Topics Covered:
1. America’s Most-Wanted Swiss Bankers
2. Top Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty

3. Five common myths about the dreaded tax audit

4. Questions from our listeners:
a. Can a state court determine who may claim a dependency exemption for a child?
b. My son was born on December 31. Can I claim him as a dependent and qualify for the child tax credit?
c. My child was stillborn. Can I claim my child as a dependent on my tax return?
d. If I claim my daughter who is a full-time college student as a dependent, can she claim her own personal exemption when she files her return?
Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.

And today I have a special guest with me in the studio. In the spirit of Day Your Child To Work Day, my daughter Madison is here with me.
Say Hi Madison. Madison says Hi Dad!
Madison is five years old and this is her first time seeing her Dad work in the studio.

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.
I have a lot to cover today in the world of taxes and helping me out will be my associate attorney Amy Spivey who will be calling in later.

America’s Most-Wanted Swiss Bankers

For decades, Switzerland has occupied an outsize role in the world of shady international finance. The country’s strict secrecy laws have made it the offshore banking destination of choice for U.S. tax evaders. The Swiss Bankers Association estimates that Swiss banks still hold at least $2 trillion that customers haven’t declared to tax authorities in their home countries. They say that you’re not a self-respecting Swiss bank if you don’t have some dodgy money floating around your system.

Since 2008 the U.S. Department of Justice and the IRS have been waging an uneasy war against Swiss banks that enable tax evasion. UBS Group and Credit Suisse Group have paid a combined $3.4 billion in U.S. fines, penalties and restitution. Wegelin, the country’s oldest bank, closed its doors entirely in 2013 after pleading guilty to conspiracy to evade taxes. In a break from long-standing policy, the government of Switzerland has pledged in recent years to share bank information with tax authorities around the world.

Despite these sweeping changes some of the biggest Swiss banks, are reluctant to take action against their employees. Credit Suisse—which in 2014 pleaded guilty to conspiracy to help Americans file false tax returns and agreed to pay the U.S. and New York state $2.6 billion—kept three indicted bankers on its payroll for almost three years after they were charged despite their failure to respond in court. Well that complacency ended last May when the New York State Department of Financial Services required the three bankers’ employment be terminated as part of a settlement.

At least 21 financial advisers in Switzerland under U.S. indictment remain at large, making them fugitives in the eyes of the American government. Their acts aren’t considered crimes under Swiss law so the country won’t extradite or prosecute them. Several still work in the Swiss financial industry, offering tax advice and other services. Some still have U.S. clients. And so far 50,000 Americans have voluntarily come forward disclosing their foreign accounts and reporting their foreign income to avoid criminal prosecution and reduced penalties.

What Should You Do?

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”). Even for those who have lost money over the years, not being able to pay the entire fines from the OVDP is not an excuse — there are ways to negotiate payments. 

Well it’s time for a break but stay tuned because we are going to tell you the Top Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from our San Francisco Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Top Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty

Jeff continues: Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Amy states: It’s one thing to make an innocent mistake on your taxes, or to overlook a tax break that could lower what you owe the IRS. While such innocent mistakes will still cost you, they usually won’t invoke the ire of the IRS to pursue criminal prosecution or assess a Civil Fraud Penalty.

Amy continues: When you intentionally disregard tax law, however, such willful neglect will get you in real trouble. The IRS defines “willfulness” as a voluntary, intentional violation of a known legal duty, specifically your tax filing and payment responsibilities.

Jeff states: Such intentional tax violations could lead to tough penalties on top of the unpaid tax and interest added to it. In some cases, the IRS pursues intentional violations as criminal acts that could carry jail time.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff continues: So it’s not a good idea to think even think about neglecting your tax filing duties or fudging the entries a little or a lot. And in case you have any doubt as to what might be problematic, here are the top tax sins that could land you in very hot tax water.

Jeff to read off each sin and Amy to comment – Jeff may skip some of the sins or go through quickly to save time.

1. Not reporting all your earned income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. When it comes to earned income — that’s your pay for work performed — not reporting payment generally isn’t an issue if all your money comes from wage or salary income. That amount is detailed on W-2 forms that must be attached to your Form 1040.

