Just How Serious Is IRS Asserting FBAR Penalties?

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The IRS has authority to assert FBAR civil penalties.  Before delving into the FBAR abyss, this is a good time to debunk some FBAR myths.  First, there is no such thing as an FBAR penalty within the Offshore Voluntary Disclosure Initiative (“OVDI”).  The FBAR penalty exists only outside of the OVDI framework.  However, there is a penalty within OVDI that is often considered to be the equivalent of the FBAR penalty.  That penalty is commonly referred to as the offshore penalty.  Generally, it is 27.5% of the highest aggregate balance of all foreign accounts during the disclosure period but lower rates are available.

Where a taxpayer does not come forward into OVDI and has now been targeted by IRS for failing to file FBAR’s, the IRS may now assert FBAR penalties that could be either non-willful or willful.  Both types have varying upper limits, but no floor.  The first type is the non-willful FBAR penalty.  The maximum non-willful FBAR penalty is $ 10,000.  The second type is the willful FBAR penalty.  The maximum willful FBAR penalty is the greater of (a) $ 100,000 or (b) 50% of the total balance of the foreign account.  In addition the IRS can pursue criminal charges with the willful FBAR penalty.

For the non-willful penalty, all the IRS has to show is that an FBAR was not filed.  Whether the taxpayer knew or did not know about the filing of this form is irrelevant.  The non-willful FBAR penalty is $10,000.00 per account, per year and so a taxpayer with multiple accounts over multiple years can end up with a huge penalty.

But if the IRS attempts to assert a willful FBAR penalty, the IRS has the burden of proving willfulness.  Willfulness has been defined by courts as “an intentional violation of a known legal duty.”

While the standard for proving willfulness in the context of a criminal tax case is relatively clear, just the opposite is true in the context of asserting a civil FBAR penalty.  For FBAR violations the standard is that a person had knowledge that he has a reporting requirement.  And if a person has that requisite knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.  The latter is referred to in legal circles as the theory of “willful blindness”.

4th Circuit Court Established Low Standard For Proving Willfulness

In one fell swoop, the 4th Circuit Court Of Appeals, which is one of eleven in the United States and ranks right below the United States Supreme Court, lowered the burden of proof needed by IRS to show that the failure to file an FBAR was intentional.

The 4th Circuit ruled that a taxpayer’s signature on his tax return was “prima facie evidence that he knew the contents of the return” and that the instructions in Schedule B, which refers to whether the taxpayer has any foreign accounts put U.S. taxpayers on “inquiry notice” of the FBAR filing requirement. It does not matter that the taxpayer never read his tax return or looked at the FBAR form.  The Court went on to say that this was enough to demonstrate a “conscious effort to avoiding learning about reporting requirements… meant to conceal or mislead sources of income or other financial information… that constitutes willful blindness to the FBAR requirements”. U.S. v. J. Bryan Williams, No. 10-2230, July 20, 2012 (unpublished).

In other words, the instructions in Schedule B for Form 1040, which refers to the FBAR, puts every taxpayer on “inquiry notice” of the filing requirement and so a taxpayer by simply signing his tax return or authorizing the filing of his tax return is presumed to be cognizant of the FBAR requirement.

The practical effect of this opinion is nothing short of mind blowing.  First, instead of having to prove a specific intent to “violate a known legal duty” which other tax cases have upheld as the standard for willfulness, the opinion suggests that a taxpayer’s presumed understanding of the FBAR requirement may be enough to make him liable for penalties for willful violations.  In other words, whether a person actually knew about the FBAR reporting requirements is meaningless.

Second, it gives a major boost to the IRS’s current intensive pursuit of overseas tax evasion by making it easier for the IRS to prove willfulness in the context of a willful FBAR penalty.  Very simply, the IRS now has enormous leverage to collect the hefty penalties that accompany the willful FBAR penalty.  Indeed, the civil penalty for willfully failing to file an FBAR may reach $100,000, or 50% of the value of the offshore account, whichever is greater.  This result is likely to be the start of a wave of FBAR audits for the IRS because of the sheer sums the IRS stands to collect by ramping up civil FBAR enforcement.

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI.  Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%.  Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty.

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances.

What Should You Do?

Don’t wait for the IRS to find you.  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 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). 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 OVDI.

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.

