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

Posted by: Taxlitigator | August 3, 2013

New IRS Commissioner Nominated by President Obama

President Obama recently announced his nomination of John Koskinen as the next Commissioner of the Internal Revenue Service for the term expiring on November 12, 2017. President Obama stated, “John is an expert at turning around institutions in need of reform. With decades of experience, in both the private and public sectors, John knows how to lead in difficult times, whether that means ensuring new management or implementing new checks and balances. Every part of our government must operate with absolute integrity and that is especially true for the IRS. I am confident that John will do whatever it takes to restore the public’s trust in the agency.”

The IRS Commissioner is appointed by the President, with the consent of the Senate, for a five-year term. Internal Revenue Code § 7803 requires that the appointment be made from individuals who, among other qualifications, have a demonstrated ability in management. Section 7803 also provides that regardless of who and when the next Commissioner is confirmed by the Senate, their term will expire on November 13, 2017 (also, it should be noted that the IRS Commissioner may be removed at the will of the President).

Treasury Secretary Lew, on the nomination of John Koskinen to lead the Internal Revenue Service, stated “I am pleased the President has nominated John Koskinen to be the next Commissioner of the Internal Revenue Service. With a distinguished record of turning around large companies and reorganizing the management and operations of highly complex public and private institutions, John is the right person to take on this critical position at this important time. Because John has a clear understanding of how to make organizations more effective and an unshakeable commitment to public service, he will be an exceptional leader who will strengthen the institution and restore confidence in the IRS. John is a man of the highest integrity, and I want to thank him for agreeing to return to public life and serve his country again after a long and accomplished career. I urge the Senate to confirm this nomination quickly.”

Treasury Secretary Lew further stated “If confirmed, John will build on the extraordinary work of Danny Werfel. Danny is an outstanding public servant who has done a remarkable job of putting the IRS on a stronger footing in just a matter of months. He has improved the agency’s operations, and he has paved the way so that the IRS can meet its fundamental obligation to provide fair, high-quality service to taxpayers.”

John Koskinen served as Non-Executive Chairman of Freddie Mac from 2008 to 2011 and acting CEO in 2009. From 2004 to 2008, Mr. Koskinen was the President of the United States Soccer Foundation. Prior to this, Mr. Koskinen was Deputy Mayor and City Administrator of Washington, D.C. from 2000 to 2003, Assistant to the President and Chair of the President’s Council on Year 2000 Conversion from 1998 to 2000, and Deputy Director for Management of the Office of Management and Budget from 1994 to 1997.

Prior to entering government service, Mr. Koskinen worked for 21 years for the Palmieri Company in a number of leadership positions including, CEO and Chairman, President, and Vice President. Earlier in his career, he served as Administrative Assistant to Senator Abraham Ribicoff, Legislative Assistant to Mayor John Lindsey of New York City, and Assistant to the Deputy Executive Director of the National Advisory Commission on Civil Disorders (the “Kerner Commission”). Mr. Koskinen practiced law with the firm of Gibson, Dunn and Crutcher and clerked for Judge David Bazelon, Chief Judge of the U.S. Court of Appeals for the District of Columbia. He serves on the boards of AES Corp. and American Capital, Ltd. Mr. Koskinen received a B.A. from Duke University and an L.L.B. and J.D. from Yale University School of Law. John Koskinen was born June 30, 1939 in Cleveland, Ohio.

Mr. Koskinen would replace Principal Deputy Commissioner Daniel Werfel, who replaced Acting Commissioner Steven Miller (before being asked to resign) who replaced Commissioner Doug Shulman (following the normal expiration of his term on November 13, 2012). Got it? John Kostinen has been described by some who know him as “incredibly fair and balanced” and “among the finest and most competent people, a total straight shooter,” character traits that generally sound right for the position.

Under any set of circumstances, being the new IRS Commissioner would be a challenging task. Assuming the role during times where the IRS has been accused of targeting taxpayers for extra scrutiny based on their political ideology and numerous other government agencies are investigating the resulting “scandal” or “phony scandal,” is deserving of our respect. Few would voluntarily walk into a political inferno without a strong degree of self-confidence in their ability to accomplish the task at hand.

If confirmed by the Senate, John Koskinen will be spending much of
his time responding to and testifying before Congress. Based upon his previous experiences, he will likely perform in a politically satisfactory manner. As to the future tax administration operations of the IRS, much will depend on the individuals John Kostinen appoints to the upper management positions within the IRS, probably most importantly the Deputy Commissioner for Services and Enforcement having responsibility for overseeing the four primary operating divisions of the IRS – the Wage and Investment Division, the Large Business and International Division, the Small Business / Self-Employed Division, and the Tax Exempt Governmental Entities Division.

Rumors have long circulated to the effect that numerous upper IRS management people (those with career experience, enforcement and otherwise) are likely leaving in the forseeable future. Something like 35-45% of senior IRS executives are eligible to retire and many have been waiting to see who would be nominated as Commissioner and determine the future direction of the IRS. Most have remained out of a sense of loyalty to the agency – once retirement eligible, they are effectively working for less (retirement benefits basically being a function of current salary) and certainly far less than many would receive if employed in the private sector.

It is impossible to train experience without dedicated, experienced trainers. If a significant number of senior executives leave the IRS, the agency will struggle. If it struggles a little, problems will likely occur. If it struggles more than a little, significant problems will occur.

John Koskinen must quickly restore public confidence in the IRS. If he can calm the Congressional and public waterways and cooperates in letting the various investigations of the IRS run their course, he will bring value to the IRS as an institution. Prior to 1997, IRS Commissioners were typically “tax people” having knowledge and experience working with the IRS from the outside. Since 1997, there have been no “tax people” confirmed as IRS Commissioner. Some would assert that a true manager could manage any large organization, whether focused on tax or not. Others would assert that a tax person would be better equipped to more quickly identify and rectify issues lurking within a tax agency without having to rely upon others.

Whether or not John Koskinen is to some degree a “tax person”, he will need to quickly earn the respect and confidence of U.S. taxpayers and those who represent such taxpayers before the IRS. Our system of taxation depends upon voluntary compliance with our tax laws. Voluntary compliance is inherently enhanced when the taxpayer and tax professional communities respect the agency enforcing the tax laws of our country. Remember, among its various responsibilities, the IRS is also the “accounts receivable department” for the U.S. government. A proper level of tax enforcement efforts focused on areas of non-compliance can impact voluntary compliance with our tax laws. Public perceptions regarding the fairness of what is to be a non-political agency can impact voluntary compliance with our tax laws as much as parking an empty police car at the appropriate intersection.

On the tax enforcement side of the IRS house, many mid-to-lower level IRS employees are generally unaffected by who is or is not the Commissioner. The vast majority of IRS employees have never met a Commissioner. Undoubtedly, recent public events, whether accurate or not, whether isolated or not, have adversely impacted the IRS workforce – a workforce that includes many extremely fine, hard working individuals who could have reaped greater personal financial rewards in the private sector. Each IRS employee reports to someone higher up the ladder and that person is generally responsible for assuring that lower-level employees do the job at hand. As in the private sector, some are better managers than others. As in the private sector, some employees are undoubtedly more manageable than others and some do not require much in the way of management. However, the executive ranks of the IRS oversee large numbers of employees and must continually find ways to improve morale and motivate even the most dedicated employees.

The IRS must balance service to the taxpayer community with an appropriate degree of enforcement of our nation’s tax laws. A freeze of the operational status of the IRS caused by recent events and departing executives could significantly reduce tax enforcement efforts and adversely impact at least the fringe areas of voluntary compliance. Time will tell whether John Koskinen can keep the IRS focused and move it forward with respect and integrity . . . but for now, he deserves our support and respect for his willingness to assume the position of Commissioner in these difficult times for the IRS.

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Posted in Uncategorized | Tags: criminal tax, irs, irs audit, tax, tax enforcement, tax fraud, voluntary disclosure

Posted by: Taxlitigator | July 12, 2013

Professional Responsibility and the FBAR by Michel Stein

We applaud the Internal Revenue Service (“IRS”) for releasing information regarding professional responsibility and the Foreign Bank and Financial Accounts Reports (“FBAR”). The FBAR reporting requirements have gain much attention in the past five years and have produced a whole host of ethical and legal concerns not historically considered by practitioners.

There have been ongoing questions and concerns regarding the level of diligence required when advising clients about foreign bank accounts and assets. The FBAR, Form TD F 90-22.1, is not a tax return. It is an information report required under the Bank Secrecy Act, 31 U.S.C. 5314, and related regulations under 31 C.F.R. § 1010.350. The FBAR, however, is referenced in U.S. tax returns. United States persons who have a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year, must report their foreign accounts by completing applicable sections of U.S. tax returns (i.e., boxes 7a and7b on Form 1040 Schedule B, box 3 on Form 1041 “Other Information” section, box 10 on Form 1065 Schedule B, or boxes 6a and 6b on Form 1120 Schedule N). The boxes on tax returns request information about the existence of foreign financial accounts in which the filer of the tax return has a financial interest or over which the filer has signature or other authority. If the response to the leading question is “yes”, then the tax return filer is prompted to file an FBAR. Moreover, certain foreign bank accounts and assets need to be identified on the Form 8938 for tax years 2011 and later.