But if you’re an independent contractor, either as your full-time job or from side work in addition to your salaried position, it’s your responsibility to keep track of your earnings and let the IRS know the amount at tax time. When you’re paid more than $600 you should get a 1099-MISC from the client. And when your business accepts credit cards for payment, remember that each year your credit card merchant service provider will issue a 1099-K reflecting all the charge sales your business made. Don’t think of ignoring one of these forms. The IRS gets copies, too.

And even when you don’t get an earnings statement, it’s still your legal duty to report the income. Even without third-party tracking, the IRS will take a long look at your return if the numbers seem off.

2. Not reporting all your unearned income

Unearned income generally is investment income. In these cases, your banker, broker or the mutual funds that you bought directly will send you 1099-DIV or 1099-INT statements with your annual earnings. Again, don’t think you can “forget” to count one or more of these amounts. The IRS is copied on these statements, too.

3. Forgetting about foreign funds

Foreign financial accounts add another layer of complexity and potential costs if you fail to report them. The IRS has been on a mission for the last few years to halt hidden offshore accounts, significantly increasing its detection efforts and prosecuting owners of unreported accounts. And now starting with 2014 foreign banks are reporting interest and investment income to the IRS just like their domestic bank counterparts

The risk is even greater if you own a foreign financial account that must be disclosed under the Foreign Bank Account Report (FBAR) rules or the Foreign Account Tax Compliance Act (FATCA). A whole separate set of penalties applies here with a minimum amount of $10,000.00 per year per each account not disclosed.

4. Exaggerating deductions

Tax deductions are a great way to reduce your tax bill. They lower your income, which generally means your tax liability will be lower, too. Many taxpayers, however, are tempted to inflate the amounts that they claim on Schedule A.

The IRS, thanks to its automatic computer screening tool known as the discriminant information function (DIF), knows what the average deduction amount is for various income levels. If your claims are larger, you can bet your 1040 will be pulled for further review.

If you did indeed have an unusually large but legitimate charitable deductions, great. Claim those that you have receipts for and then show the IRS examiner your substantiating documentation. But if you’re just pumping up the amount on your own, you could face serious consequences.

5. Inflating self-employment expenses

This is the business counterpart to inflated individual itemized deductions. Here self-employed individuals bump up the business expenses they list on their Schedule C filings. This form filed by sole proprietors offers a way to claim a variety of business expenses that can reduce self-employment income and therefore the 15.3 self-employment tax. Among the expense categories are advertising costs, office supplies and other expenses, depreciation and Section 179 expenses, auto expenses and travel, meals and entertainment costs.

As you can see, there are lots of tempting opportunities to hike amounts to reduce taxable self-employment income. Were those stamps really for office mailings, or did you use them to send out personal holiday cards? What about that book? Was it really something that helps your run your company better or was it a volume you wanted for your personal bookshelf? 

6. Mixing business and pleasure

A specific section of Schedule C that’s prone to, shall we say, shady claims is the meals and entertainment line item. When properly claimed, a business owner can deduct some of the costs of taking a client out to eat and/or an entertainment venue. But sometimes business folk go out with friends and then write it off as a business expense.

That’s not to say that you can’t be friends with other business owners or even your clients. But when you’re picking up the check, you need to make sure that the dining etc. experience is really work related. You can’t just go out with a friend, ask “how’s your business going?” and then claim the evening as a business expense. Well, you can, but if the IRS catches on to your expense ruse, you’re in trouble.

This also could be a tax problem if you combine business and personal travel. While that’s totally acceptable to the IRS, you can’t claim the travel costs as a business expense if you actually spent more time lounging on the beach instead of meeting with new clients for your new line of bathing suits. 

Instead, make sure you know how to make the most of legitimate business entertainment expenses and travel expenses by hooking up with a tax professional. 

7. Sharing your home office

A home office isn’t an automatic red flag but that doesn’t mean you should be cavalier in claiming your work space. If the room or specific area in a room isn’t used regularly and exclusively for your business dealings, it does not qualify as a home office.

Yes, it’s easy to ignore those personal files in your desk drawer. After all, when you worked at a cubical for your employer you had personal stuff there. But technically, you are illegally claiming this deduction if you conduct personal tasks in your so-called office.

