4 Costly Myths Taxpayers Have About the IRS’s Offshore Voluntary Disclosure Program (OVDP)

People who have undisclosed income in offshore accounts can — and frankly, should — take advantage of the IRS’s Offshore Voluntary Disclosure Program (OVDP).

As the term suggests, the program allows taxpayers to voluntarily disclose all foreign accounts and fully clear their tax liability (including taxes owed, interest and penalties), instead of risk getting flagged in the future and paying much steeper price. While the IRS treats each case individually, penalties for failing to report offshore accounts start at 50 percent of the balance. Furthermore, if there is suspected fraud or tax evasion, criminal prosecutions can commence.  

Although the OVDP has been around since 2009, there remains a significant amount of misinformation and misunderstanding regarding how it works — and just as importantly, how it doesn’t work. Here are four costly OVDP myths that persist:

Myth #1: Taxpayers are better off informing the IRS of undisclosed offshore accounts by amending their tax returns vs. using the OVDP.

Fact: Taxpayers who provide any disclosure of unreported foreign assets must be prepared to provide supporting information, such as bank statements. As such, reporting outside the OVDP is a categorical mistake that will not “fly under the radar screen.” The IRS can and will use the new information to develop a case against a taxpayer, which may (and likely will) lead to severe civil penalties and/or criminal prosecution.

Myth #2: Once a taxpayer enters into the OVDP, it is not possible to dispute the findings levied by the IRS after their investigation.

Fact: While remaining in the OVDP, taxpayers may contest and challenge the IRS’s findings. Agents can make mistakes, and some financial statements and other data may be open to interpretation.

Myth #3: Taxpayers who enter the OVDP expose themselves to having all of their tax returns open to examination.

Fact: The normal statute of limitations to examine a tax return is three years. However, it can be extended to six years in cases where there has been a substantial omission of income. And in cases where the IRS can show fraud, there is no statute of limitations.

Myth #4: Taxpayers who enter the OVDP must be prepared pay a penalty of 50 percent of the value of their undisclosed foreign assets.

Fact: The minimum penalty taxpayers are exposed to outside the OVDP is 50 percent of the balance (or value) of their undisclosed foreign assets. However, within the OVDP the maximum is 27.5 percent. This means taxpayers who wisely take advantage of the OVDP — while it is still being offered — will keep at least 72.5 percent of their foreign assets.

Moving Ahead

Buoyed by the Panama Papers and other high-profile investigations and revelations, the IRS is aggressively cracking down on taxpayers with undisclosed foreign assets. If this scenario applies to you — regardless of your motives for failing to disclose — the smartest and best thing you can do is consult with an attorney. Contact the Tax Law Offices of Jeffrey B. Kahn today to learn more about the OVDP and how it may benefit you. We can help you contact the IRS and proactively provide disclosure rather than risk having the IRS contact you.

For more information about how to deal with the IRS if you have offshore bank accounts, download our FREE eBook today:

IRS Issues Fall 2016 Report Card On OVDP Milestones And FACTA Implementation

IRS Issues Fall 2016 Report Card On OVDP Milestones And FACTA Implementation

IRS Issues Fall 2016 Report Card On OVDP Milestones And FACTA Implementation

Offshore Compliance Programs For Taxpayers With Undisclosed Foreign Bank Accounts Generate $10 Billion andMore Than 100,000 U.S. Taxpayers Come Back into Compliance In Reporting Foreign Accounts;IRS Urges People to Take Advantage of Voluntary Disclosure Programs

The IRS announced on October 21, 2016 that 55,800 taxpayers have come into the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations, paying more than $9.9 billion in taxes, interest and penalties since 2009. In addition, another 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties.

What that means is that the IRS has collected a combined $10 billion with 100,000 taxpayers coming back into compliance.  Furthermore, as the IRS continues to receive more information on foreign accounts, it will be more difficult for U.S. taxpayers to avoid detection and to maintain that they were non-willful in not complying with the U.S. tax laws.

Under the Foreign Account Tax Compliance Act (FATCA) and the network of inter-governmental agreements (IGAs) between the U.S. and other countries, automatic third-party account reporting has entered its second year. Also, more information also continues to come to the IRS as a result of the Department of Justice’s Swiss Bank Program. As part of a series on non-prosecution agreements, the participating banks continue to provide information on potential non-compliance by U.S. taxpayers.

