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.

Ty Warner, Beanie Babies Creator, Convicted For Not Disclosing Foreign Bank Accounts

It’s been about 20 years since the U.S. suddenly fell in love with the adorable 5-inch Beanie Baby dolls created by Ty Warner. But in October 2013 billionaire Ty Warner broke down crying in U.S. District Court as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.

The Rise And Fall Of Beanie Babies

Ty Warner wasn’t afraid to take risks. Beanie Babies first appeared in 1993, triggering a craze for the plush toys fashioned into bears and other animals. He ignored the naysayers after Beanie Babies flopped during their initial debut, and pressed forward with a product he believed in more than anyone else. One reason why the toys easily supplanted other fads such as Ninja Turtles and Cabbage Patch dolls was partly because of Mr. Warner’s strategy of deliberate scarcity. He rolled out each one—Spot the Dog, Squealer the Pig—in a limited quantity and then retired it.

At the height of the Beanie Babies craze, Mr. Warner was shipping more than 15,000 orders per day to retailers. This explosion of sales made him rich. Forbes recently put his net worth at $2.6 billion. Mr. Warner’s obsession even became an asset. When he would suddenly change product designs, collectors and wannabe entrepreneurs would snap up the $5.00 plushes and resell them on eBay at mark-ups topping 1,000%! Some people would take extreme measures to secure these rare editions. In 1999, Jeffrey White, a career criminal from West Virginia, shot and killed a co-worker at a lumberyard after an argument over Beanie Babies.

Three years into the Beanie Babies craze, Mr. Warner boarded a plane bound for Zurich, where he would make the biggest mistake of his life. In 1996, at UBS, one of Switzerland’s largest banks, he opened a secret account invisible to the IRS. The exact amount he deposited is unknown, but by 2002 it had grown to $93 million. To keep the account’s existence from prying eyes, including those of his own accountants, he signed a “hold mail” form that instructed the bank not to send any mail related to the account to the United States and to destroy any documents in his file when they became five years old.

The money Mr. Warner stashed in Switzerland remained there, compounding tax-free, for the next dozen years. And each time Warner got to the part on his Federal individual income tax return that asks if the taxpayer has any foreign accounts, he checked the box that said no.

As his net worth skyrocketed over the next few years, thanks to his 100% ownership of Ty Inc., Mr. Warner couldn’t help bragging about his success. In 1998, experts questioned his claim to be the world’s top toy seller. (Unlike public companies, private companies are not obliged to release revenue figures.) Miffed, Mr. Warner took out a full-page ad in The Wall Street Journal stating that his company had $700 million in profits in 1997. If true, that would have made it more profitable than his two top competitors at the time, Hasbro and Mattel, which reported $560 million in combined profits that year.

But you know the old saying – “What goes up also goes down”. Prices for Beanie Babies eventually crashed and collections, which some people insured for thousands of dollars, became worthless.

Ty Warner’s Tax Problems

Mr. Warner’s hubris eventually got the best of him, too and in October 2013 he pleaded guilty to tax evasion. The 69-year old billionaire who created Beanie Babies broke down crying in court in October 2013 as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.

Mr. Warner (#209 on Forbes 400 list) is not the first Forbes 400 member to draw tax charges. Leandro Rizutto (#296), founder of Conair, had his own run in with tax crimes. And another is Igor M. Olenicoff (#184), a Southern California real estate developer with a net worth of $2.9 billion.

According to the charging document, Mr. Warner opened a secret UBS account in 1996. In late 2002, he moved $93 million to Zürcher Kantonalbank. That account produced over $3 million of income in 2002 alone, which he failed to mention on his Form 1040. He even amended his 2002 return in 2007, but once again omitted the offshore income.

Mr. Warner still paid considerable tax on the nearly $50 million of 2002 income he did report. But he shorted the IRS by about $1.2 million. Including the next ten years, he admitted to the Court in his plea that he evaded paying $5 million in taxes due to the IRS. That’s a painful omission, not only drawing the tax evasion charge but huge FBAR penalties too. Prosecuters contended that he was concealing as much as $107 million in undisclosed foreign bank accounts. In Ty Warner’s case the FBAR penalty will exceed $53 million.