8. Not making a profit

Legitimate business owners want to make money, even if it means paying taxes. Other folks, though, set up operations that they fully intend to run at a loss for tax purposes. That is the textbook definition of a tax evasion scheme.

The IRS is wise to this and tries to limit such losses by requiring that a business eventually make a profit. According to the IRS time table, eventually means you must be in the black in three out of five years.

Your inability to do so will cost you. And if the IRS can show your bleeding bottom line wasn’t just due to a lack of business aptitude, but a willful intent to operate at a loss, you will be deemed to have committed a tax sin.

Jeff states: Remember, carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned because after the break we are going to tell you the Five common myths about the dreaded tax audit.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

And on the phone from our San Francisco office I have my associate attorney, Amy Spivey.

Five common myths about the dreaded tax audit

Amy states: Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. After all, how will you catch the bad guys if you give them the rule book first? Here are a few common myths about the dreaded tax audit:

Amy to read off each myth and Jeff to discuss.

Myth #1: Only the wealthy get audited.

While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The agency is increasingly relying on data mining and robo-audit systems to detect errors in tax returns, which has actually made it easier to go after small-fish taxpayers.

In 2013, the IRS audited more than 6.5 million taxpayers with an adjusted gross income of less than $1 million. And it audited fewer than 40,000 of those reporting $1 million or more.

One of the biggest reasons behind that discrepancy is the IRS’s move to pursue people who fraudulently claim the Earned Income Tax Credit, a juicy tax break worth an average $5,891 for a family of five earning less than $50,270 a year.  In 2012 alone, EITC fraud cost the government between $11.6 billion and $13.6 billion.

If you really look at the scrutiny of low- and middle-income wage earners, there is much more detailed scrutiny now than for those with investments and other sources of income. It just takes fewer resources to audit lower-income earners. And in all fairness to the IRS, Congress hasn’t been exactly generous with budgets.

And while the overall number of audits has been declining since 2010, the IRS has decreased the rate of millionaire probes more than other income brackets.  Auditing rates for the under-$200,000 income club fell by only 0.14% between 2011 and 2013, compared with a 1.63% decrease in the rate of audits of those making $1 million or more, according to the IRS.

Myth #2:  An audit means you’ll have an IRS agent knocking down my door

If the IRS’s computer system flags your tax return, you’d be hard-pressed to get an agent to pick up the phone, let alone make a house call. The traditional IRS audit and someone showing up on your doorstep is a thing of the past.

For starters, the IRS does not have the manpower. Thanks to rounds of budget cuts, the IRS has had to reduce staff by more than 8,000 employees since 2010 with no sign of relief yet.  Congress recently ordered the agency to slash another $526 million from its budget in 2014.

And while the agency’s funding and employee count decrease, more and more Americans are filing taxes each year, nearly 146 million in 2013 alone, up from 138 million five years ago.

Of the 6.5 million audits conducted last year, only 362,500, or 5.5%, resulted in an actual field visit. If your return is flagged, you’ll most likely get a letter in the mail seeking additional information. From there, you can either answer by return mail or call them directly or even better hire tax representation.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Myth #3: If I owe tax money, the IRS will be after me in a hurry

Rest assured, if IRS flags your return for suspicious activity, you will hear from them at some point — but probably not for a year or two…or more. The IRS actually has three to six years to go after questionable tax returns, and with personnel shortages, even taxpayers who willingly call them to sort out issues have a hard time getting them resolved.

Last year, more than 20 million phone calls to the IRS went unanswered, leaving just 61% of callers able to get through to a human being.

The IRS is under-funded and under-staffed. If a consumer calls the IRS, when they get through to a human being, they will likely just be told where to find the answer on the IRS website.

Myth #4: If I file for too many deductions and tax credits, I’m setting myself up for an audit

Tax credits and deductions are there for a reason: to ease the tax burden for workers who need it most. Don’t let the threat of an audit dissuade you from applying for tax credits and deductions you’re justifiably due.

Despite the IRS’s efforts to crack down on Earned Income Tax Credit fraud, it is actually one of the most commonly overlooked deductions. Twenty percent of eligible workers have missed out on the EITC, which is worth an average $5,891 for a family of five and $475 for single-filers without children.

Home-office deductions are another oft-cited target for the IRS. But it’s an overblown fear that hardly applies today, when there are more than 42 million Americans working as freelancers and independent contractors.