OVDP offers taxpayers with undisclosed income from foreign financial accounts and assets an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign financial accounts and assets now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

The IRS also developed the Streamlined Filing Compliance Procedures to accommodate taxpayers with non-willful compliance issues. Submissions have been made by taxpayers residing in the U.S. and from those residing in countries around the globe. The streamlined procedures have resulted in the submission of more than 96,000 delinquent and amended income tax returns from the 48,000 taxpayers using these procedures. A separate process exists for those taxpayers who have paid their income taxes but omitted certain other information returns, such as the Report of Foreign Bank and Financial Accounts (FBAR).

What Should You Do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5% and 10 times more than the 5% rate offered in the expanded streamlined procedures.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

mutual funds and offshore investing

Beware the Potential Tax Pitfalls of Investing in Offshore Mutual Funds or Owning Foreign Insurance Policies

Beware the Potential Tax Pitfalls of Investing in Offshore Mutual Funds or Owning Foreign Insurance Policies

If you have never reported your foreign investments on your U.S. Tax Returns, the IRS has established the Offshore Voluntary Disclosure Program (OVDP) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  When entering into OVDP, a taxpayer must file amended income tax returns reporting worldwide income and file all required informational tax forms.  Many taxpayers who attempt to do this on their own and who have Foreign Mutual Funds or Foreign Insurance Policies are finding that their OVDP submissions are being rejected or examined because of some arcane tax laws and tax procedures associated with these investments that most laypeople are not aware.

Do You Have Foreign Mutual Funds?

U.S. taxpayers ought to be aware of the potential tax heartaches associated with investing in mutual funds held by foreign banks or foreign brokerage firms. When making such investments through U.S. firms, any appreciation or depreciation of value of the funds is not recognized as gain or loss until the fund is sold or liquidated.  This is not the case with the same type of investments in foreign firms.  Each year the U.S. investor must pick up as income or record a loss in the appreciation or depreciation of value of the funds even though there was no sale or liquidation of the funds.  Essentially, such an investor loses the advantage of deferring gains which is enjoyed by those investors dealing with U.S. firms.

To understand how this operates – under the Internal Revenue Code, there is a concept called Passive Foreign Investment Company or “PFIC”.  A foreign corporation is classified as a PFIC if it meets one of the following tests:

  1. Income Test– 75% or more of the corporation’s gross income is passive income (interest, dividends, capital gains, etc.)
  2. Asset Test– 50% or more of the corporation’s total assets are passive assets; passive assets are investments that produce interest, dividends or capital gains.

The IRS has extended the characterization of a PFIC to include most foreign-based mutual funds, hedge funds and other pooled investment vehicles.

A. U.S. taxpayer with these investments is required to fill out Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualifying Electing Fund, and include it with his Form 1040 along with the appropriate PFIC income and tax computations.  The IRS offers various complicated methods of reporting PFIC income.  Under one such method, “Mark-to-Market”, the IRS requires the reporting of the value of a mutual fund from year to year and taxes any appreciation in the mutual fund values from year to year.  The tax rate that applies is 20%. This is in addition to the normal taxation of dividends and capital gains that domestic mutual funds are taxed on.

Reporting the appreciation of a mutual fund from year to year may end up being no small task as oftentimes a typical stock portfolio will contain twenty to thirty funds which may involve lots of trade activity over the course of many years.  The taxpayer needs to keep accurate and comprehensive records of all information on the mutual fund(s) including share basis, yearly balances, and any sales or purchases from year to year. With such level of activity to record each year, no wonder how laypeople and even tax preparers cannot get these computations right leading to higher penalties and perhaps jeopardizing a taxpayer’s Voluntary Disclosure Submission.

Do You Have A Foreign Insurance Policy?

There is an excise tax under Internal Revenue Code Sec. 4371 imposed on insurance policies issued by foreign insurers. Any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit they are made, signed, issued, or sold, is liable for the tax.

The following tax rates apply to each dollar (or fraction thereof) of the premium paid.

  1. Casualty insurance and indemnity, fidelity, and surety bonds: 4 cents. For example, on a premium payment of $10.10, the tax is 44 cents.
  2. Life, sickness, and accident insurance, and annuity contracts: 1 cent. For example, on a premium payment of $10.10, the tax is 11 cents.
  3. Reinsurance policies covering any of the taxable contracts described in items (1) and (2): 1 cent.