The numbers are staggering. And that ties into criminal penalties. A tax evasion conviction carries up to 5 years in prison and a $250,000 fine. Tax convictions even draw prosecution costs on top of all the back taxes, interest and penalties. And the penalties can be huge. Civil fraud penalties alone can add another 75%.

But when it comes to penalties, FBAR charges and penalties—even civil penalties—are the real gravy train for the government. An annual report of foreign accounts in the law since 1970, FBAR’s target money laundering. They were not widely known—or widely enforced—until the UBS scandal of 2008 and 2009.

But now they are ubiquitous, requiring reporting of foreign accounts even by those with mere signature authority but no beneficial interest. A willful failure to file an annual FBAR can trigger a civil penalty of up to 50% of the amount in the account at the time of the violation.

On January 14, 2014 Ty Warner the mastermind behind Beanie Babies—still considered the most successful toy launch in U.S. history—and is among the richest people in America, was sentenced by U.S. District Court Judge Charles P. Kocoras. On this day, Mr. Warner had nowhere to hide. As he walked to a court lectern in an impeccably tailored dark suit, his ginger-colored hair flaring copper under the stark lights, he looked as tentative as a modern-day Willy Wonka clomping across the plaza of his ruined reclusiveness. Mr. Warner said to Judge Kocoras, “I never realized that the biggest mistake I ever made in life would cost me the respect of those most important to me.”

But once Judge Kocoras began to speak, it became clear that Mr. Warner wouldn’t spend one day behind bars for tax evasion. The judge all but produced a sword, asked the toy man to kneel, and tapped him on each shoulder. “Mr. Warner’s private acts of kindness, generosity, and benevolence are overwhelming,” Judge Kocoras said after reading aloud letters from Warner’s supporters.

He further lauded Warner for already paying a civil penalty of $53 million (which amounts to just 2% of the billionaire’s estimated net worth), plus back taxes. “I believe . . . with all my heart, society will be best served by allowing him to continue his good works,” the judge concluded. In lieu of the four-year-plus prison term recommended by federal guidelines, Judge Kocoras sentenced Ty Warner to two years of probation, 500 hours of community service, and a $100,000.00 fine.

How Does This Effect You?

Although Mr. Warner’s numbers are huge, many more garden-variety taxpayers find themselves facing the awkward combination of failing to report interest on foreign bank accounts and failing to file FBARs. Even if the unreported income is small, the combination of amending tax returns to report it plus quietly filing past-due FBARs is a classic “quiet disclosure”. The IRS advises against them and says it can prosecute taxpayers who do it anyway.

What the IRS wants taxpayers to do is to join the 2014 Offshore Voluntary Disclosure Program. Like the 2009, 2011 and 2012 programs that preceded it, taxpayers must file up to 8 years of amended returns and up to 8 FBARs. Taxes on the unreported income, interest and a 20% penalty on the taxes seem reasonable.

But the sticking point for many is the IRS program’s counterpart to the FBAR penalty. Currently, the program’s penalty is 27.5% of the highest aggregate account balance in the undisclosed offshore accounts. For many, that is a crushing penalty, and for that reason many taxpayers have still refused to come forward taking the gamble that even with the new reporting required by foreign banks under FATCA they can remain undetected. Fortunately, starting with July 1, 2014 the IRS has issued new procedures in its Voluntary Disclosure Program that certain taxpayers could qualify of a 5% FBAR penalty and in some cases all FBAR penalties can be waived.

Crime Doesn’t Pay

The amount Ty Warner saved in income taxes by stashing money overseas was almost laughably small for a billionaire: just $5 million. He wound up having to fork over 16 times that to the feds.

$93 million
Amount in Swiss account in 2002

 $107 million
Account value in 2008

 $5 million
Taxes saved

 $80 million
Civil penalties, interest, and back taxes paid

Beanie Babies are still wonderful toys and, if you’re like most people who have them, yours are in mint condition because you once thought they would make you rich. The good news: Those animals will make a wonderful gift for a local hospital or police station, where they will provide comfort to people too young to remember that there was a time when Beanie Babies drove people to madness and its creator to the IRS. 