This was once the case, back when working from home was less common but with millions of home offices running today, the system is far more accommodating for home office users. The important thing to remember: Make sure you keep your receipts and documents and only deduct legitimate business expenses… which mean that the expense must be typical and necessary for your business.

The bottom line: If you’ve earned a tax credit or can justifiably claim a deduction, do it. Just make sure you’ve done the research and know what you need to back up your claim first.

Myth #5: I’ve got my tax refund so I don’t have to worry about an audit.

Even if your tax return was accepted and you cashed your refund check, you’re still fair game for auditors.

The IRS uses a special matching system that tracks each taxpayer’s W-2s, 1099s and 1040 forms. If it turns out that you’ve under-reported your income, the system will eventually catch up to you.

You could get your refund, and about one or almost two years later, if there’s a problem with your taxes, you’ll likely get a letter in the mail from the IRS.

As noted above, the IRS has three years to track you down, but in extreme cases of underreporting or tax evasion, they can basically come after you whenever they want.

And that’s not even the worst part. Any interest and penalties owed on your unpaid taxes will start accruing the day your taxes were due — not two years later when the IRS letter finally shows up in your mailbox. Two years of compounding interest and penalty charges will only add salt to the wound.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.

If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

OK Amy, so with my daughter Madison in the studio with me today I thought it would be appropriate for us to talk about dependents. What questions have you pulled from the kahntaxlaw inbox on this topic for me to answer?

1. Question: Can a state court determine who may claim a dependency exemption for a child?

Answer: Federal tax law determines who may claim a dependency exemption for a child. Even if a state court order allocates a dependency exemption for a child to a noncustodial parent, the noncustodial parent must comply with the Federal tax law to claim an exemption for the child. To claim an exemption for a child, the noncustodial parent must attach to the noncustodial parent’s return a copy of a release of claim to exemption by the custodial parent. The release may be on a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a document that conforms to the substance of that form.

2. Question: My son was born on December 31. Can I claim him as a dependent and qualify for the child tax credit?

Answer: Yes, if your child was born alive during the year and you meet the dependency tests, you may claim him as a dependent and take the full exemption.

3. Question: My child was stillborn. Can I claim my child as a dependent on my tax return?

Answer: You cannot claim a dependency exemption for a stillborn child.

4. Question: If I claim my daughter who is a full-time college student as a dependent, can she claim her own personal exemption when she files her return?

Answer: If you can claim an exemption for your daughter as a dependent on your income tax return, she cannot claim her own personal exemption on her income tax return. Your daughter should check the box on her return indicating that someone else can claim her as a dependent.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Chit Chat with Amy.

Thanks Amy for calling into the show. Amy says Thanks for having me.

And Madison thank you for being in the studio with me today. Well we are reaching the end of our show.

You can reach out to me on Twitter at kahntaxlaw. You can also send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

Have a great day everyone and a great weekend!

 

Topics Covered:

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

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

3. The New And Improved IRS Streamlined Procedures For Taxpayers With Undisclosed Foreign Bank Accounts.

4. Questions from our listeners:

     a. What should I look for in finding the best FBAR/OVDP attorney for my situation?

     b. Is it better to hire a sole practitioner to get a one-on-one attorney relationship or a firm with OVDP attorneys who take a team approach?

     c. Should someone hire a local general law firm or look for OVDP attorneys with a potentially wider depth of experience?

     d. Should someone hire a big law firm that does a bit of everything or a tax resolution firm that specializes in nothing but tax resolution?

     e. Should someone hire an OVDP law firm that will use an outside OVDP CPA or a law firm that has a built-in dedicated OVDP-specific accounting department?

Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.

April 15^th is a day that many people fear but in case you have an undisclosed foreign bank account, your fear has only just begun. And filing an extension for your tax return will only put off the inevitable. But there is hope as I am devoting the entire show today to educate you about this problem and the solution to resolve it.

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

The Rise And Fall Of Beanie Babies

Ty Warner, the creator of Beanie Baby dolls, 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 at the time 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. And when Mr. Warner 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, 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.

And over these same dozen years his net worth skyrocketed thanks to his 100% ownership of Ty Inc. In 1998, Ty Warner claimed 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 broke down crying in U.S. District 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.