Using A “Kovel” Agreement To Extend Privilege To Accountants

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In 1998, Congress enacted a limited privilege for tax advice that extends the same common law protections of confidentiality that apply to communications between a taxpayer and an attorney to communications between a taxpayer and any “federally authorized tax practitioner”. IRC § 7525(a)(1).  Thus, if the communication would be considered privileged if it was between a taxpayer and an attorney, then so too will it be privileged if it is between the taxpayer and a federally authorized tax practitioner. IRC § 7525(a)(3)(A). The term, “federally authorized tax practitioner” applies to any individual who is authorized to practice before the IRS. For example, it includes CPA’s, enrolled agents, and enrolled actuaries.

Unfortunately, while highly praised at the time of its enactment, the 7525 privilege does not provide much protection for communications between an accountant and his client. Most importantly, the privilege is not available when it is needed the most – during a criminal investigation or prosecution. Indeed, if an investigation is or is about to turn criminal, anything said by the taxpayer to his account will not be privileged.

However, that does not mean that discussions between a taxpayer and his accountant that are, shall we say, “sensitive in nature” – i.e., because they involve fraudulent admissions that are potentially incriminating – are never privileged. Indeed, such discussions can be privileged, but only if the accountant is a “Kovel accountant”.

In delivering legal services, an attorney will often need the assistance of non-lawyers who will become privy to confidential information. For example, paralegals and other assistants in the lawyer’s firm will become privy to sensitive information. Disclosures of information to these individuals will not constitute a waiver of the privilege.

In addition to in-house assistance, attorneys may also find it helpful to engage professionals outside the firm. In tax cases, attorneys routinely hire outside accountants. The lawyer may want the accountant to meet with the client and obtain information directly from him, and cloak that information in the attorney-client privilege just as if the lawyer obtained it directly from the client.

The traditional method by which that is done, at least in a tax practice, is through an arrangement where the lawyer engages the accountant to become part of the legal team. This arrangement was approved, and the attorney-client privilege was held to extend to the accountant, in the case of United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).

Here, as in many areas of the law, it is critical that if you are going to retain an accountant, you do it correctly. First, the only way to bring the accountant under the cloak of the attorney-client privilege is through consummating a Kovel agreement.

Second, as a matter of procedure, the attorney should engage the Kovel accountant, rather than the client. This ensures that the accountant is working for the lawyer, and not for the client.

Third, it is essential that a new accountant, rather than the client’s existing accountant, be hired. The reason has to do with controlling the flow of information and, specifically, putting up legal barriers to the IRS’s access to information that might harm the client. Of course, it is only natural that the client will want to use his existing accountant. And he’ll list any one of a number of seemingly “good” reasons. For example, the client is comfortable with him, they presumably have a good relationship, there are budgetary concerns, and the accountant is up to speed with everything.  However, that is precisely the problem. In preparing the original return, the preparer had access to information and documents that are usually not privileged. In a criminal investigation, the IRS can get to that information.  In other words, it might be difficult to distinguish between what the accountant learned outside the Kovel engagement and what he learned only within the scope of the Kovel engagement. Because only the latter is protected by the attorney-client privilege, this is clearly not a risk worth taking. For that reason, it is best for the lawyer to start out fresh and hire an independent accountant.

Whether and when to answer questions from the IRS, or whether to stand on your 5th Amendment rights, are questions that only a tax fraud lawyer can help you answer. Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, the experienced tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and San Diego and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.

Description: Working with a tax attorney expert in criminal tax defense and civil tax controversies is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.

IRS To Announce New Initiative For U.S. Expats Not Willfully Evading Taxes.

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With more than six million U.S. citizens living abroad, the IRS is looking to expand its net to bring in those U.S. Expats who are noncompliant with their tax obligations but are not willfully evading taxes may to come into compliance.  On June 3, 2014, the Commissioner of the Internal Revenue Service, John A. Koskinen, spoke at the U.S. Council For International Business-OECD International Tax Conference in Washington, D.C.

In his speech the Commissioner acknowledged that the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”) and its predecessors (the 2009 Offshore Voluntary Disclosure Program (“OVDP”) and the 2011 Offshore Voluntary Disclosure Initiative) have resulted in many U.S. taxpayers coming into compliance and that the IRS is currently considering making further program modifications to accomplish even more.  Unlike the two previous programs which had set terms and a definite expiration date, the current 2012 OVDI program’s terms are subject to change by the IRS and at any time the IRS may even terminate this program.

