ability for a prompt resolution. Practitioners must respect the nature of these examinations and exercise discretion and their best judgment in responding (or not) to each request for information. The IRS has expended considerable resources rooting out non-compliant taxpayers having previously undisclosed interests in foreign financial accounts. IRS has determined that such taxpayers represent a compliance challenge worthy of devoting substantial enforcement resources. Taxpayers and their representatives must be prepared to respond in kind.

Compliance, compliance, compliance. Those with interests in foreign accounts that have not previously been disclosed should immediately consult competent tax counsel about coming into compliance. The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming nonexistent. Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, and from others who participated in the OVDP and the OVDI identifying their banks, bankers, advisors and others. Additional information will become available as the FATCA^[iii] and Foreign Financial Asset Reporting (new Code § 6038D) become effective in the next few years.

The criminal “pre-clearance” OVDP/OVDI voluntary disclosure process of submitting the taxpayer’s name, address, date of birth and taxpayer identification number to Criminal Investigation is expected to remain available indefinitely. Representatives of numerous taxpayers having undisclosed interests in foreign financial accounts will continue to contact Criminal Investigation although there is no certainty in any potential civil resolution of the issues involved. However, likely far more taxpayers may not come forward out of concern that the IRS might assert FBAR (and other offshore related) penalties of up to 50% of the high account balance, per year. Some will undoubtedly decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution.

Many taxpayers will decide to submit a voluntary disclosure based on a personal desire to come into compliance now that they are aware of the FBAR and other foreign account reporting requirements. Others will recognize an opportunity to repatriate stagnant foreign funds into a domestic recessionary economy or may simply want to move on with their lives. Practitioners should continue to respect the value to our system of tax administration founded upon IRS and Department of Justice voluntary disclosure practice and policies as well as the ongoing governmental international tax enforcement efforts within a shrinking global community.

This is a target rich environment for the government. The IRS is committed to enforcement concerning offshore accounts and can be expected to continually enhance these efforts. The changing environment concerning bank secrecy will continue to uncover overly optimistic U.S. persons. However, the IRS simply will not be able to locate the vast majority of foreign account holders through enforcement efforts alone. The voluntary disclosure practices of the IRS and the Department of Justice are designed to encourage non-compliant taxpayers to come forward into compliance.

Our system of tax administration requires a perception of fairness and respect for those who make a voluntary, conscious decision to come into compliance before being contacted about their previous tax indiscretions. Accordingly, it can be anticipated that the IRS will continue to “draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement . . . For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under [the] voluntary disclosure practice and get right with the government.”^[iv] Coming into past compliance through a voluntary disclosure, or at least prospective compliance, is the right thing to do. Waiting is simply not a viable option . . .

_____________________________________________

[i]. Treasury Department Circular No. 230 (CIR 230), Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service, §10.20

[ii]. CIR 230 §10.23

[iii] See “FATCA and Foreign Bank Accounts: Has the U.S. Overreached?” by Scott D. Michel and H. David Rosenbloom, (Tax Analysts Viewpoints, May 30, 2011).

[iv] IRS Commissioner Douglas H. Shulman, March 26, 2009

Leave a Comment

Posted in Uncategorized | Tags: FBAR, irs audit, irs examination, tax dispute, tax enfrcement, tax fraud

Posted by: Taxlitigator | January 11, 2012

IRS Voluntary Disclosure Practice

Since 1952, practitioners are unaware of any situation where the IRS has referred a timely, truthful and complete voluntary disclosure to the Department of Justice for criminal prosecution. A truthful, timely and complete voluntary disclosure is a factor considered in the IRS decision re a possible criminal prosecution referral to the U.S. Department of Justice. ^[i] The taxpayer must fully cooperate with the government, make good faith arrangements to pay any tax, interest, and penalties determined to be applicable, and must disclose every aspect of noncompliance. ^[ii]

The voluntary disclosure practice of the IRS and the Department of Justice are designed to encourage non-compliant taxpayers to come forward into compliance. Our system of tax administration requires a perception of fairness and respect for those who make a voluntary, conscious decision to come into compliance before being contacted about their previous tax indiscretions. The various offshore voluntary disclosure programs of 2009 OVDP and the 2011/2012 OVDI represent a formalization of the historic voluntary disclosure practice in effect for limited taxpayers and for a limited time frame. These initiatives provided an important opportunity for the government to publically demonstrate the benefits to taxpayer’s voluntarily coming into compliance.