He admitted to the Court in his plea that in late 2002, he moved $93 million to Zürcher Kantonalbank so he could evade 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. In Ty Warner’s case the FBAR penalty will exceed $53 million.

But it does not stop there because these numbers while being staggering, also tie into criminal penalties. A tax evasion conviction carries up to 5 years in prison and a $250,000 fine.

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. Mr. Warner said to the Judge, “I never realized that the biggest mistake I ever made in life would cost me the respect of those most important to me.”

The judge noted “Mr. Warner’s private acts of kindness, generosity, and benevolence are overwhelming.” 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. In so 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.

Crime Doesn’t Pay

You know that 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. Listen to these numbers:

$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. 

Well it’s time for a break but stay tuned because we are going to tell you the Deadly Myths Of FATCA Non-Enforcement you should not believe.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from our San Francisco Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Jeff states: Amy and I have been looking forward to provide you with this special edition show where we are devoting this full hour to undisclosed foreign bank accounts. The penalties for non-disclosure can be catastrophic and jail-time is possible. Protect yourself.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

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

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

Jeff states: 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.

Jeff asks Amy: What Else Can You Tell Us About FATCA?

Amy replies: 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”).

Amy continues: 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.

Deadly Myths.

Jeff states: As foreign banks march towards the implementation of FATCA, there are still many people who subscribe to any one or all of the deadly myths that could find themselves facing potentially crippling circumstances after July 1, 2014.

Jeff to read off each myth and Amy to respond.

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 to their withholding agents by providing certification of compliance issued by the IRS. Failure to do so results in a 30% withholding tax imposed on their U.S investments.

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. 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. This procedure is no different than domestic banks requiring your social security number to open an account so it can issue a 1099 each year to the IRS reporting the interest income you earned.

Myth 4: 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 5: 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.

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.

Jeff asks Amy, So what is the Truth About FATCA?

Amy replies, 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. FFI’s around the world have been sending out “FATCA letters”. These letters typically include IRS Forms W-9 and W-8BEN for the U.S. customers to complete and return to the bank. 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. So either way, you will be reported to the IRS.

Jeff states: 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 one of the IRS’s Voluntary Disclosure Programs.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned because after the break we are going to tell you about The New And Improved IRS Streamlined Procedures For Taxpayers With Undisclosed Foreign Bank Accounts.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team. And on the phone from our San Francisco office I have my associate attorney, Amy Spivey.

You are listening to a special edition show where we are devoting this full hour to undisclosed foreign bank accounts. The penalties for non-disclosure can be catastrophic and jail-time is possible. But the IRS has provided programs to come clean and avoid the worst-case scenario.

The New And Improved IRS Streamlined Procedures For Taxpayers With Undisclosed Foreign Bank Accounts

Jeff states: 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.

Amy states: 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.

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

Amy states: 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.

Jeff states: 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.

Jeff continues: More and more taxpayers find themselves facing the awkward combination of failing to report interest on foreign bank accounts and failing to file FBAR’s. Even if the unreported income is small, the combination of amending tax returns to report it plus quietly filing past-due FBAR’s is a classic “quiet disclosure”. The IRS advises against them and says it can prosecute taxpayers who do it anyway.

Amy states: 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 years of FBAR’s. Taxes on the unreported income, interest and a 20% penalty on the taxes seem reasonable.

Amy continues: 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.

Jeff states: PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff states Under the streamlined procedures, 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.

Jeff asks Amy: What Constitutes Non-Willful Conduct?

Amy replies: 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.

Jeff states: 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.

Amy continues: 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.

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

Jeff continues: Both versions require that taxpayers certify that their conduct was non-willful; file 3 years of back tax returns reflecting unreported foreign source income; File 6 years of back FBAR’s reporting the foreign financial accounts; and Calculate interest each year on unpaid tax.

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

Jeff continues: 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).

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.

If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

Continuing with the theme of today’s special edition show on non-disclosure of foreign bank accounts, Amy what questions have you pulled for me to answer?

Amy replies, these questions are from an anonymous listener who has undisclosed foreign bank accounts.

Amy asks: What should I look for in finding the best FBAR/OVDP attorney for my situation?