While the current attitude of the IRS is to keep the doors open and allow as many taxpayers as possible to come forward, the IRS is mindful of the balance between those taxpayers willfully evading their tax obligations and those taxpayers who lack willfulness.  The IRS is also aware that adjustments in OVDI may be necessary to accommodate those U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives, and that those taxpayers should be treated differently than U.S. resident taxpayers who were willfully hiding their investments overseas.

The Commissioner said that the new changes to OVDI should be announced soon.

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI.  Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%.  Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty.

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances.

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 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). If the IRS announces adjustments to this program that are more favorable to U.S. Expats those benefits should apply to current OVDI applicants.  Likewise, if the IRS were to tighten the terms of OVDI and increase the penalty, anyone registered in OVDI before such a change should still be under the pre-existing terms.   But 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 OVDI.

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 Miss The FBAR June 30, 2014 Filing Deadline

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Despite the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) publishing final regulations for reporting bank accounts, securities accounts and other financial accounts located in a foreign country many taxpayers remain confused regarding the filing requirements, including the fast-approaching and accelerated filing deadline.

Historically, the disclosure of foreign bank accounts was done by filing Form TD 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”) with the U.S. Department Of Treasury. Any person who has a financial interest in, or signature authority over, a foreign financial account (the “foreign accounts”), including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, is required under the Bank Secrecy Act to report the foreign account to the U.S. Department Of Treasury by filing the FBAR by June 30th of the following calendar year. Unlike income tax filings an extension of time to file FBAR after the June 30th due date is not available.

While the requirements and deadline for disclosing foreign bank accounts have not changed, the reporting form and manner of filing has. Now disclosure is made by e-filing FinCEN Form 114. 

The Purpose of The FBAR Form

The FBAR form is a tool used by the United States government to identify persons who may be utilizing foreign financial accounts to circumvent United States tax laws. Revenue Agents or investigators use the FBAR to help identify or trace funds used for illicit purposes, including counter-terrorism, or to identify unreported income maintained and/or generated abroad.

Who Must File

Any U.S. person, with few exceptions, with a financial interest in, or signature authority or other authority over, any foreign financial account(s) in a foreign country and the aggregated value of these account(s) exceeds $10,000 at any time during the calendar year must file and FBAR. Foreign financial account(s) include, but are not limited to, a checking/savings bank account, brokerage account, mutual fund, trust, or other type of foreign financial account. A U.S. person includes a U.S. citizen, a foreign national who is a U.S. tax resident and a U.S. entity, e.g., a corporation, a partnership, a limited liability company (“LLC”) or a trust that is created, organized or formed under the laws of the U.S., any State, the District of Columbia, the Territories, the Insular Possessions of the U.S. or the Indian Tribes.

What Needs to Be Reported

If a filing requirement exists, personal information, such as name, address and Social Security number, along with the following, must be reported:

  • Maximum value of the account during the calendar year;

  • Type of account (i.e., bank, securities, foreign mutual funds, foreign-issued life insurance/annuity contract with cash value, etc.);

  • Name of financial institution in which account is held;

  • Account number; and

  • Mailing address of financial institution.

The IRS defines maximum account value as the largest amount of currency and/or monetary instruments that appear on any quarterly or more frequently issued account statement during the tax year.

Failure to File

While the FBAR is an information return that imposes no tax, significant civil and criminal penalties may be asserted for failure to file. The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation.  The government may also pursue criminal prosecution which can result in up to five years of jail time. Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI. Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%. Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty. 

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances. 

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, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). 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 OVDI.

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.

OVDI – Are You In Or Out?

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A taxpayer who has not disclosed foreign bank accounts to the IRS can be charged with substantial miscellaneous Title 26 offshore penalties that ultimately can wipe out a taxpayer’s foreign assets.  Disclosure is made by e-filing FinCEN Form 1114 (formerly Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”).  The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation.  The government may also pursue criminal prosecution which can result in up to fice years of jail time. Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

The IRS has established a program called the Offshore Voluntary Disclosure Initiative (“OVDI”) whereby taxpayers can avoid criminal prospection and the penalties are reduced.

With the deadline of June 30th approaching for the filing of a 2013 FBAR and the full implementation of FATCA starting July 1st, a taxpayer who is non-compliant with the reporting of foreign accounts and foreign income has an important decision to make. OVDI – Are You In Or Out?