Because some taxpayers have used offshore accounts for intentional tax evasion, money laundering, or terrorist financing, the U.S. government has greatly increased both FBAR-related penalties and FBAR enforcement in recent years.[i] Prior to October 22, 2004, there was no penalty for a non-willful failure to file and the maximum civil penalty for willful violations was capped at $100,000. In 2004, Congress amended 31 U.S.C. 5321(a)(5) to establish a penalty for non-willful violations, subject to a reasonable cause exception, and increased the penalty for willful violations.[ii] Currently, the maximum civil penalty is $10,000 for each non-willful failure;[iii] and if the government establishes the failure was willful, the maximum penalty is the greater of $100,000 or 50 percent of the balance of the undisclosed account each year.[iv] As a result of the increase in penalties and the increase in IRS FBAR enforcement, there has been increased interest in compliance.

The IRS has seen that some U.S. persons required to file FBARs may claim a reasonable cause defense against penalty impositions by blaming their preparers, on whom they reasonably relied, for failing to ask about the existence of a foreign bank account or to advise about the FBAR filing requirement. Consequently, some practitioners have expressed concerns about their duties and responsibilities under Circular 230 with respect to both the responses required in designated places on U.S. income tax returns (as described above) and the preparation and filing of the FBAR Form TD F 90-22.1.

According to the IRS release:

“Practitioners who prepare income tax returns have a duty under Circular 230 to inquire of their clients with sufficient detail to prepare correct responses to the foreign bank and financial account questions. The required level of due diligence required is addressed in Circular 230, section 10.22:

§10.22 Diligence as to accuracy.

Each attorney, certified public accountant, enrolled agent, or enrolled actuary shall exercise due diligence:

a. In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;

b. In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and

c. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.

Under Circular 230, section 10.34(d), a practitioner may generally rely, in good faith and without verification, on information furnished by a client. However, good faith reliance contemplates that a practitioner will make reasonable inquiries when a client provides information that implies possible participation in overseas transactions/accounts subject to FBAR requirements. A practitioner may reply on information provided by the client in good faith. However, a practitioner may not ignore the implications of any information provided to or actually known by the practitioner. If the information furnished by the client appears to be incorrect, inconsistent with other known facts, or incomplete, the practitioner is required to make further inquiry.

The practitioner is also required by Circular 230, section 10.34(c), to advise a client of any potential penalties likely to apply to a position taken on a return the practitioner is preparing or on which she or he is advising. If a determination is made that there is one or more foreign bank or financial accounts to report in designated places on U.S. tax returns as discussed above, the practitioner is not obligated to prepare the FBAR form for the client unless the practitioner feels competent to do so and the client has agreed to this additional service. Notwithstanding the lack of obligation to prepare the FBAR, the practitioner does have an affirmative obligation to advise the client of the need to file the FBAR form and the consequences of failing to do so.” (underline added).

Previous Comments on Professional Liability and FBARs was released by the IRS Office of Professional Responsibility in 2008. These Comments were reproduced in an article published in the Journal of Tax Practice & Procedure, under the title “FBAR Enforcement – Five Years Later”, written by Steven Toscher and Michel Stein, in July 2008. The IRS’s recent release does not materially alter the Comments set forth in 2008, and continues to provide a reasonable approach to the level of diligence required for those practicing in this arena.

Additional inquiries about the FBAR filing requirements may be obtained by reading FAQs Regarding Report of Foreign Bank and Financial Accounts. Specific questions and comments may be emailed to FBARquestions@irs.gov.

For more information regarding this topic please contact Michel Stein – ms@taxlitigator.com Mr. Stein is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. He is a former Attorney-Adviser of the U.S. Tax Court and is a Certified Specialist in Taxation Law by the State Bar of California, Board of Legal Specialization. Mr. Stein represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. He has extensive experience with voluntary disclosures and foreign account and asset reporting, and he frequently lectures throughout the country on these and other tax related topics. Additional information is available at www.taxlitigator.com .

[i] See, e.g., Joint Committee on Taxation, JCS-5-05, General Explanation of Tax Legislation Enacted in the 108th Cong. 377-378 (May 2005).

[ii] The American Jobs Creation Act of 2004, Pub. L. No. 108-357, Title VIII, § 821(a), 118 Stat. 1586 (Oct. 22, 2004).

[iii] 31 U.S.C. §§ 5321(a)(5)(A)-(B).

[iv] 31 U.S.C. § 5321(a)(5)(C).

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

Posted by: Taxlitigator | July 7, 2013

PART I: Six IRS Letters and Notices You Must Not Ignore by Edward M. Robbins, Jr.

Every year the IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices are for informational purposes only and do not need a taxpayer response. Many more of these letters and notices are benign and can be dealt with simply, without having to call or visit an IRS office. Some letters and notices portend adverse action by the IRS in the event of an inadequate response by the taxpayer. It is unwise for a taxpayer to ignore any of the foregoing letters and notices, but ignoring them will not necessarily cause permanent impairment of the taxpayer’s legal rights.

However, a handful of the letters and notices cannot be ignored without serious adverse legal consequences for the taxpayer, and this article identifies those letters and notices and describes those adverse legal consequences. These are the IRS letters and notices a taxpayer must not ignore. We will discuss in three parts:

Statutory Notice of Deficiency (Ninety Day Letter)
Final Partnership Administrative Adjustment (FPAA) under TEFRA
The IRS Summons (including an IRS caused Grand Jury Subpoena)
The Final Notice Before Levy
Statutory Notice of Denial of a Claim for Refund
Notice of Computational Adjustment under TEFRA

This article addresses the first two of the Notices referenced above. Mr. Robbins will soon post additional articles regarding the remaining Notices referenced above.

1. Statutory Notice of Deficiency (Ninety Day Letter)

The statutory notice of deficiency is a common IRS letter, issued at the end of an income, estate or gift tax examination, where the IRS and the taxpayer cannot agree to the results of the IRS examination. The form is generally referred to as a 90-day letter because the taxpayer is given the opportunity either to agree within ninety days to pay the tax or, in the alternative, to petition the U.S. Tax Court for a redetermination of the IRS’s notice of deficiency. The 90-day letter is also referenced as the taxpayer’s ticket to Tax Court where the taxpayer can litigate his claim without first paying the tax deficiency. If the taxpayer wishes the Tax Court to hear his case, the taxpayer or counsel must prepare and file with the Tax Court a petition for redetermination within the ninety-day period. If the taxpayer defaults on the 90-day letter, the taxpayer is forever barred from filing a Tax Court petition to litigate the merits of his case.

The reason the taxpayer does not want to ignore the 90-day letter is that, if the taxpayer does not petition the Tax Court within this 90-day period, upon the expiration of the ninetieth day, the IRS will assess and bill the taxpayer for the deficiency (plus applicable penalties and interest), since the adjustment is now final and no longer merely a proposed adjustment. If the taxpayer is unable to pay the assessed deficiency, the matter will be forwarded to the IRS collection apparatus for forced collection activity.[i]

The taxpayer will receive the statutory notice of deficiency by certified mail. A taxpayer can recognize a statutory notice of deficiency by reading the first page. The notice will be clearly identified as a “Notice of Deficiency” in multiple places. It will identify the tax year, type of tax, and amount of tax deficiency. It will contain an abbreviated discussion of the taxpayer’s rights to petition the Tax Court. When the taxpayer gets her hands on a statutory notice of deficiency, the next move is imperative-get it to her tax professional without delay. Do this, even if the taxpayer thinks the tax professional is receiving copies of everything from the IRS. If the taxpayer doesn’t have a tax professional, get one.

2. Final Partnership Administrative Adjustment (FPAA) under TEFRA[ii]

The FPAA is the statutory notice of adjustments (as distinguished from a statutory notice of deficiency) in a partnership proceeding that is subject to judicial review in the Tax Court, the Court of Federal Claims, or the district court where the partnership’s principal place of business is located. The FPAA is the notice required to be sent to the partnership’s Tax Matters Partner, notice partners and representatives of notice groups at the completion of a partnership’s tax examination.[iii] It reflects the IRS’s final determination of the correct treatment of partnership items; however, it is not a tax deficiency notice. Only partnership adjustments are properly identified in an FPAA. For partnership tax years ending after August 5, 1997, an FPAA may also include penalty issues that are determined at the partnership level.

Within ninety days after the mailing of the FPAA, the Tax Matters Partner may file a petition for readjustment of partnership items in the Tax Court, the district court in which the partnership’s principal place of business is located, or the Court of Federal Claims. During such ninety-day period, no other partner may file a petition for judicial review. If the Tax Matters Partner does not file a petition during the ninety days period, any notice partner or 5% partner group may, within sixty days following the close of such ninety-day period, file a petition with any of the courts in which the TMP could have filed a petition. If all partners default on the FPAA, the adjustments in the FPAA are conclusively determined for all time, and the IRS will assess and bill the taxpayer for the deficiency (plus and applicable penalties and interest) on the taxpayer’s return resulting from the adjustments in the FPAA. If the taxpayer is unable to pay the assessed deficiency, the matter will be forwarded to the IRS collection apparatus for forced collection activity.

There are additional adverse consequences for a taxpayer defaulting on an FPAA that are significantly worse than the negative consequences of defaulting on a 90-day letter. In particular, in a non-TEFRA audit, the taxpayer, if he chooses, can ignore all or any part of the IRS audit, default on the statutory notice of deficiency, pay the tax, and ultimately obtain full administrative and judicial consideration of the taxpayer ’s claim in a refund suit. This traditional refund route is unavailable under TEFRA. After the enactment of TEFRA, one partnership audit, notice and any TEFRA judicial proceeding conclusively binds all partners for all partnership items. The IRS determination in a TEFRA audit is conclusive and, except for a TEFRA judicial proceeding, cannot be challenged in any court, except for computational issues. A taxpayer wishing to challenge the IRS TEFRA determination must make that challenge under the TEFRA regime. The elimination of the refund route for taxpayers under TEFRA significantly limits the taxpayer’s maneuvering room in challenging the IRS in a TEFRA case.