Jeff replies: I have learned key insights from years of taking cases over where prior OVDP attorney-client relationships have failed. I have also picked up terrific feedback from our past and present clients.  Because of this, I think I am uniquely qualified to know what types of questions you need to ask to find the right OVDP attorney for you.

Amy asks: Is it better to hire a sole practitioner to get a one-on-one attorney relationship or a firm with OVDP attorneys who take a team approach?

Jeff replies: The advantage of the team approach is that your case should benefit well from the collaboration of your law firm. The advantage of a one-on-one attorney relationship is that you deal with the same attorney who personally knows your case. Both these advantages have merit and are important which is why at the Law Offices Of Jeffrey B. Kahn, P.C. we follow a hybrid of these two approaches whereby your case is supported by a team of professionals yet you have direct access to me as the leading tax attorney making sure the your case is proceeding smoothly and that you gain all the possible benefits and best possible outcome.

Amy asks: Should someone hire a local general law firm or look for OVDP attorneys with a potentially wider depth of experience?

Jeff replies: A local general law firm is not going to have the depth of OVDP experience that we do. Yet, we know that many people prefer to hire locally even though after the initial conference, information and documents are exchanged through the mail, fax and internet. That is why I am available to meet with clients in multiple locations in California for client convenience and gain reassurance that my team and I will help you through your offshore issue.

For our worldwide clientele, many of them are already accustomed to and comfortable with having fairly in-depth business relationships with people remotely; and with the Law Offices Of Jeffrey B. Kahn, PC they get the added reassurance of having an OVDP firm who — more than likely — has successfully handled a case just like theirs before.

Amy asks: Should someone hire a big law firm that does a bit of everything or a tax resolution firm that specializes in nothing but tax resolution?

Jeff replies: Bigger does not necessarily mean better. There is a rather steep learning curve to OVDP, so hopefully any law firm you interview will be honest with you about their level of expertise and won’t bill you for their time to get up-to-speed.

The Law Offices Of Jeffrey B. Kahn, P.C. has taken over many OVDP cases where a client had hired a previous OVDP attorney. And routinely we see mistakes someone made that the OVDP attorneys billed their clients for. And then to correct those mistakes — yep they charged their clients for that too. In contrast, we do not look to create work to justify a higher bill. It is in our best interest to get your case resolved as effectively as possible. This is especially important with any cases under the new streamlined procedures as the IRS does not consider your application to the program complete until the full Civil Package is filed. We recognize this and look to turn around this package as quick as possible.

Amy asks: Should someone hire an OVDP law firm that will use an outside OVDP CPA or a law firm that has a built-in dedicated OVDP-specific accounting department?

Jeff replies: From my experience, one of the last things you want is your OVDP attorney to be acting as a mere liaison between an OVDP examiner and a client’s CPA. We strongly prefer our clients to use our own team at the Law Offices Of Jeffrey B. Kahn, P.C. for two reasons:

1. Shouldn’t the attorney who will be negotiating where the numbers on an amended tax return came from actually know where they came from? If the attorney is merely the proxy for the CPA, then there could be missed opportunities of tremendous value.  Small changes in tax treatment can have huge consequences. Did you know that foreign-earned income or PFIC tax reporting requires the highest level of tax knowledge, and that many experts, even experts at the IRS will disagree about legal conclusions — even when facts are similar?

2. As mentioned before, for streamlined OVDP cases, it is important to get the Civil Package completed as soon as possible. Your accountant will likely be busy with regular tax season work and therefore not have the time to attend to your situation. Your accountant may also be part of the problem preventing you from attaining nonwillful status. Remember, until the Civil Package is filed you are not protected if the IRS finds you out first.

The OVDP attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. know not just the tax code but get to know your facts well enough to persuade the IRS to find the most favorable tax treatment for you – and in the case of the streamlined procedures it is for you to be deemed as non-willful.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Well we are reaching the end of our show.

Thanks Amy for calling into the show. Amy says Thanks for having me.

You can reach out to me on Twitter at kahntaxlaw. You can also send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

Have a great day everyone!

Issues discussed:

1. When is traveling a legitimate business expense?
2. What are the Pros/Cons of doing a tax extension?
3. How liable am I for my spouse’s tax mistakes?