What Should You Do?

Charges like Mr. Warner’s stratospheric bubble-bursting Beanie Baby tax and FBAR consequences are reminders that your freedom is at stake and the dollars in question can get worse—catastrophically worse—than the reduced FBAR penalty offered by IRS in its Voluntary Disclosure Programs.

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.

America’s Manifest Destiny Still Lives On Today As FATCA Imposes Our Will On Banking Worldwide

In the 19th century, Manifest Destiny was a widely held belief in the United States that American settlers were destined to expand throughout the continent. Historians have for the most part agreed that there are three basic themes to Manifest Destiny: the special virtues of the American people and their institutions; America’s mission to redeem and remake the west in the image of agrarian America; and an irresistible destiny to accomplish this essential duty. This spirit has endured into the 21st century with the application of FATCA over worldwide banking activity.

Never heard of FATCA? You will.

FATCA—the Foreign Account Tax Compliance Act—is America’s global tax law. It was quietly enacted in 2010. And after a four-year ramp up, it is finally in full effect. What is most amazing is not its impact on Americans—although that is considerable—but its impact on the world. Yes, the whole world.

Never before has an American tax law attempted such an astounding reach. And it is clear FATCA has succeeded, after shrewd diplomacy by President Obama and his Treasury Department. FATCA requires foreign banks to reveal Americans to the Department Of Treasury and the IRS with accounts over $50,000. Non-compliant institutions could be frozen out of U.S. markets, so everyone is complying.

Ten Essential Facts About FATCA:

1FATCA Blew In On a Perfect Storm. FATCA grew out of a controversial rule. America taxes its citizens—and even permanent residents—on their worldwide income regardless of where they live. In 2009, the IRS struck a groundbreaking deal with the Swiss banking giant UBS for $780 million in penalties and American names. Recently, Credit Suisse took a guilty plea and paid a record $2.6 billion fine. Since then, all 106 Swiss banks accepted a U.S. Department Of Justice (DOJ) deal and with many other subsequent developments, banking is now more transparent than could ever have been imagined. FATCA was enacted in 2010, when only some of those developments were unfolding. The idea was to cut off companies from access to critical U.S. financial markets if they didn’t pass along American data. And boy did that idea work.

2. Everyone Around the World is Complying. More than 80 nations—including virtually every one that matters—have agreed to the law. As for those few rouge nations that remain that have not signed on, I would question how safe is your money anyways in those countries. So far, over 77,000 financial institutions have signed on too. Countries must throw their agreement behind the law or face dire repercussions. Even tax havens have joined up. The IRS is so proud of this accomplishment that it maintains a searchable list of financial institutions on its website. Click here to check out this list.

3Even Russia and China Agreed to FATCA. If you think money anywhere can escape the IRS, think again. Even notoriously difficult China and Russia are on board. Which is more amazing? Probably Russia. The U.S. and Russia were negotiating a FATCA deal until March, 2014, but Russia’s annexation of Crimea caused the U.S. to suspend talks. That meant Russian financial institutions faced being frozen out of U.S. markets. Russia took last minute action to allow Russian banks to send American taxpayer data to the U.S. when President Vladimir Putin Signed a Law in the 11th Hour to Satisfy U.S. Treasury. By the way, now that the embargo on Cuba has been lifted, the U.S. Treasury will be looking for Cuba to promptly sign on to FATCA as a condition for opening banking relationships.

4FATCA is America’s Big Stick. Cleverly, FATCA’s 30% tax and exclusion from U.S. markets would be so catastrophic that everyone has opted to comply. Foreign financial institutions must withhold a 30% tax if the recipient is not providing information about U.S. account holders. The choice is simple, and that’s why everyone is complying.

5Everyone is on the Lookout for American Indicia. Foreign Financial Institutions (FFI’s) must report account numbers, balances, names, addresses, and U.S. identification numbers. For U.S.-owned foreign entities, they must report the name, address, and U.S. TIN of each substantial U.S. owner. And in what is a kind of global witch hunt, American indicia will likely mean a letter. Don’t ignore it.