It is very important to understand that the TEFRA statute of limitations has been held to be a partnership item.[iv] As a result, the IRS has taken the position that in order for taxpayers to challenge the timeliness of an FPAA[v], the partnership must raise the issue in a TEFRA proceeding, otherwise the statute of limitations defense is waived and the FPAA is deemed timely for all intents and purposes. Whether or not the IRS’s position is ultimately upheld, taxpayers do not want to ignore a late FPAA in the mistaken belief that the FPAA is ineffective. If the IRS is correct, defaulting on a late FPAA is no different than defaulting on a timely FPAA, that is, all partnership item adjustments in the FPAA will be conclusively determined by the terms of the FPAA.

The taxpayer can recognize an FPAA by reading the first three pages. The FPAA will be clearly identified as a “Notice of Final Partnership Administrative Adjustment” in multiple places. It will identify the partnership and tax year. It will contain an abbreviated discussion of the partners’ rights to petition the FPAA. The taxpayer should not assume that some other partner will be responding to the FPAA. When the taxpayer gets his hands on an FPAA, the next move is imperative-get it to his tax professional without delay. Do this, even if the taxpayer thinks the tax professional is receiving copies of everything from the IRS. If the taxpayer doesn’t have a tax professional, get one.

For more information regarding this topic please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. He is the former Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com .

[i] After the taxpayer pays the proposed tax the taxpayer can file a claim for refund and contest the deficiency in district court or U.S. Court of Federal Claims. There may be sound reasons for a taxpayer to intentionally agree to pay the tax and file a claim for a refund at a later time within the period provided by statute.

[ii] Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), any IRS examination and resulting adjustment in the treatment of partnership items appearing on individual and corporate taxpayer returns were determined by individual audits and notices of deficiency which included both partnership and non-partnership items. With TEFRA Congress provided that adjustments to partnership items, whether resulting in deficiencies, refunds, or changes having no tax effect, are determined in a single proceeding at the partnership level rather than at the partner level. Limited Liability Companies (LLCs) that file a Form 1065, U.S. Return of Partnership Income, and their respective members are also subject to TEFRA administrative and judicial procedures and treated in a manner similar to TEFRA partnerships and their partners.

[iii] Typically the IRS sends an original FPAA by certified mail, although the TEFRA statute does not require certified mail, unlike the statute for the 90-day letter.

[iv] See, e.g., Weiner v. United States, 389 F.3d 152, 155–59 (5th Cir. 2004), cert. denied, 544 U.S. 1050 (2005); himblo v. Comm’r, 177 F.3d 119, 125 (2d Cir. 1999); Kaplan v. United States, 133 F.3d 469, 473 (7th Cir. 1998); Barnes v. United States, 80 A.F.T.R.2d 6145 (M.D. Fla. 1997), aff ’d by unpublished op., 158 F.3d 587 (11th Cir. 1998); Slovacek v. United States, 36 Fed. Cl. 250, 255 (1996).

[v] Section 6229(a) provides that in general the limitations period for the assessment of tax attributable to any partnership item or affected item shall not expire before three years after the partnership return is filed. The three-year period runs from the later of (1) the date on which the partnership return was filed, or (2) the last day for filing such return (determined without regard to extensions). The FPAA must be issued within the limitations period for the assessment of tax attributable to any partnership item.

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Posted by: Steven Toscher | July 1, 2013

CAN THE FRAUD OF THE TAX PREPARER BE IMPUTED TO THE TAXPAYER? by Steve Toscher and Della Bauserman

Prior to 2001, the answer was generally “No.” Today, the answer is unclear.

In 1950, there were a series of cases, that all had similar facts, where the Tax Court addressed the issue of whether the fraud of the preparer could be imputed to the taxpayer for the purposes of the fraud penalty under IRC §6663. In these cases, the taxpayers were all employees of the same airline and all had their tax returns prepared by Mr. Nimro. Mr. Nimro filed false and fraudulent returns for these taxpayers. The IRS asserted the fraud penalty in each of these cases. In each of these cases the Tax Court determined that the deficiency was not due to fraud of the taxpayer. The Tax Court in these cases focused on whether the taxpayer had the intent to file a false and fraudulent return. In one of the main cases, Fulton v. Comm’r, 14 T.C. 1453 (1950), the Tax Court stated that the IRS had “not proven that it was within the actual or apparent scope of Nimro’s authority as petitioner’s agent to prepare and file a false and fraudulent return.”

In 1971, the Tax Court also declined to attribute the fraud of the tax preparer to the taxpayer for the purposes of extending the statute of limitations under IRC §6501(c)(1) in Klemach v. Comm’r, T.C. Memo 1971-169. In that case, the taxpayer was in a partnership with Mr. Bear, who prepared both the partnership’s tax returns and the taxpayer’s tax returns. The taxpayer and Mr. Bear were both indicted by a federal grand jury for alleged fraudulent evasion of federal income taxes based on the understatement of income from the partnership. Mr. Bear pled guilty to all counts, but the indictment was dismissed against the taxpayer. In finding that the statute of limitations was closed, The Tax Court focused on whether the Taxpayer intended to file a false and fraudulent return.

In 2000, the IRS issued FSA 200104006 (Sept. 15, 2000). In this FSA, the taxpayer was a truck driver. The tax preparer took a diesel fuel excise credit on the taxpayer’s tax return that the tax preparer knew that the tax payer was not entitled to. The tax preparer was prosecuted for preparing false returns for the taxpayer and several other drivers. The IRS determined that the fraudulent intent of the tax preparer was insufficient to extent the statute of limitations for the taxpayer under IRC §6501(c)(1).

In 2001, the IRS issued FSA 200126019 (March 30, 2001). This FSA has the same facts and same author as FSA 200104006. However, this FSA comes to the conclusion that the fraudulent intent of the tax preparer may be used to keep the statute of limitations open on the taxpayer’s return under IRC §6501(c)(1).

In 2007, the Tax Court determined that the fraud of the tax preparer may be used to keep the statute of limitations open on the taxpayer’s tax return in Allen v. Comm’r, 128 T.C. 37. The taxpayer was a UPS driver, who had Mr. Goosby prepare his tax returns. Mr. Goosby claimed false and fraudulent itemized deductions on the taxpayer’s tax returns. Mr. Goosby was convicted of 30 violations of Code §7206(2) for willfully aiding and assisting in the preparation of false and fraudulent returns, but was not convicted based on the taxpayer’s returns. The Tax Court determined that the statute of limitations was open based on the tax preparer’s fraudulent intent. The Tax Court did not cite either the Klemach case or any of the cases from 1950.

On March 1, 2013, the Second Circuit decided City Wide Transit, Inc. v. Comm’r, 709 F.3d 102. Ms. Fouche retained Mr. Beg, an accountant, on behalf of the corporation for the sole purpose of negotiating with the IRS a reduction in the corporation’s outstanding employment tax liabilities for periods that are not at issue in this case. Ms. Fouche never requested for Mr. Beg to prepare any of the corporation’s Forms 941. Mr. Beg convinced Ms. Fouche that he had reached an agreement with the IRS. Mr. Beg claimed that, as part of the agreement with the IRS for prior Forms 941, he needed to deliver the corporation’s current Forms 941 along with a certified check for the amount due as the forms became due. Ms. Fouche delivered the correctly prepared forms to Mr. Beg and certified checks for the amount due payable to the IRS. Mr. Beg altered the checks and deposited them in a foreign bank account. Mr. Beg also altered the Forms 941 that he filed by fraudulently claiming that the corporation had made advance EIC payments to employees. Mr. Beg filed these altered forms with the IRS along with checks drawn on the foreign bank account for the lesser amounts due shown on the forms. Unbeknownst to Ms. Fouche, Mr. Beg also filed amended Forms 941, fraudulently claiming that the corporations had made advance EIC payments to employees in prior periods. Mr. Beg pled guilty to charges of knowingly and willfully signing false returns and knowingly and willfully preparing and presenting false tax returns. The Tax Court determined that Mr. Beg’s filing of the Forms 941 and the amended Forms 941 was incidental to his embezzlement scheme and, therefore, the IRS had not proved Mr. Beg’s fraudulent intent under IRC §6501(c)(1). The Second Circuit reversed the Tax Court. The most critical part of the Second Circuit’s opinion is footnote 3, which explains that, on appeal, the taxpayer conceded the issue of whether City Wide was liable for the tax preparer’s fraud. Therefore, the Second Circuit has yet to decide whether the fraudulent intent of the tax preparer can be imputed to the taxpayer.

As of June of 2013, the IRS has been trying to extend the statute of limitations on taxpayers returns based on their tax preparer’s fraud; the Tax Court has been allowing the IRS to extend the statute of limitations on taxpayers returns based on the tax preparer’s fraud; and the Court of Appeals have not yet decided the issue.

For more information on this topic please contact Steve Toscher – st@taxlitigator.com – or Della Bauserman – db@taxlitigator.com – and see their article titled “Surprise – The Fraud of Your Tax Preparer May Extend the Statute of Limitations on Tax Assessments” in the April – May 2013 issue of the CCH Journal of tax Practice and Procedure posted under “Publications” at www.taxlitigator.com .

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Posted in Uncategorized | Tags: badges of fraud, criminal tax, examination, foreign account, fraud, irs, irs audit, irs examination, offfshore voluntary disclosure, OVDI, OVDP, tax controversy, tax dispute, tax enforcement, tax evasion, tax examination, tax fraud, tax penalty, taxpayer, voluntary disclosure

Posted by: Taxlitigator | June 20, 2013

Reminder: 2012 FBAR Filing Due by June 30

If you had any interest in a foreign financial account at any time during calendar year 2012, you may have an obligation to file an FBAR by June 30, 2013!