However, the tax doesn’t apply to casualty insurance premiums paid to foreign insurers for coverage of export goods in transit to foreign destinations.  Premium means the agreed price or consideration for assuming and carrying the risk or obligation. It includes any additional charge or assessment payable under the contract, whether in one sum or installments. If premiums are refunded, claim the tax paid on those premiums as an overpayment against tax due on other premiums paid or file a claim for refund.

The liability for this tax attaches when the premium payment is transferred to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient designated by the foreign insurer or reinsurer) or to any nonresident agent, solicitor, or broker. A person can pay the tax before the liability attaches if the person keeps records consistent with that practice.

The person who pays the premium to the foreign insurer (or to any nonresident person such as a foreign broker) must pay the tax and file the return (Form 720, Quarterly Federal Excise Tax Return). The Form 720 covers the last calendar quarter and is due no later than the last day of the month succeeding the reporting quarter.  For example, a Form 720 covering the quarter ended September 30, 2016 is due October 31, 2016.  If you are required to file this Form, you will also need to secure a Taxpayer Identification Number (not your social security number) as these excise taxes are tracked separately by IRS just like employment taxes.

The fact that a tax treaty with the foreign county exempts the taxation of these insurance policies does not waive the requirement for you to file the Form 720.  Attach any disclosure statement to the first quarter Form 720 you would need to file. You may be able to use Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as a disclosure statement.

Conclusion.

If you are a U.S, taxpayer with foreign mutual funds or foreign insurance policies, make sure your tax filings are compliant and complete by enlisting the assistance of counsel experienced in the reporting of these investments.

IRS Issues Fall 2015 Report Card On OVDP Milestones And FATCA Implementation

Offshore Compliance Programs For Taxpayers With Undisclosed Foreign Bank Accounts Generate $8 Billion; IRS Urges People to Take Advantage of Voluntary Disclosure Programs

On October 16, 2015 the IRS announced in a news release that more than 54,000 taxpayers have entered into offshore voluntary disclosure programs since 2009. Both the Offshore Voluntary Disclosure Program (OVDP) and the streamlined procedures enable taxpayers to correct prior omissions and meet their federal tax obligations while mitigating the potential penalties of continued non-compliance. There are also separate procedures for those who have paid their income taxes but omitted certain other information returns.

IRS Commissioner John Koskinen stated “The groundbreaking effort around automatic reporting of foreign accounts has given us a much stronger hand in fighting tax evasion. People with undisclosed foreign accounts should carefully consider their options and use available avenues, including the offshore program and streamlined procedures, to come back into full compliance with their tax obligations.”

Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and foreign jurisdictions, automatic third-party account reporting began in 2015, making it less likely that offshore financial accounts will go unnoticed by the IRS.

In addition to FATCA and reporting through IGAs, the Department of Justice’s Swiss Bank Program continues to reach non-prosecution agreements with Swiss financial institutions that facilitated past non-compliance. As part of these agreements, banks provide information on potential non-compliance by U.S. taxpayers. Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to apply to OVDP to resolve their tax obligations.

OVDP offers taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns and information reporting obligations. The program encourages taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS at a later date and face more severe penalties and possible criminal prosecution.

Since OVDP began in 2009, there have been more than 54,000 voluntary disclosures by taxpayers with undisclosed foreign bank accounts. The IRS has collected more than $8 billion from this initiative. 

The streamlined procedures, initiated in 2012, were developed to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts but whose circumstances substantially differed from those taxpayers for whom the OVDP requirements were designed. More than 30,000 taxpayers have used streamlined procedures to come back into compliance with U.S. tax laws. Two-thirds of these have used the procedures since the IRS expanded the eligibility criteria in June 2014.

What Should You Do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5% and 10 times more than the 5% rate offered in the expanded streamlined procedures.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

The IRS Does Care About Your Small Undisclosed Foreign Bank Account!

Since 2009 the IRS campaign against unreported income and undisclosed foreign accounts has morphed from a focus on Swiss banks and large accounts to a kind of everyman’s tax disclosure.  But keep in mind that just like when the net is lowered into the water it catches all sizes of fish – the IRS states no undisclosed foreign account is too small to avoid penalties. Many people have problems sleeping because of Foreign Account Tax Compliance Act (FATCA) and the filing requirements of Foreign Bank Account Reporting (FBAR).