6FBAR’s Are Still Required. FBAR’s predate FATCA, but get ready for duplicate reporting. FATCA just adds to the burden, including Form 8938, but it doesn’t replace FBAR’s. The latter have been in the law since 1970 but have taken on huge importance since 2009. U.S. persons with foreign bank accounts exceeding $10,000 must file an FBAR by each June 30. These forms are serious, and so are the criminal and civil penalties. FBAR failures can mean fines up to $500,000 and prison up to ten years. Even a non-willful civil FBAR penalty can mean a $10,000 fine. Willful FBAR violations can draw the greater of $100,000 or 50% of the account for each violation–and each year is separate. The numbers add up fast. Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance.

7FATCA is Compelling Compliance. U.S. account holders who are not compliant have limited time to get to the IRS. The IRS recently changed its programs, making its Offshore Voluntary Disclosure Program a little harsher. Yet for those not willing to pay the 27.5% penalty—which rose to 50% August 4, 2014 for some banks—the new IRS’s Streamlined Program may be a good option for those who qualify. The latter applies now to both foreign and U.S.-based Americans. Some still want to amend their taxes and file FBAR’s in a “quiet disclosure” which could bring civil FBAR penalties or even prosecution. Thus, caution is clearly in order.

8Banking Will Never Be the Same. FATCA is making banking transparent worldwide. With Swiss bank deals, prosecutions, John Doe Summonses, and FATCA, the IRS has quicker, better and more complete information than ever.

9Forget Repeal or Dismantling FATCA. Republicans have mounted a lackluster repeal effort, but there’s no serious push to repeal FATCA. Some say FATCA will be like prohibition, lasting for a time but doomed. We’ll see, but it sure doesn’t look that way now.

10Don’t Count on Other Passports. Some dual nationals or U.S. Green Card holders think they can bypass FATCA—and other U.S. tax rules—by using a non-U.S. passport and non-U.S. address with their foreign bank. Don’t succumb to this – you may just make it worse, handing the IRS another badge of willfulness. Your bank and the IRS will likely find out eventually, even if not right away.

Why You Should Do Something About It Before It’s Too Late

Until the government receives your name and account information and chooses to act on that information, you have the opportunity to avoid the possibility of time in a federal prison and reduce the potential civil penalties for failing to report your foreign account. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, 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.

Sovereign Management In Panama Now Under DOJ/IRS Investigation.

Important announcement to U.S. taxpayers that opened offshore bank accounts through a company called Sovereign Management & Legal, Ltd. Based in Panama, the company offers to help Americans open offshore bank accounts with nominee corporations. Knowing that many people who do take these actions are also committing tax evasion, the IRS and Justice Department obtained a John Doe summons from a federal judge. The IRS hopes to find Americans who used Sovereign to open accounts.

Federal Court Approves U.S. Government Issuance Of John Doe Summonses

A Federal Judge recently approved the Internal Revenue Service’s issuance of what is known as a “John Doe” summons to several entities in the U.S who utilized the services of Sovereign Management & Legal Ltd. (“Sovereign”). These entities include FedEx, DHL, UPS, Western Union, the Federal Reserve Bank of New York, Clearing House Payments Company LLC and HSBC USA. According to Sovereign’s website and the government’s Petition filed with the U.S. District Court for the Southern District of New York, Sovereign provides Offshore Banking, Corporation and Trust services. The U.S. government alleges that U.S. taxpayers used those services to conceal ownership of assets held offshore to evade U.S. taxation.

A “John Doe” summons may be issued when the government is unsure of the exact identity of the person(s) for whom they are seeking the information. These summonses seek information that the government cannot procure through the Foreign Account Tax Compliance Act (“FATCA”) and serves as the latest effort in the IRS’s recent push to achieve global tax compliance from its citizens. FATCA, enacted by Congress in March of 2010, requires foreign financial institutions to report certain information about U.S. taxpayer held foreign financial accounts or foreign entities in which U.S. taxpayers hold a substantial ownership interest.

In the context of offshore financial holdings, the government has recently issued John Doe summonses to a number of financial institutions requesting account information for U.S. taxpayers with ownership or signature authority over foreign accounts without knowing the names of the specific taxpayers whose information it is seeking. For a John Doe summons to be approved, the government is required to make a showing in court that (1) the summons relates to a particular person or ascertainable group, (2) there is a reasonable basis for believing that such person or group may have failed to comply with any provision of the internal revenue law, and (3) the information sought is not readily available from other sources.