U.S. persons having a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account may be required by the Bank Secrecy Act to report their interest in the account to the IRS by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). A U.S. person may have a reporting obligation even though the foreign financial account does not generate any income.

If a U.S. person had such a financial interest or signature authority at any time during calendar year 2012, the FBAR must be received by the Department of the Treasury on or before June 30, 2013. The FBAR is not filed with the federal income tax return. The granting by the IRS of an extension to file federal income tax returns does not extend the due date for filing an FBAR. The June 30th filing date may not be extended.

FBAR filers report their foreign accounts by (1) completing boxes 7a and 7b on Form 1040 Schedule B; box 3 on the Form 1041 “Other Information” section; box 10 on Form 1065 Schedule B; or boxes 6a and 6b on Form 1120 Schedule N and filing the FBAR, satisfies the account holder’s reporting obligation. Even if all relevant information is not available, the FBAR should be filed with as much information as is available; the FBAR can be later amended (by checking the “Amended” box in the upper right corner of the first page of the FBAR) when the additional or new information becomes available.

A United States person having a financial interest in or signature authority over a foreign financial account must file an FBAR if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. A United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the U.S. or under the laws of the U. S.; and trusts or estates formed under the laws of the United States.

The term “person” means an individual and legal entities including, but not limited to, a limited liability company, corporation, partnership, trust, and estate. A U.S. resident includes an alien residing in the United States. To determine whether the U.S. person is a resident of the U.S., look for guidance in the residency tests set forth in 26 U.S.C. §7701(b).

A single-member LLC, which is a disregarded entity for U.S. tax purposes, is a U.S. person for FBAR filing purposes since the tax rules concerning disregarded entities do not apply with respect to the FBAR reporting requirement (FBARs are required under Title 31, not under any provisions of the Internal Revenue Code).

Financial Account. A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).

Foreign Financial Account. A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account. A “foreign country” includes all geographical areas outside the United States, the commonwealth of Puerto Rico, the commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

Financial Interest. A U.S. person has a financial interest in a foreign financial account for which:

(1) the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person; or

(2) the owner of record or holder of legal title is one of the following: (a) An agent, nominee, attorney, or a person acting in some other capacity on behalf of the U.S. person with respect to the account; (b) A corporation in which the U.S. person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock; (c) A partnership in which the U.S. person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital; (d) A trust of which the U.S. person: (i) is the trust grantor and (ii) has an ownership interest in the trust for U.S. federal tax purposes [See 26 U.S.C. § 671-679 to determine if a grantor has an ownership interest in a trust]; (e) A trust in which the U.S. person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year, unless the trust, a trustee of the trust, or agent of the trust: (i) is a U. S. person and (ii) files an FBAR disclosing the trust’s foreign financial accounts.; or (f) Any other entity in which the U.S. person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

Signature Authority. Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means. There are specified exceptions to the “signature authority only” filing requirement for officers or employees of certain types of banks and entities.

Where to File. The FBAR is filed by mailing to: Department of the Treasury, Post Office Box 32621, Detroit, MI 48232-0621. If an express delivery service is used, file by sending the FBAR to: IRS Enterprise Computing Center ATTN: CTR Operations Mailroom, 4th Floor, 985 Michigan Avenue, Detroit, MI 48226. Delivery messenger service contact telephone number: (313) 234-1062.

The FBAR instructions indicate that it may be hand delivered to any local office of the IRS for forwarding to the Department of the Treasury, Detroit, MI. The FBAR may also be delivered to the IRS’s tax attaches located in United States embassies and consulates for forwarding to the Department of the Treasury, Detroit, MI. The FBAR is not considered filed until it is received by the Department of the Treasury in Detroit, MI. The FBAR form and instructions are available at http://www.irs.gov/pub/irs-pdf/f90221.pdf

Electronic Filing of the FBAR. On June 29, 2011, the Financial Crimes Enforcement Network (FinCEN) announced that all FinCEN forms must be filed electronically with certain exceptions. However, the FBAR was granted a general exemption from mandatory electronic filing through June 30, 2013. E-filers will receive an acknowledgement of each submission. Currently, the government only has the ability to accept FBAR e-filings when one signature is required. Although the FBAR instructions state that a spouse included as a joint owner, who does not file a separate FBAR, must also sign the FBAR in Item 44, the e-filing process will not yet allow for both signatures on the same electronic form. As such, if spouses desire to e-file regarding a jointly owned account, each spouse must e-file a separate FBAR. Information regarding and registration for e-filing of an FBAR is available at http://www.fincen.gov/news_room/nr/html/20110717.html

Verification of FBAR Filing. Ninety days after the date of filing, the filer can request verification that the FBAR was received. An FBAR filing verification request may be made by calling 866-270-0733 and selecting option 1. Up to five documents may be verified over the phone. There is no fee for this verification.

Alternatively, an FBAR filing verification request may be made in writing and must include the filer’s name, taxpayer identification number and the filing period. There is a $5 fee for verifying five or fewer FBARs and a $1 fee for each additional FBAR. A copy of the filed FBAR can be obtained at a cost of $0.15 per page. Check or money order should be made payable to the United States Treasury. The request and payment should be mailed to: IRS Enterprise Computing Center/Detroit, ATTN: Verification, P.O. Box 32063, Detroit, MI 48232.

No Extension of Time to File FBAR. There is no extension of time available for filing an FBAR. Extensions of time to file federal tax returns do NOT extend the time for filing an FBAR. If a delinquent FBAR is filed, attach a statement explaining the reason for the late filing.

Failure to File the FBAR. The failure to timely file the FBAR can be subject to civil penalties and possibly criminal sanctions (i.e., imprisonment). The civil penalties might be $10,000 per year but a willful failure to file could be subject to civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years. Penalties might be avoided if there is reasonable cause for the failure to timely file the FBAR.

Record Keeping Requirements. Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number or other designation of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period. The records must be retained for a period of 5 years from June 30th of the year following the calendar year reported and must be available for inspection as provided by law. Retaining a copy of the filed FBAR can help to satisfy the record keeping requirements.

Separate Reporting Requirements by U.S. Taxpayers Holding Foreign Financial Assets (Form 8938). Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The Form 8938 filing requirement does not replace or otherwise affect the requirement to file FBAR. A chart providing a comparison of Form 8938 and FBAR requirements, and other information to help taxpayers determine if they are required to file Form 8938, may be accessed from the IRS Foreign Account Tax Compliance Act Web page http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements .

Questions. Assistance regarding the filing of an FBAR is available by telephone at 866-270-0733 (toll-free within the U.S.) or 313-234-6146 (from outside the U.S., not toll-free) from 8 a.m.—4:30 p.m. Eastern time, or by sending an e-mail to FBARquestions@irs.gov. Additional information, including Frequently Asked Questions, is available at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FAQs-Regarding-Report-of-Foreign-Bank-and-Financial-Accounts-(FBAR)—Filing-Requirements#FR5

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Posted in Uncategorized | Tags: examination, FBAR, foreign account, foreign bank account, irs, irs examination, offfshore voluntary disclosure, OVDI, OVDP, tax, tax controversy, tax dispute, tax disute, tax enforcement, tax penalty, voluntary disclosure, wilful, willful, willfulness

Posted by: Taxlitigator | June 15, 2013

DoJ Files Action to Collect Multiple 50% Civil FBAR Penalties in U.S.A. vs. Zwerner

Numerous U.S. taxpayers with previously undisclosed interests in foreign financial accounts and assets continue to analyze and seek advice regarding the most appropriate methods of coming into compliance with their filing and reporting obligations. Many U.S. taxpayers are pursuing participation in the current IRS offshore voluntary disclosure program (the OVDP which began in 2012), modeled after similar programs in 2009 and 2011.

Taxpayers participating in the ongoing 2012 OVDP generally agree to file amended returns and file FBARs for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years. Under the 2009 OVDP, the FBAR-related penalty was 20 percent and under the 2011 OVDP the FBAR-related penalty was 25 percent of the highest account value during the prior six tax years. The 2012 OVDP is ongoing and does not have a stated expiration date but it can be terminated by the IRS at any time either entirely or as to specific classes of taxpayers.

As of December 2012, the combined OVDPs apparently resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues received. Recently, the Government Accountability Office (GAO) issued a report based on a review of the 2009 OVDP. See IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, GAO-13-318 (March 27, 2013). See <a href=”http://www.gao.gov/products/GAO-13-318″>http://www.gao.gov/products/GAO-13-318</a>

The GAO Report recommended that going forward the IRS should (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue “quiet disclosures” and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible “attempts to circumvent tax, interest and possibly penalties that might be due” and take action to help ensure compliance. The IRS agreed with the foregoing GAO recommendations. GAO also reported that almost all of the 2009 OVDP participants received the maximum offshore penalty (equivalent to 20 percent of the high account balance during the 2009 OVDP time frame), almost half had accounts in Switzerland, and about half of the revenue collected came from a small percentage of high penalty cases.

Despite various potential risks of not coming into compliance through the OVDP, some taxpayers choose to disclose their offshore accounts outside the OVDP. According to the GAO Report, in a “quiet disclosure”, taxpayers file amended income tax returns for all or some of the tax years otherwise covered by an offshore program, and report previously unreported income – whether such income is associated with the previously unreported accounts or otherwise. At the same time, taxpayers attempting a quiet disclosure typically file late Forms 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs), if they had not previously filed FBARs, or amended FBARs, if they had, to disclose the previously unreported offshore accounts. GAO identified 10,595 potential “quiet disclosures” that occurred during the pendency of the 2009 OVPD. The GAO Report asserts that a failure by the IRS to identify and pursue “quiet disclosures” will undermine the incentive of others to participate in the offshore programs.