Historically, a disclosure is timely if it is received before the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance; the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena). Importantly, the IRS Voluntary Disclosure Practice describes a voluntary disclosure to include:

(6) Examples of voluntary disclosures include: a. a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above. This is a voluntary disclosure because all elements . . . above are met.^[iii]

The Department of Justice maintains a voluntary disclosure policy that provides:

Whenever a person voluntarily discloses that he or she committed a crime before any investigation of the person’s conduct begins, that factor is considered by the Tax Division along with all other factors in the case in determining whether to pursue criminal prosecution. If a putative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service’s voluntary disclosure practice, the Tax Division may consider that factor in its exercise of prosecutorial discretion. It will consider, inter alia, the timeliness of the voluntary disclosure, what prompted the person to make the disclosure, and whether the person fully and truthfully cooperated with the government by paying past tax liabilities, complying with subsequent tax obligations, and assisting in the prosecution of other persons involved in the crime. ^[iv]

Further, the Department’s Policy Directives and Memoranda provides:

. . . the Service’s voluntary disclosure policy remains, as it has since 1952, an exercise of prosecutorial discretion that does not, and legally could not, confer any legal rights on taxpayers. If the Service has referred a case to the Division, it is reasonable and appropriate to assume that the Service has considered any voluntary disclosure claims made by the taxpayer and has referred the case to the Division in a manner consistent with its public statements and internal policies. As a result, our review is normally confined to the merits of the case and the application of the Department’s voluntary disclosure policy set forth in Section 4.01 of the Criminal Tax Manual.^[v]

Taxpayers submitting a voluntary disclosure as well as those who “opt-out” of the 2009 OVDP or the 2011 OVDI remain within IRS Criminal Investigation’s Voluntary Disclosure Practice. Therefore, they are still required to cooperate fully with any following examination by providing all requested information and records and must pay or make arrangements to pay the tax, interest, and penalties they are ultimately determined to be due. If a taxpayer does not cooperate or make payment arrangements, their matter may be referred back to Criminal Investigation. The opt-out decision should follow an extremely careful consideration of all relevant facts and circumstances that may adversly impact the taxpayer as a result. Benefits from opting out are, at best, far from certain.

[i] IRM 9.5.11.9 (June 26, 2009)

[ii] Id.

[iii] Id. See also the Criminal Information in United States v. Schiavo, Case 1:11-cr-10192-RGS-1 (USDC Mass, May 19, 2011) regarding the prosecution of a taxpayer for quietly filing a false amended return disclosing earnings on a foreign account but failing to disclose the underlying income deposited into the foreign account (¶ 11.A “silent disclosure” occurs when a U.S. taxpayer with an undeclared account files FBARs and amended returns and pays any related tax and interest for previously unreported offshore income without notifying the IRS of the undeclared account through the Voluntary Disclosure Program. A silent disclosure does not constitute a voluntary disclosure. On its website, the IRS strongly encourages taxpayers to come forward under the Voluntary Disclosure Program and warns them that taxpayers who instead make silent disclosures risk being criminally prosecuted for all applicable years. ¶ 18. On or about October 6, 2009, following widespread media coverage of UBS’s disclosure to the IRS of account records for undeclared accounts held by U.S. taxpayers and the IRS’s Voluntary Disclosure Program, Schiavo made a “silent disclosure” by preparing and filing FBARs and amended Forms 1040 for tax years 2003 to 2008, in which he reported the existence of his previously undeclared account at HSBC Bank Bermuda. He made such filings notwithstanding the availability of the Voluntary Disclosure Program. Schaivo reported on the amended individual income tax returns the interest income that he earned from the previously undeclared account he held at HSBC Bank Bermuda but did not report on the 2006 return the income earned that he earned from Headway Partners. ¶ 19. On or about October 27, 2009, a Special Agent from the IRS attempted to interview Schiavo at his home. ¶ 20. On or about October 29,2009, Schiavo prepared and executed a second amended individual income tax return for tax year 2006 on which he reported the income earned that he earned from Headway Partners and that had been deposited into his previously undeclared account at HSBC Bank Bermuda.).