The Federal District Court found that the government met its burden with respect to these requests. For example regarding the courier companies named in the Summons, the government believes that the John Doe summonses will assist them in identifying U.S. clients of Sovereign through records of shipping services between Sovereign and taxpayers in the U.S.

HSBC USA is among the entities named in the government’s Petition because of its correspondent bank accounts held at the bank by HSBC Hong Kong and HSBC Panama. The correspondent account provides banking services to the foreign bank that does not have a U.S. branch so that the foreign bank may reach U.S. customers. The government alleges that HSBC USA’s records relating to the correspondent accounts will assist the government in determining the identity of Sovereign’s clients who held accounts with HSBC Hong Kong and HSBC Panama through wire transfer information and cancelled checks retained by HSBC USA.

The government’s Petition further requests authority to issue summonses to gather wire and electronic fund transfer information from the New York Federal Reserve, Western Union and Clearing House Payments Company. According to the Petition, the New York Federal Reserve Bank maintains the primary electronic funds transfer system for domestic U.S. fund transfers, Western Union also facilitates transfers of funds, and the Clearing House Payments Company operates the main electronic funds transfer system for processing international U.S. dollar funds transfers made between international banks. All of these sources are believed to contain information relevant to discovering the identities of U.S. taxpayers hiding assets offshore through services allegedly provided by Sovereign.

The John Doe summons has already proved to be a powerful tool to help the IRS gather information, including names and account information of U.S. taxpayers with foreign accounts or other foreign financial interests. The IRS has used the John Doe summonses to target individuals with foreign accounts who are hoping to “wait out” the IRS and thus avoid making a voluntary disclosure as well as those intending to avoid future reporting requirements. Once a taxpayer is on the IRS’s radar, IRS Criminal Investigation will no longer clear them to come into compliance under the protections of a voluntary disclosure program.

Services Offered By Sovereign Management That Could Facilitate Tax Evasion By U.S. Taxpayers.

Curious about the services offered by Sovereign, I visited their website.

One of the services offered by Sovereign is an “anonymous offshore ATM / debit card”. Long associated with tax evasion, offshore debit cards are a popular way for people with hidden assets to repatriate their money into the United States. Transferring money into your U.S. account would leave a paper trial but an anonymous debit card allows one to spend money in the United States and make ATM withdrawals with very little paper trail.

Sovereign advertises that their cards have neither a name imprinted on them nor encoded in their magnetic strips.

Of course, to open a foreign bank account most foreign banks want to see a passport. Sovereign has that covered too. For a fee, Sovereign offers “aged” offshore shelf corporations that already have bank accounts. Why present a passport when you can buy a company “off the shelf” that already has an offshore account?

Still need more anonymity? Sovereign offers “nominee director service”.

Worried that you might lose control of your funds or your offshore shelf company? Sovereign has an answer for that too. Their nominee directors come with undated resignation letters.

Sovereign advertises that for a mere $3,500 you can own a ready made Nevis corporation owned by a Panamanian foundation, complete with bank account. An aged company or one with nominee directors is extra, of course.

While none of these things alone are illegal, the IRS considers them to affirmative acts of tax evasion. Unless you have some valid business purpose, having a nominee entity will at a minimum get you audited and if you get caught with an unreported foreign account, you could land in jail.

Is There A Risk Of Getting Caught?

Absolutely! In the case of Sovereign, because they are located in Panama, their customer lists are beyond the reach of the Justice Department. The courier companies however can be subpoenaed and they carry checks and incorporation papers back and forth to Sovereign. Likewise the major credit card companies and ATM networks can be subpoenaed for the financial transactions flowing through their institutions. If you have not reported your foreign income and you have not disclosed your foreign bank accounts, you should seriously consider participating in the IRS’s 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. 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 San Francisco, Los Angeles, 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.

Don’t Believe The Seven Deadly Myths Of FATCA Non-Enforcement.