Taxpayers pursuing a quiet disclosure or a prospective filing are often aware of the OVDP but believe they would be unduly punished by the “one size fits all” approach under the OVDP. Although possibly economically oppressive for some, the OVDP avoids exposure to numerous additional penalties associated with the income tax returns and various required foreign information reports, the potential for what might be a difficult examination, and limits the number of tax years at issue while also providing certainty with respect to the avoidance of a referral for criminal tax prosecution.

The government continues to assert that those who are discovered disclosing offshore accounts outside of the OVDP risk more significant civil penalties, depending on the facts and circumstances of their cases. Certainly, all taxpayers are anything but equally culpable with respect to issues relating to the filing and reporting requirements involving foreign financial accounts. Overall, IRS examinations of taxpayers outside the confines of the OVDP have progressed in a somewhat reasonable manner. The fairness in the resolution often depends on the actual facts involved.

Many have been wondering whether the IRS will pursue examinations of quiet disclosures of taxpayers residing in the United States in some manner. It remains uncertain whether the IRS would or could effectively pursue those residing outside the United States in any realistic manner. It should also be acknowledged that there remain viable alternatives to the OVDP, including the voluntary disclosure practice of the IRS set forth in Internal Revenue Manual 9.5.11.9 [see Example 6(A)], Section 4.01 of the Criminal Tax Manual for the U.S. Department of Justice, and Section 3, Policy Directives and Memoranda, Tax Division of the U.S. Department of Justice. These practices and policies provide protection from a criminal investigation and prosecution but do not determine the outcome of any civil examination proceedings.

BSA Filing Requirements. 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 the FBAR. Civil penalties for willful failure to comply with the reporting requirements of Section 5314 can be imposed under 31 U.S.C. § 5321(a) (5). For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed under Section 5321(a) (5) is the greater of $100,000 or 50 percent of the balance in an unreported foreign account, per year, for up to six tax years.

U.S.A. vs. Carl R. Zwerner. On June 11, 2013, the U.S. government filed a Complaint to collect multiple civil FBAR penalties in the amount of $3,488,609.33 previously assessed against Carl R. Zwerner of Coral Gables, Florida for his alleged failure to timely report his financial interest in a foreign bank account, as required by 31 U.S.C. § 5314 and its implementing regulations. See United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013). According to the Complaint, from 2004 through 2007, Mr. Zwerner, a U.S. citizen, had a financial interest in an account at ABN AMRO Bank in Switzerland (hereinafter, “the Swiss bank account”).

The Complaint alleges that the balance of the Swiss bank account from 2004-2007 was at all times greater than $10,000 and that, as such, on or before June 30, 2005, 2006, 2007, and 2008, Mr. Zwerner was required to file an FBAR reporting his financial interest in the Swiss bank account for each year from 2004, 2005, 2006, and 2007, respectively. However, the Complaint also asserts that prior to October 2008, Mr. Zwerner had never reported his financial interest in the Swiss bank account on an FBAR, nor had he reported income he earned from that account on his federal income tax returns.

To many, pursuing multiple year, maximum penalties following submission of amended returns and delinquent FBARs appears punitive. The nature of the underlying actions, if any, that may have led to the filing of the Complaint are unknown. However, the Excessive Fines Clause of the Eighth Amendment and relevant Supreme Court caselaw support a conclusion to the effect that a civil penalty or forfeiture is unconstitutional if the penalty or forfeiture is at least in part “punishment” and such punishment is grossly disproportionate to the conduct which the penalty is designed to punish.The touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality – the amount of the penalty must bear some relationship to the gravity of the offense that it is designed to punish.

The Complaint in Zwerner further alleges that on or about October 13, 2008, Mr. Zwerner filed a delinquent FBAR reporting his financial interest in the Swiss bank account during 2007, along with an amended income tax return for 2007; on or about March 27, 2009, Mr. Zwerner filed amended income tax returns and delinquent FBARs for 2004, 2005, and 2006. The basis of the Complaint is that Mr. Zwerner’s alleged failure to timely report his financial interest in the Swiss bank account for 2004-2007 was willful. Apparently, Mr. Zwerner did not hold the Swiss bank account in his own name. The Complaint alleges that from 2004 to 2006 he held the account in the name of any entity called the Bond Foundation and that, in January 2007, he transferred the account to an entity called the Livella Foundation. However, the Complaint asserts that at all times, however, Mr. Zwerner was the beneficial owner of the account.

According to the Complaint, Mr. Zwerner’s original tax returns for 2004 to 2007 did not report any income earned from the Swiss bank account; that the first time he reported such income was when he amended those returns; and that Mr. Zwerner represented on Schedule B of his original tax returns for those years that he did not have an interest in a foreign financial account. The Complaint asserts that Mr. Zwerner “expressly represented to the accountant who prepared his original tax returns for 2006 and 2007 that he had no interest in or signature authority over a financial account in a foreign country.” Further, it asserts that in a “letter dated August 9, 2010, Mr. Zwerner admitted to the IRS that he was aware that he should have reported both the existence of the account and the income he earned from it.”

The government carries the burden of proving wilfulness into the courtroom. Taxpayers should carefully review the recent court decisions in United States v. Williams, No. 10-2230 (4th Cir. 2012) and United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) on the issue of determining “willfulness” for assertion of the more significant “willful” FBAR penalties (of up to 50% of the account balance, per year). Although the underlying facts in each case were not the best, the courts might not lightly view those with considerable financial resources who fail to inquire about their potential reporting requirements associated with various interests in foreign financial accounts.

The Internal Revenue Manual suggests that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.” However, the wilfullness determination should continue to be based on the actual facts and the context in which statements are made (or not) rather than assertions in a legal pleading.

The Complaint alleges that due to Mr. Zwerner’s willful failure to file FBARs reporting his financial interest in the Swiss bank account during 2004-2007, a delegate of the Secretary of the Treasury of the United States assessed penalties against him under 31 U.S.C. § 5321(a)(5) in the amount of 50% of the balance of his account at the time of the violations for each year, as follows: (a) 2004 – $723,762, assessed on June 21, 2011; (b) 2005 – $745,209, assessed on August 10, 2011; (c) 2006 – $772,838, assessed on August 10, 2011; and (d) 2007 – $845,527 assessed on August 10, 2011. According to the Complaint: (a) on June 21, 2011, a delegate of the Secretary of the Treasury of the United States gave notice of the penalty assessment for 2004 to Mr. Zwerner and made demand for payment thereof; (b) on September 8, 2011, a delegate of the Secretary of the Treasury of the United States gave notice of the penalty assessments for 2005-2007 to Mr. Zwerner and made demand for payment thereof; (c) despite the notices and demands for payment, Mr. Zwerner did not pay the penalties assessed against him. As of June 6, 2013, the Complaint alleges that Mr. Zwerner owes the United States $3,488,609.33 in penalties assessed under 31 U.S.C. § 5321, including interest and other additional amounts which accrued and continue to accrue as provided by law.

The road that led to the filing of the Complaint seeking collection of multiple year FBAR penalties against Mr. Zwerner is as uncertain as the potential outcome of the litigation that is forthcoming. It is not known whether there are additional facts that may have caused the government to be pursue the filing of the Complaint or whether this might reflect a new beginning in the offshore enforcement arena.

Time will tell the extent, if any, to which the filing in Zwerner may impact others who similarly attempt to come into compliance outside the OVDP. The government will not and can not pursue such actions against everyone. Many factors likely come into play in the exercise of government discretion on which matters to pursue, or not.

Given the complexities of the Internal Revenue Code, other relevant statutes and life in general, many of the indiscretions associated with an income tax return or FBAR are anything but willful or intentional and definitely not fraudulent in nature. It is also likely that long-term residents of the U.S. might be deemed to have a higher degree of knowledge and will be treated differently than long-term non-residents of the U.S. In each situation, the actual facts and circumstances of each matter must be carefully reviewed before anyone can determine the appropriate method of coming into compliance with the various filing and reporting requirements associated with offshore financial accounts.

The Way Forward. The OVDP may not be for everyone. The decision whether to participate in the ongoing 2012 OVDP as opposed to possibly pursuing a quiet or prospective disclosure must take into account all relevant facts and circumstances as well as the possibility of expansive IRS discretion to perform examinations over a lengthy period of time. Having inherited funds in a foreign financial account, without more, might not be considered deserving by the IRS of some lesser penalty regime. Other considerations often include the U.S. residency status of the taxpayer, the source and amount of funds, how long the account has been maintained, whether there were withdrawals or deposits into the account or the account was moved to another foreign financial institution at some point, whether the taxpayer’s advisors had some degree of knowledge about the account, the sophistication and education of the taxpayer, whether foreign entities were involved as accountholders, etc.

Deposits and withdrawals to a foreign account by U.S. residents can reveal intentions and knowledge of various individuals involved. Those residing in the U.S. who do not participate in the OVDP should likely consider their responses to government inquiries regarding the manner in which deposits and/or withdrawals were made to/from the foreign account(s); the mechanics of how deposits/withdrawals were made; the form in which deposits/withdrawals occurred (i.e. cash, check, wire, travelers’ check, etc.); amounts that were withdrawn/deposited each time; when such deposits/withdrawals occurred; where such deposits/withdrawals occurred; whether there were there limitations on the amounts that could be deposited/withdrawn; and documents received a deposit/withdrawal occurred (i.e. receipt, credit memo, debit memo, etc.)?