[iv] Section 4.01, Criminal Tax Manual, U.S. Department of Justice (2008)

[v] Section 3, Policy Directives and Memoranda, Tax Division, U.S. Department of Justice (02/17/1993)

Leave a Comment

Posted in Uncategorized | Tags: FBAR, irs audit, OVDI, OVDP, tax dispute, tax enforcement

Posted by: Taxlitigator | January 11, 2012

Overview of FBAR Reporting Requirements

U.S. citizens and residents are taxed on their worldwide income, subject to certain very specific exemptions, whether they live inside or outside of the United States. Foreign income must be reported on a U.S. tax return whether or not the person receives a Form W-2, Wage and Tax Statement, a Form 1099 (information return) or the foreign equivalent of those forms. Foreign source income includes but is not limited to earned and unearned income, such as wages and tips, interest, dividends, capital gains, pensions, rents, and royalties. Generally, certain U. S. persons are required to file Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR) with the government if they have a reportable interest in one or more financial accounts in a foreign country having an aggregate value exceeding $10,000 at any time during the calendar year.

The IRS has been aggressively attempting to uncover tax-avoidance schemes involving the use of domestic or offshore financial accounts and arrangements. Most individuals wrongly believe that prior tax indiscretions can somehow be routinely resolved in a purely civil manner, without a criminal investigation or prosecution. However, within the past few years, at least 40 U.S. taxpayers and another 20 advisors (bankers, lawyers, consultants, etc.) have been criminally indicted for activities associated with U.S. persons holding undeclared interests in foreign financial accounts. Untold others are targets or subjects of ongoing federal criminal investigations.[i] In July 2010, various individuals around the country received a letter from the U.S. Department of Justice, Tax Division stating, in part:

Re Investigation of undeclared Foreign Financial Accounts.

The Department of Justice is conducting an investigation of U.S. taxpayers who may have violated federal criminal laws by failing to report they had a financial interest in, or signature authority over, a financial account located in a foreign country. We have reason to believe that you had an interest in a financial account in India that was not reported to the IRS on either a tax return or FBAR, Department of Treasury Form TD F 90-22.1, report of Foreign Bank and Financial Account. You are advised that the destruction or alteration of any document that may relate to this investigation constitutes a serious violation of federal law, including but not limited to obstruction of justice . . .. You are further advised that you are a subject of a criminal investigation being conducted by the Tax Division [of the Department of Justice].

Few individuals are able to emotionally survive receipt, at home, of the foregoing type of letter advising them that they are the “subject of a criminal investigation being conducted by the Tax Division” of the U.S. Department of Justice. If the initial taxpayer contact is from the IRS, a purely civil tax resolution is no longer certain and the likelihood of substantial civil penalties is significant. If the initial taxpayer contact regarding an undisclosed potential interest in a foreign financial account is from the Department of Justice, a purely civil tax resolution is anything but certain and is perhaps unlikely. Waiting is not a viable option for taxpayers having an undisclosed interest in a foreign financial account. They should immediately pursue a course of compliance designed to avoid criminal prosecution and substantial civil penalties. Actions designed to avoid detection by the government will surely increase the potential for criminal prosecution. Taunting a tiger having eleven active aircraft carriers and Seal Team Six simply doesn’t make any sense . . .