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI. Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%. Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty. 

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances. 

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, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). 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 OVDI.

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.

OVDI Myths

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U.S. taxpayers with previously undisclosed interests in foreign financial accounts and assets continue to analyze and seek advice regarding the most appropriate methods of coming into compliance with their U.S. filing and reporting obligations. Many are pursuing participation in the current IRS Offshore Voluntary Disclosure Initiative known as OVDI (the current version began in 2012 and is modeled after similar programs in 2009 and 2011 which initially were called the Offshore Voluntary Disclosure Program or OVDP). But what all the confusion and misinformation out there – what should you do? In this blog I attempt to clear some misconceptions.

Myth #1: An individual will be better off “explaining” the undisclosed foreign bank accounts through amended tax returns, rather than opting into OVDI.

Even outside of OVDI, any disclosure to the IRS requires that the taxpayer file amended tax returns and be prepared to provide the foreign bank information and statements to support the new income being reported. Such returns are signed by the taxpayer that they are true and complete. Being outside of OVDI the government can develop a case supporting severe penalties and even criminal prosecution using the combination of original filed tax returns which omitted the foreign income and amended tax returns reporting the foreign income as admissions of intent to evade U.S. income tax.  

Myth #2: Once an individual enters into OVDI, you cannot dispute the amount of penalties imposed by the program.

Just because the penalty rate structure is set in OVDI does not mean the amount of penalty can never be disputed. Agents assigned to OVDI cases do make mistakes and do misinterpret foreign bank income and transaction activity including those accounts, assets and transactions that should not be part of any penalty calculation. These disputes or differences can still be contested and challenged through different means and channels while still remaining in OVDI.

Myth #3: An individual who enters into OVDI opens up all years for examination since becoming a U.S. person for tax purposes with undisclosed foreign bank accounts and unreported foreign income.

While the normal Statute Of Limitations to examine a tax return is three years, it can be extended to six years where there is a substantial omission of income and where the government can show fraud, the government has no limitation on how far back it can go. Furthermore, the government has a six-year Statute Of Limitations to pursue criminal prosecution. A person who is in OVDI avoids criminal exposure and any income tax return amendments are limited to the last eight years or if shorter, from the time the individual becomes a U.S. person for tax purposes.

Myth #4: An individual who enters in OVDI is forfeiting assets, including entire lifetime savings and more to the government so that any income, inheritances, or gifts these people may receive in the future will belong to the IRS. 

Outside of OVDI, the MINIMUM penalty is 50% of the value of your foreign assets. But for taxpayers participating in OVDI, the MAXIMUM penalty is 27.5%. That means for taxpayers who are in OVDI, they will still get to keep at least 72.5% of their foreign assets.   

Myth #5: Once the IRS learns of an individual entering into OVDI, the IRS will remove or prevent the individual from the program and the IRS will prosecute that person using the very information provided by the taxpayer as part of the OVDI process.    

To encourage taxpayers to come forward into OVDI, the government will respect the transactional or use immunity it offers to taxpayers participating in the program.  At this time the government would prefer cases to be dispensed in OVDI even though the government gives up criminal prosecution and takes a “hair-cut” on the penalties that can be imposed.  

Myth #6: The IRS Criminal Investigation Division (“CID”) in evaluating your OVDI application will characterize your offshore transactions to involve the crimes of money laundering, wire fraud, mail fraud or tax evasion to prevent you from qualifying for the program.

Unless you are involved in drug trafficking, weapons trafficking or some other illegal activity that another government agency would have you on a watch list, the government would rather see a taxpayer come forward in OVDI and as a result for those that do the government will not pursue criminal prosecution and will apply the reduced penalties outlined in the OVDI structure.  

Myth #7: Since there is no public follow-through by the IRS of its threats to individuals who have not entered the OVDI, it is a safe bet to avoid OVDI and instead pursue a Quiet Disclosure.

Whenever a taxpayer files an original or amended income tax return, the government will have at least three years from the due date of the return or date the return was filed (whichever is later) to examine that return. This is still the case even if the return that was filed showed an overpayment that was refunded to you. But with OVDI, you do not have this cloud of uncertainty hanging over you. At the conclusion of your OVDI case, the government will issue a closing agreement that when signed off by the taxpayer closes the case.