FATCA

FATCA was enacted in 2010 and the IRS has touted that FATCA has been successful so far. The IRS states they have collected US$6.5 billion and they reasonably believe that as much as $100 billion per year could be collected. The IRS is working with other countries that would like to use the U.S. model to improve their tax collection. The IRS will be working closely with the Organization for Economic Cooperation and Development (OECD) to implement Global FATCA (what many people are now calling GATCA); and also that the forms to request information from financial institutions would be standardized so that all countries would use the same forms, making it easy on the financial institutions. The IRS reasonably believes that FATCA can work, and given that the law has the effect of forcing compliance by every country, ultimately, everyone will benefit.

FBAR

Keep in mind that an FBAR is different from FATCA and the requirements are also different. While impact of FATCA is to report you foreign income on your U.S. income tax returns, FBAR is an informational submission that must be filed with the Treasury Department if you have more than $10,000 in financial assets overseas. So, for FATCA, the financial institutions and the foreign governments will report to the IRS directly, but for FBAR, the taxpayers must self-report to the United States Treasury Department by June 30th each year.

Sure, there are thresholds, including the rule that you don’t need to file annual FBARs if you have $10,000 or less in your accounts. But remember, that is in the aggregate, so having three accounts with $4,000 each puts you over.  

Plus, the $10,000 ceiling is judged every single day of the year. If you ever go over $10,000 in the aggregate at any point during the year, you must file. Remember too that even this FBAR threshold isn’t applicable to income taxes. If small accounts produce income, you must report it.

Say you have a foreign account with $8,000 at all times during the year, and it produces $400 of interest income. Even though the account isn’t subject to FBAR rules, you must report the income. And most foreign banks don’t send you handy Form 1099-type reminders at tax time.

Even if your undisclosed foreign bank account is small, if you fail to file FBARs and/or fail to report income, you could go to jail or face huge fines or penalties. The IRS has made clear that non-compliant accounts—and there’s no threshold for what accounts are too small to ignore—can be dealt with severely.

FBAR penalties can be enormous, a civil penalty of $10,000 for each non-willful violation. If your violation is willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation.

Criminal penalties are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment.

Consider Whether Your Delinquency Is Only In Taxes, Only FBARs Or Both.

Where The Delinquency Is FBAR’s Only –

For such cases you could be entitled to an FBAR Penalty Abatement. Perhaps you properly relied on the advice of professionals in not filing the FBARs or you reasonably did not know you had a filing obligation. By showing “reasonable cause” you may be able to abate the FBAR filing penalties. While the reasonable cause cases generally arise under the income tax laws and regulations, established under the Internal Revenue Code, FBAR penalties are assessed under the Bank Secrecy Act, which is part of the USA Patriot Act. Nevertheless we have found that precedent set forth in the tax cases may help in supporting reasonable cause to abate FBAR penalties.

Where The Delinquency Is FBAR’s AND Taxes

You need to consider whether your non-compliance could be deemed willful by the IRS.  Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that’s the result of a good-faith misunderstanding of the requirements of the law.  The application of this standard will vary based on each person’s facts and circumstances so it is something that has to be evaluated on a case-by-case basis.

For Non-willful Delinquencies – The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.

Both versions require that taxpayers:

a. Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

b. File 3 years of back tax returns reflecting unreported foreign source income;

c. File 6 years of back FBAR’s reporting the foreign financial accounts; and

d. Calculate interest each year on unpaid tax.

In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:

a. Possible waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record;

b. Possible waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance); and

c. Possible waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651.

For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.

For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).

Now If You Believe That The IRS Would Deem You Willful – The 2014 Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.  OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.

OVDP requires that taxpayers:

  • File 8 years of back tax returns reflecting unreported foreign source income;
  • File 8 years of back FBAR’s reporting the foreign financial accounts;
  • Calculate interest each year on unpaid tax;
  • Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
  • Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years. This is referred to as the “OVDP Penalty”.

In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue:

  • Charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and
  • Other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

What Should You Do?