Overview of FBAR Reporting Requirements and Civil Penalties. Under the Bank Secrecy Act^[ii], a resident or citizen of the United States and a person in, and doing business in, the United States must file an FBAR if: (i) the person has a financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and (ii) the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year^[iii]. The FBAR must be filed by June 30 of each year for the prior calendar year. Extensions of time to file federal income tax returns do not extend the time for filing FBARs – there is presently no statutory or regulatory provision granting an extension beyond June 30 to file an FBAR.

Taxpayers are required to acknowledge their interest in the foreign financial account and identify the foreign country where the account is maintained on Schedule B, Line 7 of their income tax return. Line 7a of Schedule B of Form 1040 generally asks the taxpayer for a somewhat unsophisticated “yes” or “no” answer to the question: “At any time during [tax year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions on back for exceptions and filing requirements for Form TD F 90-22.1.” The instructions to Schedule B provide a general description of the FBAR and how to obtain a copy of the FBAR^[iv].

A “financial account” includes bank, savings and checking accounts, time deposits, securities accounts; mutual funds, brokerage and securities derivatives accounts; accounts where the assets are held in a commingled fund and the owner holds an equity interest in the fund; any other account maintained in a foreign financial institution or with a person doing business as a financial institution; and a foreign insurance policy having a cash surrender value.^[v] The term does not include individual bonds, notes, or stock certifications in the physical possession of the U.S. Person. The FBAR is not required for an account maintained with a branch, agency, or other office that is located in the U. S. even though the financial institution itself may be foreign.

The term “financial interest” includes accounts for which the U.S. Person is the owner of record or has legal title, whether the account is maintained on their own benefit or for the benefit of others that might include non-United States persons; accounts where the owner of record or holder of legal title is a person acting as an agent, nominee, or in some other capacity on behalf of a U.S. Person; a corporation in which a U.S. Person directly or indirectly owns more than 50% of the total value of the shares of stock; and an account where the owner of record or holder of legal title is a partnership in which the U.S. person owns interest in more than 50% of the profits or a trust in which the U.S. person either has a present beneficial interest in more than 50% of the current income.^[vi]

A U.S. person has account “signature authority” if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank or other person with whom the account is maintained.^[vii] A person with “other authority” over an account is one who can exercise power that is comparable to signature authority over an account by direct communication, either orally or by some other means, to the bank or other person with whom the account is maintained.

It is not a violation of U.S. law to have a legal or beneficial interest in a foreign financial account. However, failure to properly report the foreign account on Schedule B and to file an FBAR may be subject to civil and criminal sanctions. The two primary civil FBAR penalties are referred to as “non-willful” and “willful”^[viii]. The “non-willful” penalty is up to $10,000 for each negligent violation of the FBAR filing or record keeping requirements and may be waived if “such violation was due to reasonable cause” and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”^[ix] “Willfully” failing to file an FBAR can be subject to both criminal sanctions (i.e., imprisonment) and civil penalties equivalent to the greater of $100,000 or 50% of the high balance in an unreported foreign account, per year – for each year since October 22, 2004 for which an FBAR wasn’t filed.^[x] If asserted for one or more years, the penalty is not limited to the amount of funds in the account, etc. Schedule B and the instructions provide the government with what may be an important “willfulness” link between an income tax return and the FBAR filing requirements.