There will also be inquiries as to whether the foreign accounts remain open and if not, where the funds were transferred when the account(s) were closed. Some U.S. residents closed accounts and wire transferred the funds directly to a domestic account. Others closed accounts and transferred the funds through various means to other foreign accounts. Decisions regarding something other than OVDP participation should be carefully considered depending upon the taxpayers responses to each of the foregoing questions. If discovered before any form voluntary disclosure submission, the potential resolution is uncertain.

Zwerner may represent more than an effort to collect civil FBAR penalties. Worldwide respect for the integrity of the U.S. system of tax administration depends, at least in part, upon how the government continues to treat those who pursue some type of timely and truthful voluntary compliance with the filing and reporting requirements associated with their foreign financial accounts. A system of tax administration based in large part on voluntary compliance can not ignore the potential impact associated with the manner in which those who voluntarily comply, even if in a somewhat tardy fashion (but before any contacts by the government), are treated.

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

Posted by: Taxlitigator | June 12, 2013

Recissions of IRS OVDP Pre-Clearance Letters

Taxpayers participating in the IRS Offshore Voluntary Disclosure Program (OVDP – see www.irs.gov for OVPD information and guidance) generally agree to an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5% of the highest account value that existed at any time during the prior eight tax years. The ongoing 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.

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, Report of Foreign Bank and Financial Accounts (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 up to six tax years. The FBAR for calendar year 2012 must be received by June 30, 2013.

Participation in the OVDP begins by providing IRS Criminal Investigation (CI) with the taxpayers name, address, taxpayer identification number and date of birth. No other information is required nor should additional information be provided at least until issuance by CI of a “pre-clearance letter” indicating that the taxpayer has been pre-cleared into the OVDP. Thereafter, taxpayers proceed with a more complete disclosure in the form of a summary letter with attachments known as the Offshore Voluntary Disclosure Letter. This letter is being updated and revised into IRS Forms 14457 and 14454. A CI clearance letter is typically issued following submission of the Offshore Voluntary Disclosure Letter and taxpayers then submit amended income tax returns, FBARs, a penalty worksheet and related account information.

Issuance of the pre-clearance and clearance letters is intended to provide a degree of assurance to the taxpayer that their voluntary disclosure has been timely and can proceed without potential for a criminal referral to the Tax Division of the Department of Justice for criminal prosecution. However, in recent months, various taxpayers who long ago received pre-clearance letters and then proceeded to disclose additional information regarding their previously undisclosed interests in foreign financial accounts have had their criminal referral clearance rescinded by CI. Many received letters indicating “Although your client was informed that he was accepted into the Offshore Voluntary Disclosure Program (OVDP) on or about [date], upon further review it has been determined that your client is disqualified from the OVDP.” Oops !

Many of these taxpayers have accounts at either Bank Leumi or Bank Mizrahi and it remains possible that such rescissions may have been issued in connection with a much larger, more ominous future investigation. Not dissimilar to the process of rounding up the potential targets in other criminal tax investigations and then figuring out which are the most culpable.

So far, the government has been silent regarding the possible basis for such rescissions. However, it would seem difficult for the government to actually pursue criminal prosecutions of these individuals without a strong showing that such a prosecution is not based on tainted evidence [see Kastigar v. U.S., 406 U.S. 441 (1972)]. However, these individuals might not ultimately be afforded any civil benefits otherwise associated with participation in the IRS OVDP, etc. Some of these individuals may actually never hear from the government again . . . time will tell.

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Posted in Uncategorized | Tags: badges of fraud, criminal tax, FBAR, foreign account, fraud, irs, irs audit, irs examination, offfshore voluntary disclosure, offshore, OVDI, OVDP, penalty, tax controversy, tax dispute, tax disute, tax enforcement, tax examination, tax fraud, voluntary disclosure

Posted by: Taxlitigator | June 12, 2013

IRS FBAR Voluntary Disclosure Program, Opt-Out Considerations and Taxpayer Interviews

The IRS has operated four offshore voluntary disclosure programs (OVDP) since 2003 offering various incentives for taxpayers to disclose their offshore financial accounts and pay delinquent taxes, interest, and penalties. As of December 2012, the combined OVDPs resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues received.[i] Beyond revenue generation, the offshore programs have provided the IRS with a wealth of information on various banks and advisors assisting people with offshore tax evasion, which the IRS is using to continue its international enforcement efforts.

Factors believed to have influenced participation in an offshore program include: (1) 2003 Offshore Voluntary Compliance Initiative: Promoters identified and John Doe summons for information on taxpayers who used bank cards to access hidden offshore income[ii]; (2) 2009 Offshore Voluntary Disclosure Program: John Doe summons for UBS accounts in Switzerland[iii]; (3) 2011 Offshore Voluntary Disclosure Initiative: IRS actions against many foreign banks, including HSBC, which provided IRS information on accounts in India[iv]; (4) 2012 Offshore Voluntary Disclosure Program: FATCA and increased actions against a number of foreign financial institutions.[v]

The IRS has reported disclosures and collections from each offshore program as: (1) 2003 Offshore Voluntary Compliance Initiative: 1,321 disclosures resulting in the collection of $200 million in unpaid taxes, penalties and/or fees; (2) 2009 Offshore Voluntary Disclosure Program: 15,000 disclosures resulting in the collection of $4.1 billion (as of December 31, 2012) in unpaid taxes, penalties and/or fees; (3) 2011 Offshore Voluntary Disclosure Initiative: 18,000 disclosures resulting in the collection of $1.4 billion (as of December 31, 2012) in unpaid taxes, penalties and/or fees; and (4) 2012 Offshore Voluntary Disclosure Program: 5,000 disclosures (as of December 31, 2012) and an undetermined amount collected.[vi]

Recently, the Government Accountability Office (GAO) issued a report based on a review of the 2009 OVDP.[vii] The GAO Report (1) described the nature of the noncompliance of 2009 OVDP participants, (2) determined the extent IRS used the 2009 OVDP to prevent noncompliance, and (3) assessed the efforts of the IRS to detect taxpayers trying to circumvent taxes, interests, and penalties that might otherwise be due. GAO determined that almost all of the 2009 OVDP participants received the maximum offshore penalty, almost half had accounts in Switzerland, and about half of the revenue collected came from a small percentage of high penalty cases.[viii]

Despite significant risks of not coming into compliance through the OVDP, some taxpayers remain noncompliant. Others attempt to disclose their offshore accounts outside the OVDP. In a “quiet disclosure”, taxpayers file amended income tax returns for all or some of the tax years otherwise covered by an offshore program, and report previously unreported income – whether such income is associated with the previously unreported accounts or otherwise. At the same time, taxpayers attempting a quiet disclosure typically file late Forms 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs), if they had not previously filed FBARs, or amended FBARs, if they had, to disclose the previously unreported offshore accounts.

Some taxpayers attempt to report their interests in offshore accounts and any income from the accounts prospectively on their current year’s tax return, without amending prior years’ returns, and by filing FBARs for the current and subsequent tax years. This filing would be similar to a situation where someone opened a new offshore account in the current year. Taxpayers pursuing a quiet disclosure or a prospective filing are aware of the OVDP but believe they would be unduly punished by the “one size fits all” approach under the OVDP. Although possibly economically oppressive for some, the OVDP avoids exposure to numerous additional penalties associated with the income tax returns and various required foreign information reports, a detailed examination, and limits the number of tax years at issue while also providing certainty with respect to the avoidance of a referral for criminal tax prosecution. Those who are discovered disclosing offshore accounts outside of the OVDP risk more significant penalties and the possibility of criminal prosecution, depending on the facts and circumstances of their cases.

The GAO Report recommended and the IRS agreed that going forward it should (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent tax, interest and possibly penalties that might be due and take action to help ensure compliance. The IRS agreed with the foregoing GAO recommendations.

BSA Filing Requirements. 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 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, per year, for up to six tax years.

FATCA. Unlike the reporting requirements for U.S. financial institutions, there has been no reporting regime for foreign financial institutions, and this lack of information has limited IRS’s ability to ensure taxpayers were reporting offshore income accurately. IRS has begun implementing provisions of the Foreign Account Tax Compliance Act (FATCA), which requires, beginning in 2015, U.S. financial institutions to withhold a portion of certain payments made to foreign financial institutions that have not entered into a specific agreement with IRS to report information on their U.S. clients. FATCA should enhance the ability of the IRS to identify noncompliant taxpayers. Although FATCA will not replace the OVDP, future offshore programs be more focused on identifying promoters of offshore tax schemes that are not associated with the financial institutions otherwise subject to the FATCA reporting requirements.

The OVDP. For years, the IRS has been pursuing – with undetermined 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. An OVDP attracts taxpayers by offering a reduced risk of criminal prosecution and potentially lower penalties than if the unreported income and foreign financial account was discovered by one of IRS’s other enforcement programs. In order to encourage participation in the OVDP, the IRS publicizes the fact that it knows, or soon will know, the names of some offshore account holders. Since 2009, the IRS and the Tax division of the Department of Justice (DOJ) have publicized more than 40 prosecutions of taxpayers and foreign advisors and bankers. IRS also publicizes the terms of its offshore programs, which offer incentives to taxpayers who voluntarily disclose their accounts before IRS learns about them.