Remember small amounts and small accounts may not raise the same kinds of big ticket issues. Nevertheless, there’s no small fry rule at the IRS. Even small amounts of income and account balances can be worth addressing. It’s far better to address these issues than to worry endlessly over not being in compliance with the rules. We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS Agents To Hunt Tax Dodgers Overseas

On a recent airplane trip from the Bay Area to Southern California, I sat beside a distinguished-looking elderly man. I initiated a conversation with him and found out he was a former judge now living in Mexico. We talked about everything, including taxation.

The former judge admitted that he was an American citizen and he and some of his friends have problems sleeping because of Foreign Account Tax Compliance Act (FATCA). So, I asked him what about Foreign Bank Account Reporting (FBAR), as that was more serious than FATCA. But he had never heard about it. I wondered how many people are like the former judge and his friends who can’t sleep at night because of FATCA and who never heard of FBAR.

FATCA

FATCA was enacted in 2010 and the IRS has touted that FATCA has been successful so far. The IRS states they have collected US$6.5 billion and they reasonably believe that as much as $100 billion per year could be collected. The IRS is working with other countries that would like to use the U.S. model to improve their tax collection. The IRS will be working closely with the Organization for Economic Cooperation and Development (OECD) to implement Global FATCA (what many people are now calling GATCA); and also that the forms to request information from financial institutions would be standardized so that all countries would use the same forms, making it easy on the financial institutions. The IRS reasonably believes that FATCA can work, and given that the law has the effect of forcing compliance by every country, ultimately, everyone will benefit.

FBAR

Keep in mind that an FBAR is different from FATCA and the requirements are also different. While impact of FATCA is to report you foreign income on your U.S. income tax returns, FBAR is an informational submission that must be filed with the Treasury Department if you have more than $10,000 in financial assets overseas. So, for FATCA, the financial institutions and the foreign governments will report to the IRS directly, but for FBAR, the taxpayers must self-report to the United States Treasury Department by June 30th each year.

Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation—and each year you didn’t file is a separate violation. By the way the IRS can go back as far as 6 years to charge you with violations.

Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment.

Foreign Corporations

The IRS has a special interest in foreign corporations (i.e., corporations organized outside the United States). They are interested in shareholders with at least 10% ownership and directors of these foreign corporations. Foreign corporations are very important because that is where the big bucks are. They want U.S. citizens and green card holders who are 10% shareholders and directors (in said corporations) to provide information from the following sources annually: articles of incorporation, listing of directors, annual returns for the company filed with the registrar of companies and financial statements. While this information is filed for informational purposes only, the foreign corporations should file a tax return with the IRS. You should note that the requirement applies to partnerships and trusts also.

Those Who Gave Up U.S. Citizenship

The IRS has noted that a record number of Americans have given up citizenship recently and some may have done so with the intent to get around FATCA. But the news is bad, because the IRS is threatening that every one of those citizens will be thoroughly investigated with a view to seeing if they are trying to evade taxes.

The IRS warns that people with a certain amount of assets will be treated as if all the assets were sold and will be taxed as at the day when citizenship was given up. This will also apply to long-term green card holders. Also, if one has given up citizenship and spends more than 30 days in the United States in a calendar year, he may be taxed as if he were a citizen.

Bad Banks

The IRS has named about a dozen banks worldwide that are considered bad – and if you have an account in one of those banks and failed to comply with your filing and tax-reporting obligations, you are very likely to have a problem with the IRS.

Is The IRS Watching You?

The IRS claims it can tell when people enter and exit the country, and lying on immigration forms and tax returns is a federal offence. There is even a website that the IRS uses that can be used to tell whenever people enter and exit the United States.

Be aware that the number of days spent in the U.S. is very important in determining your tax status. For citizens, if you spend more than 330 days outside the U.S. per year, you will not be required to participate in Obamacare, or the number of days spent abroad will affect the amount of foreign earnings you may be able to exclude from income, hence paying low or no tax to Uncle Sam. For green card holders, you have immigration issues, as well as tax issues if you spend more than a specified period outside the United States.

It’s A Small World After All.

The IRS said people may be able to run, but they can’t hide. The IRS said it is going to have agents all over the world, as they are going to work closely with foreign governments through the information exchange programs and the financial institutions.

Also, the IRS is using Internet searches and social media like Facebook and LinkedIn to find tax dodgers, along with whistle-blowers. There will be GATCA, where other countries will be following the IRS path and these countries along with the U.S. are proposing one standard form that will be used to get information from financial institutions worldwide. So, if China wants information from Swiss banks, it will use the same forms to make the request as Jamaica or France.