Willfulness. “Willfulness” is generally determined by “a voluntary, intentional violation of a known legal duty”.^[xi] The Internal Revenue manual (IRM) provides that willfulness is demonstrated by the person’s knowledge of the FBAR reporting requirements coupled with the person’s conscious choice not to comply with the requirements.^[xii] Under the concept of “willful blindness”, willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and record keeping requirements.^[xiii] The IRM provides an example involving willful blindness where a person admits knowledge of but fails to answer the question concerning signature authority at foreign banks on Schedule B of his income tax return.^[xiv]

To impose a willful FBAR penalty, the Government has the burden of proving that the taxpayer was “willful” in that they somehow made a “voluntary, intentional violation of a known legal duty.”^[xv] In United States v. J. Bryan Williams,^[xvi] even though the taxpayer acknowledged using a foreign financial account for the purpose of evading taxes in a conspiracy to defraud the government and checked “No” for Question 7a on Schedule B of his Form 1040, the district court held that his failure to file an FBAR was non-willful because the government did not meet its burden of proving that Mr. Williams knew about the FBAR requirements and nonetheless affirmatively chose to not comply. The court explained that the government “[did] not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account.”^[xvii]

The government has acknowledged the “inherent difficulty of proving, or disproving, a state of mind (willfulness) at the time of a violation.”^[xviii] A determination that there was a willful violation must generally be supported by substantial circumstantial evidence such as a combination of efforts taken to conceal the source and existence of the accounts through nominee foreign corporations or foundations having no true business or estate planning purposes[xix], lack of disclosures to the taxpayers advisors and possibly others, “hold mail” instructions to the institution, information and notes contained in the internal records of the foreign financial institution,[xx] etc. and will depend on the facts and circumstances of each case. The government might assert that the Schedule B reference to the FBAR instructions somehow supports a conclusion that the person could have learned of the FBAR filing and record keeping requirements. However, the IRM clearly states that the mere fact that a person checked the wrong box, or no box, on a Schedule B of their income tax return is not sufficient, by itself, to establish a “willful” FBAR violation.[xxi] How much more is required will surely be the subject of much future litigation.

[i] A “target” is a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant. A “subject” of an investigation is a person whose conduct is within the scope of the grand jury’s investigation. See United States Attorneys Manual 9-11.151

[ii] See 31 USC §§5311-5330 and 31 CFR Chapter X (Effective March 1, 2011; formerly 31 CFR Part 103 through February 28, 2011).

[iii] 31 U.S.C. § 5314; 31 C.F.R. §§103.24 and 103.32

[iv] http://www.irs.gov/pub/irs-pdf/f90221.pdf.

[v] IRM 4.26.16.3.2 (07-01-2008)

[vi] IRM 4.26.16.3.4 (07-01-2008)

[vii] IRM 4.26.16.3.5 (07-01-2008)

[viii] 31 U.S.C. § 5321(a)(5)

[ix] 31 U.S.C. § 5321(a)(5)(B)

[x] 31 U.S.C. § 5321(a)(5)(C)

[xi] IRM 4.26.16.5.3 (07-01-2008)

[xii] Id.

[xiii] Id.

[xiv] Id.

[xv] See CCA 200603026 (September 01, 2005); IRM 4.26.16.4.5.3 (07-01-2008); See also United States v. J. Bryan Williams, 106 A.F.T.R. 2d 2010-6150, 2010-2 USTC 50,623 (E.D. Virginia, September 1, 2010).

[xvi] Id.

[xvii] Williams, supra at *7 (emphasis in original). See also Ratzlaf v. United States, 510 U.S. 135 (1994), a Supreme Court case that addressed the standard for willfulness in the context of a criminal violation of a structuring provision of the Bank Secrecy Act (BSA). The standard applied in Ratzlaf, at 141, was “a voluntary intentional violation of a known legal duty” – the government had to prove that the defendant had acted with knowledge that his conduct was unlawful in order to establish he had willfully violated the anti-structuring law. It was not enough that he knew the bank had a duty to report the transactions. In CCA 200603026 (September 1, 2005), the IRS concluded that “in order for there to be a voluntary intentional violation of a known legal duty, the account holder would just have to have knowledge that he had a duty to file an FBAR, since knowledge of the duty to file an FBAR would entail knowledge that it is illegal not to file the FBAR. A corollary of this principle is that there is no willfulness if the account holder has no knowledge of the duty to file the FBAR.”