Numerous taxpayers with previously undisclosed interests in foreign financial accounts and assets continue to seek participation in the current IRS offshore voluntary disclosure program (the OVDP which began in 2012), modeled after similar programs in 2009 and 2011. Taxpayers participating in the ongoing 2012 OVDP generally agree to file amended returns and file FBARs for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years. Under the 2009 OVDP, the FBAR-related penalty was 20 percent[ix] and under the 2011 OVDP the FBAR-related penalty was 25 percent of the highest account value during the prior six tax years. The 2012 OVDP is ongoing and does not have a stated expiration date but it can be terminated by the IRS at any time either entirely or as to specific classes of taxpayers.[x]

GAO Analysis of the 2009 OVDP. The GAO analyzed tax return data for all 2009 OVDP participants and exam files for a random sample of cases with penalties over $1 million; interviewed IRS Offshore officials; and developed and implemented a methodology to detect taxpayers circumventing monies owed. To determine the extent to which IRS used data from the 2009 OVDP to better prevent and detect future noncompliance, the GAO reviewed changes the IRS made to subsequent offshore programs and interviewed IRS officials from the Offshore Compliance Initiative office about actions taken to identify and target additional offshore noncompliance.

To assess IRS’s efforts to detect quiet disclosures, the GAO used IRS tax return data from the tax years covered by the 2009 OVDP, tax year 2003 through tax year 2008, and compared their results with those from the IRS. GAO also used general tax return data from tax years 2003 through 2010 from the IRS and FBAR data from the Financial Crimes Enforcement Network (FinCEN) to assess other possible methods by which taxpayers may be circumventing potential liabilities for taxes, interest, and penalties associated with a failure to report an interest in an offshore account.

The GAO Report determined that of 10,439 closed 2009 OVDP cases reviewed, 96 percent agreed to the standard offshore penalty–20 percent of the highest aggregate value of the accounts–meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period subject to the OVDP.[xi] The overall median account balance from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties collected.

Taxpayers from these cases disclosed a variety of reasons for maintaining accounts offshore, with many having accounts at UBS in Switzerland. GAO compared the locations of offshore accounts on 2008 FBARs filed by 2009 OVDP Participants with all 2008 individual FBAR filers and determined that Swiss accounts represented 42.11% of all 2009 OVDP individual participants as compared to 7.44% of all individual taxpayers filing 2008 FBARs; Canadian accounts represented 4.31% of all 2009 OVDP individual participants as compared to 17.08% of all individual taxpayers filing 2008 FBARs; Chinese accounts represented 3.06% of all 2009 OVDP individual participants as compared to 2.81% of all individual taxpayers filing 2008 FBARs; French accounts represented 4.1% of all 2009 OVDP individual participants as compared to 4.4% of all individual taxpayers filing 2008 FBARs; German accounts represented 3.76% of all 2009 OVDP individual participants as compared to 5.82% of all individual taxpayers filing 2008 FBARs; Hong Kong accounts represented 2.81% of all 2009 OVDP individual participants as compared to 2.78% of all individual taxpayers filing 2008 FBARs; Indian accounts represented 2.37% of all 2009 OVDP individual participants as compared to 3.0% of all individual taxpayers filing 2008 FBARs; Israeli accounts represented 3.96% of all 2009 OVDP individual participants as compared to 1.76% of all individual taxpayers filing 2008 FBARs; Taiwanese accounts represented 2.38% of all 2009 OVDP individual participants as compared to 0.94% of all individual taxpayers filing 2008 FBARs; and accounts in the United Kingdom represented 8.21% of all 2009 OVDP individual participants as compared to 14.4% of all individual taxpayers filing 2008 FBARs.[xii]

The GAO review of the 2009 OVDP closed cases for individual taxpayers[xiii] revealed that taxpayers agreeing to the 20 percent penalty represented 96 percent of closed cases with penalties remitting $2.786 billion in penalty dollars having a median penalty amount of $116,393; taxpayers agreeing to the 12.5 percent penalty represented less than 1% of closed cases with penalties remitting $0.002 billion in penalty dollars having a median penalty amount of $5,831; taxpayers agreeing to the 5 percent penalty represented 4 percent of closed cases with penalties remitting $0.021 billion in penalty dollars having a median penalty amount of $18,478; and all penalty rates remitting an aggregate of $2.810 billion in total penalty dollars and a median penalty amount of $107,949.[xiv]

For large penalty cases, almost 50 percent of taxpayers had one or more bank accounts with UBS in Switzerland.[xv] Many taxpayers in the 30 large penalty cases reviewed by GAO had resided outside the United States for extended periods of time–either as U.S. citizens or prior to obtaining U.S. citizenship. Many taxpayers who disclosed extended periods of non-U.S. residency reported that they had opened their offshore accounts with income earned outside of the United States. Some had been living and working overseas as U.S. citizens for many years. Others opened accounts before immigrating to the United States. Although some taxpayers became U.S. residents decades ago, they maintained their offshore accounts and did not disclose them on tax returns or FBARs. Some taxpayers reported opening bank accounts in Switzerland as a means of protecting family assets during periods of war or instability in their native country; some cited family histories or personal fears about the safety of U.S. banks as their reasons for moving savings offshore; some cited the need to protect or shelter assets from possible U.S. lawsuits; some who immigrated to the United States reported that they had been unaware of their FBAR reporting requirements, that they had to state that they had foreign accounts on the Form 1040, Schedule B, or that the United States taxes the worldwide income of its residents, including overseas investment income.[xvi]

GAO estimated that that 47 percent of taxpayers receiving large penalties inherited offshore accounts from a parent, spouse, or other relative– some of whom were not U.S. citizens or residents.[xvii] GAO further estimated that that 40 percent of 2009 OVDP participants receiving large penalties used complex arrangements to indirectly own or manage their offshore accounts.[xviii] These arrangements involved the use of foreign corporations, foundations, trusts, and other entities in jurisdictions that have been designated as offshore tax havens and financial privacy jurisdictions, some of which were recommended by foreign financial advisors. In some cases, the entities were “sham” entities–i.e., entities created to conceal ownership from U.S. tax authorities or disguise the repatriation of offshore funds back to the United States.

Detecting Quiet Disclosures. The IRS Offshore Compliance Initiative office tested several different methodologies to identify “quiet disclosures”, including: (1) looking at amended returns during tax year 2003 to tax year 2008, the period covered by the 2009 OVDP, and removed any non-offshore related adjustments, such as filings status changes and additional exemptions; (2) looking at amended returns with increased tax assessments over an established threshold during tax year 2003 to tax year 2010; (3) comparing taxpayers with a history of filing FBARs in non- secrecy jurisdictions between tax year 2003 and tax year 2008 who filed delinquent FBARs processed in 2009 involving a secrecy jurisdiction along with an amended return; and, (4) in 2012, an effort which was not designed to detect quiet disclosures, but to reroute misaddressed amended returns sent in by participants in the 2011 offshore program, was the most successful effort to find them. Collectively, the IRS detected several hundred returns that were identified as quiet disclosures involving previously unreported interests in offshore accounts.[xix]

GAO identified 10,595 potential “quiet disclosures” that occurred during the pendency of the 2009 OVPD.[xx] Unlike IRS, GAO looked at all taxpayers who, for the tax years covered by the 2009 OVDP: filed amended or late returns, and filed amended or late FBARs. They then excluded 2009 OVDP participants from this population. While only an IRS examination can determine whether a potential quiet disclosure is an actual quiet disclosure, the 10,595 taxpayers that GAO identified have an unlikely combination of characteristics that could indicate that taxpayers are quietly disclosing. GAO identified 3,386 taxpayers that filed amended or late returns, and filed amended or late FBARs for multiple years. From that group, GAO identified 94 taxpayers that met the same criteria for all six tax years covered by the 2009 OVDP. IRS agreed with the GAO methodology as reasonable and appropriate.[xxi] GAO further recommended that the IRS explore different methodologies that include a systematic evaluation of amended returns or late filed returns, along with amended or late filed FBARs, without too narrowly restricting either the amended return or the FBAR populations.[xxii]

The GAO Report asserts that a failure by the IRS to identify and pursue “quiet disclosures” will undermine the incentive of others to participate in the offshore programs.[xxiii] If taxpayers are able to quietly disclose and pay less overall penalties than they would have in the OVDP, the incentive for other noncompliant taxpayers to participate in a program is significantly reduced. Further, if quiet disclosures remain undetected, IRS might not receive leads to other noncompliant taxpayers, their advisors and other financial institutions enabling such conduct by U.S. citizens and residents.

IRS can be expected to pursue leads from every potential source and design computer filters to match and detect those pursuing compliance outside the 2012 OVDP. To maintain the integrity of the 2012 OVDP, IRS is likely to assert penalties exceeding those within the OVDP against those discovered to have pursued a quiet disclosure. As such, currently noncompliant taxpayers should carefully consider their unique facts and circumstances in deciding whether to avoid participating in the OVDP in favor of a quiet or prospective disclosure. When considering the OVDP, many look to whether the taxpayer might 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). What is the realistic possibility of reducing that prospect by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDP? What would be the potentially applicable penalties upon an 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 OVDP asserts 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, is actually less outside the OVDP.

The decision to participate in the ongoing 2012 OVDP as opposed to possibly pursuing a quiet or prospective disclosure must take into account all relevant facts and circumstances as well as the possibility of expansive IRS discretion to perform examinations over a lengthy period of time. Having inherited funds in a foreign financial account, without more, might not be considered deserving by the IRS of some lesser penalty regime. Other considerations often include the source and amount of funds, how long the account has been maintained, whether there were withdrawals or deposits into the account or the account was moved to another foreign financial institution at some point, whether the taxpayer’s advisors had some degree of knowledge about the account, the sophistication and education of the taxpayer, whether foreign entities were involved as accountholders, etc.

Finally, all noncompliant taxpayers should carefully review the recent court decisions in United States v. Williams, No. 10-2230 (4th Cir. 2012) and United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) on the issue of determining “willfulness” for assertion of the more significant FBAR penalties (of up to 50% of the account balance, per year). Although the underlying facts in each case were not the best, the courts might not lightly view those with considerable financial resources who fail to inquire about their potential reporting requirements associated with various interests in foreign financial accounts.