The idea is to make it easier for the banks to retrieve information. So, we may be looking to one tax system if the OECD has its way and tax evasion worldwide may very well be a thing of the past in a few years’ time, and the full compliance with the IRS requirements is the best way forward.

What Should You Do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

IRS Extends A Sweetheart Deal This Valentine’s Day To U.S. Taxpayers With Undisclosed Foreign Bank Accounts

On June 18, 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations and would largely waive these penalties if taxpayers come forward and show that they didn’t hide the money on purpose.

Separate from United States income tax returns, many U.S. persons are required to file with the U.S. Treasury a return commonly known as an “FBAR” (or Report of Foreign Bank and Financial Accounts; known as FinCEN Form 114), listing all non-US bank and financial accounts. These forms are required if on any day of any calendar year an individual has ownership of or signature authority over non-US bank and financial accounts with an aggregate (total) balance greater than the equivalent of $10,000.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes.

Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation—and each year you didn’t file is a separate violation. By the way the IRS can go back as far as 6 years to charge you with violations.

Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment.

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.  The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.

Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBAR’s (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

What Constitutes Non-Willful Conduct?

The key to qualification in this new procedure is to prove that your past actions or inactions can be considered to be non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that’s the result of a good-faith misunderstanding of the requirements of the law.  The application of this standard will vary based on each person’s facts and circumstances so it is something that has to be evaluated on a case-by-case basis.

If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures.   Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the Offshore Voluntary Disclosure Program (“OVDP”) or its predecessor programs) may still use the streamlined procedures.

The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.

Both versions require that taxpayers:

a. Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

b. File 3 years of back tax returns reflecting unreported foreign source income;

c. File 6 years of back FBAR’s reporting the foreign financial accounts; and

d. Calculate interest each year on unpaid tax.

In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:

a. Possible waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record;

b. Possible waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance); and

c. Possible waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651.

For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.

For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).

Case Example:

Raj is an engineer working and living in California. He was born in India and came to California after completing his education in India. While he was a child his parents set up a bank account in India which he did not even know about until just recently. That account has been earning interest all of these years and now has a balance of $100,000.00.

What liabilities does Raj face under the Internal Revenue Code?

1. Back taxes, interest and 20% accuracy related penalty for the unreported interest income going back at least three years.

2. FBAR penalties of $10,000 per account per year (going back 6 years results in a $60,000 penalty).

When I total that all up, what started out as an account with $100,000.00 would leave Raj with about $30,000 – that’s a 70% reduction in value!

How would Raj fare by hiring tax counsel experienced in OVDP and going forward with one of the programs established by IRS?

1. Back taxes and interest for the unreported interest income for the last three years.
2. No 20% accuracy related penalty.
3. No FBAR Penalties
4. A one-time 5% OVDP penalty (applied against the value of the account)

So when I total that all up, what started out as an account with $100,000.00 now would leave Raj with about $93,000.00 – a 7% reduction in value. That’s a lot better than a 70% reduction in value! And there are things that we can do as tax counsel to make that reduction even smaller and perhaps get full abatement of penalties.

What Should You Do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Hiding Money Or Income Offshore Among The List Of Tax Scams For The 2015 Filing Season

IRS Commissioner John Koskinen was proud to announce that “the recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore and he encouraged taxpayers to come in voluntarily and getting their taxes and filing requirements in order.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, the IRS reports there have been more than 50,000 disclosures and the IRS has collected more than $7 billion from this initiative alone.  The IRS also has conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. Finally, the IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

The IRS remains committed to top priority efforts to stop offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil. In fact, the Internal Revenue Service Criminal Investigation Division (IRS-CI) and Her Majesty’s Revenue & Customs (HMRC) co-hosted a three-day International Criminal Tax Symposium in Washington, D.C. starting January 27, 2015.  The symposium focused on combating offshore tax evasion and international financial crimes—including cyber-crime—and brought together delegates from criminal tax and enforcement programs from Australia, Canada, The Netherlands, Norway, New Zealand, the United Kingdom and the United States.