[xviii] See CCA 200603026 (September 1, 2005) “The burden of proof for criminal cases for establishing willfulness is to provide proof ‘beyond a reasonable doubt.’ Although the same definition for willfulness applies (‘a voluntary intentional violation of a known legal duty’), the Service would have a lesser burden of proof to meet with respect to the civil FBAR penalty than the criminal penalty. We expect that a court will find the burden in civil FBAR cases to be that of providing ‘clear and convincing evidence,’ rather than merely a ‘preponderance of the evidence.’ The clear and convincing evidence standard is the same burden the Service must meet with respect to civil tax fraud cases where the Service also has to show the intent of the taxpayer at the time of the violation. Courts have traditionally applied the clear and convincing standard with respect to fraud cases in general, not just to tax fraud cases, because, just as it is difficult to show intent, it is also difficult to show a lack of intent. The higher standard of clear and convincing evidence offers some protection for an individual who may be wrongly accused of fraud.”

“The burden of proof the Service has with respect to civil tax fraud penalties represents an exception to the general presumption of correctness that the courts have afforded to tax assessments (where the taxpayer, who is in the best position to provide supporting documentation, would ordinarily have the burden to show that taxes and tax penalties assessed are incorrect). There is a presumption of correctness in tax cases because the courts recognize the importance of the government’s ability to efficiently collect taxes, which are ‘the life-blood of government.’2 Because the FBAR penalty is not a tax or a tax penalty, the presumption of correctness with respect to tax assessments would not apply to an FBAR penalty assessment for a willful violation—another reason we believe that the Service will need to meet the higher standard of clear and convincing evidence.”

[xix] See “Entity Classification of Liechtenstein Anstalts and Stiftungs”, CCA AM2009-012 (October 16, 2009) differentiating the U.S. tax treatment between Lichtenstein Anstalts (typically classified as business entities under Treas. Reg.§ 301.7701-2(a) and not as trusts under Treas. Reg. §301.7701-4(a) because, in most situations, their primary purpose is to actively carry on business activities) and Stiftungs (generally treated as trusts under Treas. Reg. § 301.7701-4(a) having the primary purpose to protect or conserve the property transferred to the Stiftung for the Stiftung’s beneficiaries and is usually not established primarily for actively carrying on business activities.).

A “target” is a person as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant. A “subject” of an investigation is a person whose conduct is within the scope of the grand jury’s investigation. See United States Attorneys Manual 9-11.151

[xx] See In re: Grand Jury Investigation M.H. (Case No. 11-557712, (9^th Cir August 19, 2011) for a discussion regarding whether foreign account information required to be maintained under 31 U.S.C. § 5311 and the regulations thereunder is protected by the 5th Amendment privilege or must be disclosed under the “Required Records Doctrine”espoused in United States v Doe, 465 US 605, 611-612 (1984) and Fisher v United States, 425 US 391, 409-10 (1967).

[xxi] IRM 4.26.16.5.3 (07-01-2008)

Leave a Comment

Posted in Uncategorized | Tags: FBAR, foreign account, irs, irs audit, tax, tax dispute, tax enforcement

TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

Form 8300: Reporting Domestic Currency Transactions

New Filing Compliance Procedures for Non-Resident U.S. Taxpayers

IRS Provides Updated Guidance re FBAR Voluntary Disclosure Program

The IRS Whistleblower Program: Making Money the Old Fashioned Way!

Practice Tips From the Tax Trenches

FBAR Offshore Voluntary Disclosure Initiative (OVDI)

Non-Filers Beware: Who’s That Knocking at Your Door ?

Examining the FBAR / Offshore Account Information Document Request (IDR)

IRS Voluntary Disclosure Practice

Overview of FBAR Reporting Requirements

Categories

Email Subscription

Recent Posts

Archives