This May Be Your One Last Opportunity to Avoid Criminal Prosecution and Increased Civil Penalties!

Since July 1, 2014, the most feared U.S. legislation regarding international tax enforcement – Foreign Account Tax Compliance Act (“FATCA”) – is being implemented by most banks around the world. As part of this compliance, foreign banks from around the world are sending letters to account holders that they believe have, or had, a U.S. tax nexus (or other U.S. connection) requesting information to determine whether such account holders have disclosed their foreign bank accounts to the IRS. The letters from foreign banks generally require an account holder to disclose whether the account has been declared to the IRS through the filing of a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) form and/or a Form 1040 personal income tax return, participation in the various IRS Offshore Voluntary Disclosure Programs, or otherwise. Sometimes foreign banks request that the account holder submit an IRS Form W-9 or W-8BEN, which is generally required to be completed by U.S. account holders for tax reporting purposes.

What Is FATCA?

FATCA was signed into law in 2010 and codified in Sections 1471 through 1474 of the Internal Revenue Code. The law was enacted in order to reduce offshore tax evasion by U.S. persons with undisclosed offshore accounts. There are two parts to FATCA – U.S. taxpayer reporting of foreign assets and income on Form 8938 and reporting by a Foreign Financial Institution (“FFI”) of foreign bank and financial accounts to the IRS.  It is the latter that is resulting in FFI’s sending out that dreaded letter to suspected U.S. account holders requesting U.S. taxpayer identification and information (referred hereafter as the “FATCA letter”).

FATCA generally requires an FFI to identify certain U.S. accountholders and report their accounts to the IRS. Such reporting is done either through an FFI Agreement directly to the IRS or through a set of local laws that implement FATCA.

If an FFI refuses to do so or otherwise does not satisfy these requirements (and is not otherwise exempt), U.S.-source payments made to the FFI may be subject to withholding under FATCA at a rate of 30%. Note that FATCA information reporting and withholding requirements generally do not apply to FFI’s that are treated as “deemed-compliant” because they present a relatively low risk of being used for tax evasion or are otherwise exempt from FATCA withholding.

Seven Deadly Myths.

As foreign banks march inexorably towards the implementation of FATCA, there are still many people who subscribe to any one or all of the seven deadly myths that could find themselves facing potentially crippling circumstances after July 1, 2014. For safety’s sake, we get down to brass tacks and present the facts below – in plain language – to debunk these myths.

Myth 1: No action required now.

This is false. As of July 1, 2014 all FFI’s must have implemented a FATCA Compliance Program to comply with its country’s Intergovernmental Agreement (“IGA”) with the United States. FFI’s must self-certify their FATCA status [Chapter 4 of the U.S. Internal Revenue Code] to their withholding agents by either providing a Global Intermediary Identification Number (GIIN) or new IRS Form W-8BEN-E/W-8IMY prior to this date.

Myth 2: Best to “wait and see” for a foreign country’s enabling legislation.

This is false. Wishing this to be the case does not make this so. To be clear, registration and reporting are distinct functions under FATCA. All FATCA registration is directly with the IRS and is occurring now.

Registration with the IRS is free of cost and mandatory for any FFI to become registered deemed-compliant under its country’s IGA. Only the IRS has the power to register a FFI and issue a GIIN. Enabling legislation by the foreign country is irrelevant to FATCA registration for FFI’s as no foreign country revenue authority has – or will ever have – the power to register a FFI and issue a GIIN. Again, we emphasize, this must be done directly with and by the IRS.

The truth is, a foreign country’s enabling legislation is simply intended to provide the legal framework for compliance with, not avoidance of FATCA (and other automatic tax information exchange agreements), and the development of the regulatory framework for operating the agreement.

Myth 3: IRS registration may breach confidentiality.

This is false. Withholding agents already require W-8s from all FFI’s to avoid withholding liability. This is a long-established practice and the Form W-8 has simply now been revised to include FATCA status. A FFI must self-certify, under penalty of perjury, its FATCA status to withholding agents using the new W-8 before July 1, 2014. To obtain a GIIN, a FFI must file Form 8957 via the IRS Foreign Financial Institution Registration System (FRS) (or manually). Once the GIIN is obtained, it can be verified by withholding agents via FRS or submitted via Form W-8. There are no material differences between the information disclosed, or commitments made, under Form W-8 and Form 8957. Both forms are complementary and require basic identifying information about the FFI. Specific investor information is never disclosed.