Tax Scam: Hiding Income Offshore

Through the years, offshore accounts have been used to lure taxpayers into scams and schemes which usually peak during filing season as people prepare their returns or hire people to help with their taxes. Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shut down scams and prosecute the criminals behind them.

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.

Big Penalties For Non-compliance – Jail-time Is Possible.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Separate from United States income tax returns, many U.S. persons are required to file with the U.S. Treasury a return commonly known as an “FBAR” (or Report of Foreign Bank and Financial Accounts; known as FinCEN Form 114), listing all non-US bank and financial accounts. These forms are required if on any day of any calendar year an individual has ownership of or signature authority over non-US bank and financial accounts with an aggregate (total) balance greater than the equivalent of $10,000.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes.

Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation—and each year you didn’t file is a separate violation. By the way the IRS can go back as far as 6 years to charge you with violations.

Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment. Many violent felonies are punished less harshly.

Voluntary Disclosure.

Since 2009, the IRS has provided several programs for taxpayers to disclose their offshore accounts, potentially reduce their financial liability, and avoid criminal prosecution. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

The IRS further warned that it is obtaining a significant amount of information regarding offshore tax evasion from its enforcement efforts as well as the Foreign Account Tax Compliance Act (FATCA), which will require foreign financial institutions to start disclosing the identities of U.S. accountholders as early as March 2015.

The Offshore Voluntary Disclosure Program (OVDP) provides protection from criminal prosecution and offers fixed terms for resolving civil tax and penalty liabilities. Instead of the multitude of potential penalties, the OVDP generally allows taxpayers to pay a 27.5% miscellaneous penalty on the highest aggregate balance of undisclosed accounts, pay tax on any undisclosed income for the last 8 years, and pay interest on such income. The OVDP offers significant benefits, but a successful conclusion requires multiple complex steps. 

Effective July 1, 2014, the Streamlined Disclosure Programs provide potential alternative methods for taxpayers to address their offshore reporting delinquencies. Under the Streamlined Disclosure Programs, taxpayers file three years of amended or delinquent returns and six years of FBAR’s, but are subject to a reduced penalty structure. U.S. residents pay a penalty of 5% of the highest balance of their offshore accounts, while non-U.S. resident taxpayers are subject to no penalty on their account balances. However, to participate in the Streamlined Disclosure Programs, the IRS requires taxpayers to certify that their failure to disclose their accounts was non-willful.

What Should You Do?

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or in 2012 OVDI, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Given the complexity of the offshore account disclosure programs and the risk of increased penalties as numerous financial institutions disclose information required by FATCA, taxpayers with undisclosed offshore accounts should hire an experienced tax attorney in Offshore Account Voluntary Disclosures to consider the benefits and burdens of the programs and explore options to craft a workable solution for resolving these issues.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

London Mayor Refuses To Pay U.S. Tax Bill

London Mayor Boris Johnson is being pursued by U.S. tax officials while his former New York counterpart Michael Bloomberg was given an honorary knighthood by Queen Elizabeth last month.

Beware As The U.S. Tax Net Closes On Thousands Of U.S. Citizens Living Abroad.

The Conservative mayor of London – who was born in New York and holds an American passport – just revealed he is being pursued by the U.S. authorities for an unpaid tax demand. The demand reportedly relates to his first home in the UK, which he said was not subject to capital gains tax in England. According to U.S. tax law all citizens are required to file a tax return and pay U.S. taxes, even those with dual citizenship and those who earned income abroad.

The British Newspaper “The Telegraph” reports the home, in Islington, north London, was bought by Mr. Johnson and his barrister wife in 1999 for £470,000. They sold the house for £1.2million in 2009. As mayor of London, Mr. Johnson earns a salary of £144,000 and on top of that he is paid £250,000 a year for his column in the Telegraph. While in the U.K. he would not have been liable for capital gains tax as residents do not pay it on the sale of their first home, Mr. Johnson could be facing a bill of over £100,000 to the U.S.

U.S. tax laws which are administered by the Internal Revenue Service mandate that if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.

Quite simply: Your worldwide income is subject to U.S. income tax, regardless of where you reside.

When questioned in a recent interview on NPR, Mayor Johnson complained that he had been hit with an IRS demand for capital gains tax. He said the U.S. demand related to his first home in the U.K., even though it is not subject to capital gains tax in England. Mr. Johnson thinks it is outrageous to tax U.S. citizens everywhere no matter what. He exclaimed that he hasn’t lived in the U.S. since he was five years old!