Myth #8: Those taxpayers outside of OVDI are assessed far less in taxes and penalties than individuals who have elected to make a disclosure through OVDI.

With the government encouraging taxpayers to come forward in OVDI, why would the government undermine the integrity of the program by offering a better deal to people who do not come forward and look to avoid detection by the IRS? If a taxpayer did not disclose his foreign bank accounts AND did not report foreign income, you will fare worse than entering into OVDI and end up loosing the entire value of your foreign accounts.

Myth #9: By entering into OVDI, you fully waive all constitutional rights.

Some people have stated that participants entering into the OVDP must waive Constitutional Protections against: self-incrimination (5th amendment), unreasonable search and seizure (4th amendment), and excessive fines (8th amendment).  What they fail to recognize is that the same constitutional protections apply to OVDI participants as to people who file original or amended income tax returns with the IRS.

Myth #10: The IRS favors a Qualified Quiet Disclosure over a Quiet Disclosure.

Some people have stated that a “Qualified Quiet Disclosure” is different from a “quiet disclosure” for which the latter the IRS has promised a detection and punishment campaign.  Truth is that unless you enter into OVDI, any other form of disclosure is a “Quiet Disclosure” that can subject you to the full wrath of the IRS and with the IRS then looking to impose the maximum in penalties you can likely end up loosing all of your foreign account funds and perhaps be subject to criminal prosecution.

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 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). 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 OVDI.

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.

Avoiding OVDI – Pitfalls Of Other Forms Of Disclosures

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A taxpayer who has not disclosed foreign bank accounts to the IRS and to cure this delinquency and avoid criminal repercussions applies to the Offshore Voluntary Disclosure Initiative (“OVDI”), generally must pay a miscellaneous Title 26 offshore penalty, in lieu of traditional penalties that would apply to foreign assets or entities outside of OVDI.  The most significant penalty that the offshore penalty replaces is the penalty for failure to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).  The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation.  Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Individuals with previously undisclosed foreign assets and/or income have come to understand the need to be come compliant with the IRS and with all the confusion out there on how best to become compliant. The avenues to be compliant that are most widely discussed are (1) the Offshore Voluntary Disclosure Initiative (“OVDI”), (2) making a Quiet Disclosure, or (3) making a Present Tax Year Only Disclosure.

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI. Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%. Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty. 

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances. 

Making A Quiet Disclosure

While promoted under different names such as “Explained Disclosure”, “Qualified Quiet Disclosure” or “Silent Disclosure”, they all mean the same as Quiet Disclosure.

There are strong indications that going forward, the IRS will be cracking down more stringently on the practice of “quiet disclosures”.  Under a quiet disclosure, a taxpayer through normal IRS filing channels files new or amends past tax returns and FBAR’s to report previously unreported offshore accounts and foreign income in an attempt to avoid potential civil penalties and fines.

The danger in doing this, however, is that if the IRS discovers a quiet disclosure, the taxpayer will be exposed to higher civil penalties than he would have if he voluntarily came forward under OVDI.  Where a taxpayer has been discovered by IRS in this process, that taxpayer who made the quiet disclosure will not be eligible for the 27.5% OVDI penalty.  Instead the traditional penalties of 50% would apply.  Also, if appropriate, the IRS may recommend criminal prosecution to the Department of Justice. 

The IRS does encourage those who have already quietly disclosed to come forward under the OVDI to avail themselves of the lower penalty rates and avoid potential harsher consequences but you must act quickly because OVDI is not available to you if the IRS has already selected you as a target.

Making A Present Tax Year Only Disclosure

Some tax advisors are recommending that taxpayers merely get into compliance on a go forward basis and do nothing to address the past non-compliance gambling that the IRS does not have the resources to detect the foreign account. I call this “Present Tax Year Only Disclosure”. This could be the worst advice ever.  In my opinion this option is also not viable because of the ease with which the U.S. government can flag Foreign Bank Account Reports (FinCEN 114 formerly TDF 90-22.1) commonly known as “FBAR′s”. Furthermore, the IRS Criminal Investigation Division (“CID”) has created a group of special agents to monitor for just this occurrence.