Myth 4: Certain foreign investment funds may be exempted as sponsored entities.

This is false. Sponsored entity exemption would require all the sponsored FFI’s of the sponsor to use a single GIIN. If any FFI using the sponsored GIIN becomes FATCA non-compliant – for any reason – all FFI’s using the same GIIN would also become non-compliant.

Myth 5: Model 1 or Model 2 IGA’s displace U.S. Treasury Regulations.

This is false. They both work in tandem. A FFI is treated as FATCA-compliant, and not subject to FATCA withholding tax, to the extent it complies with its obligations under the IGA. The U.S. Treasury regulations are incorporated by reference into the IGA. Under the IGA, the foreign country is bound to use U.S. Treasury definitions to the extent those definitions are not defined by the IGA, and importantly, the foreign country is not permitted to use any other definition in local legislation that would “frustrate the purposes” of the IGA.

Myth 6: There is no person charged with the responsibility that a foreign bank complies with the IGA.

This is false. Under the IGA a FATCA Responsible Officer (FRO) must be appointed who is (a) as an officer of the registered deemed-compliant FFI with sufficient authority to ensure that the FFI meets the applicable registration requirements and (b) who certifies that the FFI will comply with its continuing FATCA obligations.

Myth 7: There is no incentive for FRO’s to ensure a foreign bank’s compliance under an IGA.

This is false. FRO’s have serious compliance responsibilities under FATCA. In fact, FATCA compliance revolves around the FRO, like Sarbanes Oxley compliance revolves around the CFO. Especially in the context of a FFI that does not typically have any staff, the role is even more essential. It’s a fallacy and wishful thinking that FROs can be lax or “lite” under the IGA. The IRS has consistently expressed its expectations that FRO’s deliver robust FATCA compliance and high-quality FATCA information from either procedure. Whoever says otherwise has not been paying attention and we all know how this story ended for Switzerland. Key considerations for a FRO under the IGA include:

  • Willfully submitting any fraudulent or materially false document to the IRS is a Federal offence. [IRC §§7206(2) & 7207]
  • FFI’s self-certification as a Reporting Financial Institution to withholding agents will entail signing the IRS Form W-8 under penalties of perjury.

The Truth About FATCA.

Whether out of lack of knowledge, preparedness or self-interest, those who are propagating these myths are not doing themselves or their U.S. clients any favors. As of July 1, 2014, FATCA went into full effect, which means that FFI’s now have to report the required FATCA information to the IRS. Many FFI’s are making a full effort to comply with FATCA. As part of this effort, FFI’s around the world have been sending out “FATCA letters”. A FATCA letter is basically a letter from your bank or other financial institution which introduces FATCA to their customers and asks them to provide answers to a various set of questions aiming to find out information specific to FATCA compliance. Often, instead of asking all of these questions directly a FATCA letter would simply list out a series of forms that contain these questions such as IRS Forms W-9 and W-8BEN.

The information furnished by the customer to the bank would then be used by the bank to report information on the customer’s foreign accounts to the IRS. If the customer refuses to answer the questions or provide the necessary forms, the financial institution would often close the account and report it as a “recalcitrant account” to the IRS. Once that is done, the government will look to see if your account ever had in excess of a $10,000 balance. If it did and you did not report it on an FBAR or on your federal income taxes, the case will likely be referred to the IRS Criminal Investigation Division. At that point, the government will begin to build a case against you. A U.S. citizen can be sentenced up to five years in prison for each year that they willfully failed to file an FBAR and can be penalized up to 50% of the balance of the foreign account for each year that they willfully failed to report (up to 250% of the account’s balance). The civil penalties alone can easily reach double the amount of the balance of the account in question.

Why You Should Do Something About It Before It’s Too Late

Until the government receives your name and account information and chooses to act on that information, you have the opportunity to avoid the possibility of time in a federal prison and reduce the potential civil penalties for failing to report your foreign account. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, 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.