Still, U.S. tax law is what it is and the IRS demands its money. Asked whether he would pay the bill, Johnson replied: “No is the answer. I think it’s absolutely outrageous. Why should I? I pay the lion’s share of my tax, I pay my taxes to the full in the U.K. where I live and work.”

Renouncing U.S. Citizenship Is Not The Cure.

A foreign-based person looking to renounce U.S. citizenship is treated as “exiting the U.S.” To exit, you generally must prove five years of U.S. tax compliance, and in some cases you pay an exit tax which is equal to 15% of the value of all your assets! Long-term residents giving up a Green Card can be required to pay the tax too.

Will The IRS Chase Mayor Johnson Down?

Yes and if you are in the same situation the IRS should be coming after you too. We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or in 2012 OVDI, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Have undisclosed foreign bank accounts? – What you should expect your tax preparer to ask you when you come in to get your taxes prepared next year.

CPA’s and other professional tax return preparers are bound to the IRS Code Of Professional Responsibility commonly called Circular 230 which if a tax preparer violates could lead to big penalties and sanctions for that tax preparer.

What penalties could tax preparers face?

A tax preparer who is in violation of these rules could be subject to the following:

Internal Revenue Code § 6694(a) provides that if any part of an understatement of a taxpayer’s liability is due to an “unrealistic position” taken on his return, any income tax return preparer who knew (or reasonably should have known) of this position is subject to a penalty of $250. If the understatement is due to a reckless or intentional disregard of rules or regulations the penalty is $1,000 per occurrence.

The tax preparer’s employer, firm or entity also is subject to the penalty if it knew, or reasonably should have known, of the conduct giving rise to the penalty.

While these may not seem like large amounts, if this penalty is assessed IRS employees are instructed to report the income tax return preparer to the IRS Office of Professional Responsibility (“OPR”). A tax preparer who is referred to the OPR, may be subject to suspension, disbarment, or censure. In addition, if the preparer has violated Circular No. 230, the IRS may impose a monetary penalty in an amount up to the gross income derived or to be derived from the conduct giving rise to the penalty.

Additionally, the IRS can go criminal on the tax preparer. Unscrupulous tax return preparers are generally prosecuted for violation of the Internal Revenue Code §7201, Attempt to Evade or Defeat Tax. This is a felony offense and carries a maximum potential penalty of up to five years in prison and a fine of up to $250,000. Internal Revenue Code §7206(1) and (2), Fraud and False Statements, also carries a maximum potential penalty of up to three years in prison and a fine up to $250,000.

What is one of the main obligations that a tax preparer must follow?

Circular No. 230 §10.22 Diligence as to accuracy which states that:

Each tax return preparer 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.

This does not mean that you as a tax preparer have to actually audit or examine the records of your client. Under Circular No 230 §10.34(d), a tax preparer 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.

But what if the client makes certain statements that sound suspicious?

A tax preparer may not ignore the implications of any information provided to or actually known him or her. If the information furnished by the client appears to be incorrect, inconsistent with other known facts, or incomplete, the tax preparer is required to make further inquiry. The practitioner is also required by Circular No 230 §10.34(c), to advise a client of any potential penalties likely to apply to a position taken on a return the tax preparer is preparing or on which she or he is advising.

So if it is determined that the client has foreign income that must be reported on his U.S. income tax return and the client refuses to report this income, a tax preparer to avoid penalties and sanctions by the IRS cannot assist a client in filing a false return or filing a tax return taking a position that cannot be reasonable is not supported by the tax law.

Questions for tax preparers to ask.

With the IRS having more resources and information to detect taxpayers with undisclosed foreign accounts, what changes should taxpayers expect when they next meet with their tax preparer?

1. Does the client have a foreign account?
2. If yes, is it the type of account that is covered by 31 U.S.C. Section 5314?
3. If applicable, has the client properly completed Form 1040, Schedule B, Interest and Ordinary Dividends, Part III, Line 7a?
4. Has the client annually reported the income from the account?
5. Has the client filed FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR)?
6. Has the client filed Form 8938, Statement of Specified Foreign Financial Assets, with his or her federal income tax return?
7. Has the IRS already contacted the client about the foreign account?

What should you do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or in 2012 OVDI, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.