First Time FBAR Filers. The number of taxpayers reporting offshore accounts on Form 1040, Schedule B and the number of taxpayers filing FBARs has increased significantly in recent years.[xxiv] In 2003, there were 243,296 Schedule B’s filed reporting foreign accounts and 199,738 FBARs filed.[xxv] In 2010, there were 515,635 Schedule B’s filed reporting foreign accounts and 594,488 FBARs filed.[xxvi] In 2011 there were 618,134 FBARs filed.[xxvii] The GAO Report surmised that the increased foreign account reporting could be attributable to taxpayers reporting new offshore accounts or taxpayers who had always reported income from offshore accounts on their tax returns could now be filing FBARs and reporting the existence of the accounts on Schedule B for the first time (perhaps as a result of IRS publicity surrounding the IRS offshore enforcement efforts).[xxviii]

The increased reporting of foreign accounts on Schedule B and the increased FBAR filings are significantly larger than the approximately 39,000 taxpayers that came forward in one of IRS’s offshore programs. As such, GAO questioned whether these increases are most likely attributable to taxpayers attempting to circumvent penalty regime of the OVDP. The IRS is expected to try to determine whether taxpayers who reported their offshore income properly, but had not filed FBARs, recently started filing delinquent FBARs (as directed by the 2009 OVDP instructions). GAO believes the IRS could also examine a selection of first time FBAR filings to determine the date offshore accounts were opened to determine the potential magnitude of this issue.[xxix]

The Way Forward. GAO determined that the IRS’s offshore programs have been effective in compelling taxpayers to disclose their unreported offshore income. Through these programs, IRS has collected more than $5.5 billion, brought tens of thousands of taxpayers into compliance, and gained increased information on offshore noncompliance. However, it remains uncertain as to the number of additional U.S. taxpayers may remain noncompliant. In conclusion, the GAO Report recommends that IRS (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance. IRS agreed with all of GAO’s recommendations.

Deposits and withdrawals to the foreign account can reveal intentions and knowledge of various individuals involved. Those who do not participate in the OVDP should be prepared to respond to government inquiries regarding the manner in which deposits and/or withdrawals were made to/from the foreign account(s); the mechanics of how deposits/withdrawals were made; the form in which deposits/withdrawals occurred (i.e. cash, check, wire, travelers’ check, etc.); amounts that were withdrawn/deposited each time; when such deposits/withdrawals occurred; where such deposits/withdrawals occurred; whether there were there limitations on the amounts that could be deposited/withdrawn; and documents received a deposit/withdrawal occurred (i.e. receipt, credit memo, debit memo, etc.)?

There will also be inquiries as to whether the foreign accounts remain open and if not, where the funds were transferred when the account(s) were closed. Some taxpayers closed accounts and wire transferred the funds directly to a domestic account. Others closed accounts and transferred the funds through various means to other foreign accounts. Further questions often lay within the responses to each of the foregoing questions. Decisions regarding something other than participating should be carefully considered depending upon the taxpayers responses to each of the foregoing questions. If discovered before any voluntary disclosure submission, a purely civil resolution is anything but certain.

Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, from others who participated in previous offshore voluntary disclosure programs who have been required to identify their bankers and advisors. Additional information is becoming available as the government mines information received under the Foreign Account Tax Compliance Act (FATCA) and from Foreign Financial Asset Reporting (Form 8938). Foreign institutions in Asia, the Middle East and elsewhere continue to advise 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. Such institutions will take whatever action is necessary to avoid being indicted, beginning with the delivery of account holder information to the U.S. government.

GAO has identified methods by which the IRS offshore enforcement efforts can be further enhanced. These efforts are designed to uncover noncompliant taxpayers who, for whatever reason, have been waiting for what they perceive to be a more reasonable resolution. U.S. taxpayers who have not come into compliance should immediately consult competent tax professionals and determine the best method of immediately getting into compliance – waiting is not a viable option.

[i] IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, GAO-13-318 (March 27, 2013). See http://www.gao.gov/products/GAO-13-318

[ii] The 2003 offshore program stemmed from a series of John Doe summonses issued to a variety of financial and commercial businesses to obtain information on U.S. persons who held credit, debit, or other payment cards issued by offshore banks. IRS used records from the summonses to trace the identities of taxpayers whose use of these payment cards may have been related to hiding taxable income; this drew many other taxpayers to the offshore program

[iii] The 2009 OVDP coincided with events that helped attract a large number of taxpayers to the program. On February 18, 2009, UBS AG, a global financial services firm headquartered in Switzerland, entered into a deferred prosecution agreement confirming the account of a whistleblower and acknowledging that its employees participated in a scheme to actively assist and facilitate U.S. taxpayers’ concealment of taxable income. As part of the deferred prosecution agreement, UBS agreed to turn over identities and account information on a limited number of clients. Later that month, the Department of Justice (DOJ) petitioned the U.S. District Court in Miami for an order enforcing a John Doe summons, seeking turnover of information on approximately 52,000 undisclosed accounts. By August 2009, IRS and DOJ announced they had reached a settlement agreement with Switzerland. The agreement required Swiss authorities to give IRS the names of approximately 4,450 U.S. clients with accounts at UBS, pursuant to a request under the USA-Switzerland income tax treaty. All parties agreed to keep confidential the specific criteria by which the 4,450 accounts would be selected until after the 2009 OVDP deadline passed. This created uncertainty among UBS account holders as to whether their names were on the list to be disclosed. IRS gave taxpayers until October 15, 2009, to enter the program. IRS publicity about the program, and correspondence sent by UBS to all U.S. account holders, emphasized the several criminal and civil penalties applicable to

taxpayers who did not make voluntary disclosures before Switzerland turned over the account data.

[iv] During the 2011 program, IRS and DOJ were building cases against tax evasion involving foreign banks in several countries, including Switzerland, Liechtenstein, Israel, and India. Many 2011 program articipants came forward as a result of criminal enforcement activity and a John Doe summons issued to HSBC, a global banking and financial services firm headquartered in the United Kingdom, with significant business operations in Hong Kong and Asia.

[v] Id. at page 10. The 2012 program, which is still open at present does not have an end date, is expected to

draw participants based on further criminal enforcement activity against foreign banks and opportunities for additional John Doe summonses that are being built by IRS and DOJ with information from past offshore programs. Also during this time, as the Foreign Account Tax Compliance Act (FATCA) becomes fully implemented, IRS expects to have increased information reporting from certain taxpayers and from foreign financial institutions on offshore accounts.

[vi] Id., page 10,Table 1.

[vii] Id.

[viii] Id.

[ix] A 5 percent penalty was generally allowed if taxpayers did not open or cause the account to be opened, had no account use, and had paid all applicable U.S. taxes on funds deposited to the accounts, with only account earnings having escaped U.S. taxation. In later program years, minimal account activity was allowed, for example, to update address information, or to withdraw a minimal amounts of funds, defined as less than $1,000 in any program year for which the taxpayers was noncompliant. This limit did not include transfers back to the United States upon closing an offshore account. Less than 5 percent of 2009 OVDP participants received one of the mitigated offshore penalties, 12.5 percent or 5 percent

[x] See “IRS Offshore Voluntary Disclosure Program: Opt-Outs, a Revised FBAR and Rescissions of Pre-Clearance Letters by Criminal Investigation” by Charles P. Rettig, CCH Journal of Tax Practice and Procedure, April-May 2013

[xi] IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, GAO-13-318 (March 27, 2013). See http://www.gao.gov/products/GAO-13-318, at page 13. The GAO review of the 2009 OVDP Closed Cases (Individual Taxpayers) as of November 29, 2012 revealed that taxpayers agreeing to the 20 percent penalty represented 96 percent of closed cases with penalties remitting $2.786 billion in penalty dollars having a median penalty amount of $116,393; taxpayers agreeing to the 12.5 percent penalty represented less than less than 1% of closed cases with penalties remitting $0.002 billion in penalty dollars having a median penalty amount of $5,831; taxpayers agreeing to the 5 percent penalty represented 4 percent of closed cases with penalties remitting $0.021 billion in penalty dollars having a median penalty amount of $18,478; and all penalty rates remitting an aggregate in total penalty dollars of $2.810 billion and a median penalty amount of $107,949.

[xii] Id. At page 14, Figure 3

[xiii] From the 19,337 participants in the 2009 OVDP, GAO identified 10,439 closed examination cases as of November 29, 2012, which were used for their penalty analysis.

[xiv] IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, GAO-13-318 (March 27, 2013). See http://www.gao.gov/products/GAO-13-318, at page 13, Table 2 and Table 3.

[xv] Id. at page 15

[xvi] Id at page 15-16

[xvii] Id at page 16

[xviii] Id. at page 17

[xix] Id at 25

[xx] Id at 24

[xxi] Id at 25

[xxii] Id at 26

[xxiii] Id at page 23

[xxiv] Id at 26. IRS Form 1040, Schedule B, Line 7a includes a yes/no question asking taxpayers if, at any time during the tax year, they had 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 figure contains IRS estimates of the number of forms in which a taxpayer answered “yes” to this question. Under the BSA, U.S. residents or citizens with a financial interest or signature authority over one or more foreign financial accounts with a total of more than $10,000 are required to annually file form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) with Treasury. The FBAR must be filed for the calendar

year by June 30 of the following year.

[xxv] Id at 27

[xxvi] Id at 27

[xxvii] Id at 27

[xxviii] Id at 26

[xxix] Id at 28

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

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.

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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.

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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

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