The IRS has clearly indicated its disdain for those who make quiet disclosures instead of participating in OVDI and to discourage taxpayers from pursuing this route, the IRS has implemented procedures at the Service Centers to intercept those filings reporting foreign income for further review and investigation by the IRS.  Where a taxpayer has been discovered by IRS in this process, that taxpayer who made the quiet disclosure will not be eligible for the 27.5% OVDI penalty.  Instead the traditional penalties of 50% would apply.  Also, if appropriate, the IRS may recommend criminal prosecution to the Department of Justice. 

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 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). 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 OVDI.

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.

June 16 Tax Deadline Nears for Taxpayers Living Abroad

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U.S. taxpayers living abroad qualifying for an automatic two-month extension must file their 2013 Federal individual income tax returns by Monday, June 16, 2014.

The June 16th deadline applies in the following two situations: (1) U.S. citizens and resident aliens living overseas, or (2) U.S. taxpayers serving in the military outside the U.S. on the regular April 15th due date. Eligible taxpayers get one additional day because the normal June 15th extended due date falls on Sunday this year. To use the two-month extension, taxpayers must attach a statement to their tax return explaining which of these two situations applies.

Many taxpayers living abroad are still not aware that the Internal Revenue Code requires U.S. citizens and resident aliens to report all worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. Not surprisingly, there are many taxpayers based here in the U.S. who are also not aware of this law requiring the reporting of all worldwide income.

The Internal Revenue Code also requires U.S. persons with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Form 114 replaces TD F 90-22.1, the FBAR form used in the past. It is due to the U.S. Treasury Department by Monday, June 30th and can only be filed electronically through the U.S. Treasury’s BSA E-Filing System website. This due date cannot be extended and Federal income tax extensions do not extend the FBAR filing due date. The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation. The government may also look to file criminal charges for will failure to file. Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Taxpayers who cannot meet the June 16th deadline to file their 2013 Federal individual income tax return can get an automatic extension until October 15, 2014. But remember, this is an extension of time to file, not an extension of time to pay. Interest, currently at the rate of three percent per year compounded daily, applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month, applies to payments made after June 16, 2014.

Now for some taxpayers, an additional extension beyond October 15th may be available. For example, members of the military and others serving in Afghanistan and other combat zone localities normally have until at least 180 days after they leave the combat zone to file their returns and pay any taxes due.

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 2012 Offshore Voluntary Disclosure Initiative (“OVDI”). 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 OVDI.

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.

Tax Attorney, Jeffrey B. Kahn, Esq. of Kahntaxlaw on ESPN – May 22, 2014 Show

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Topics Covered:

1. Lessons learned from the criminal tax evasion Conviction of Rashia Wilson a/k/a “Queen Of IRS Tax Fraud”.
2. What should you do where you have undisclosed foreign bank accounts and unreported foreign income?
3. Understanding the IRS Criminal Investigation Process and what signs to be on the lookout for that you may be subject to an IRS Criminal Investigation.
4. Questions from our listeners:

When would I need to hire a tax attorney?
What constitutes IRS and State Tax Disputes that a tax attorney should be involved?
What constitutes Complex Legal Tax Issues that a tax attorney should be involved?
What questions should I ask when interviewing tax lawyers?

U.S. Hammers Credit Suisse – Bank Pleads Guilty in Criminal Tax Case

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Credit Suisse Agrees to Pay $2.6 Billion to Settle Probe by U.S. Justice Department

Credit Suisse Group AG became the first financial institution in more than a decade to plead guilty to a crime on May 19, 2014 when the Swiss bank admitted it conspired to aid tax evasion and agreed to pay $2.6 billion to settle a long-running probe by the U.S. Justice Department.

Attorney General Eric Holder, in announcing the charges, said the bank engaged in an “extensive and wide-ranging” scheme to help U.S. taxpayers hide assets.

The criminal charge filed Monday in federal court outlined a decades-long, concerted attempt by Credit Suisse to “knowingly and willfully” help thousands of U.S. clients open accounts and conceal their “assets and income from the IRS.” Mr. Holder said the bank destroyed account records sent to the U.S. for client review, concealed transactions and “failed to take even the most basic steps to ensure compliance with tax laws.”

Even after a U.S. crackdown on Swiss accounts in 2008 led Credit Suisse and rival UBS AG to tighten restrictions on the kinds of services they would provide to American customers, they continued to take steps that hindered investigators, the filing said. Credit Suisse didn’t conduct a thorough inventory of the accounts its managers oversaw, and some managers helped clients move their assets to other offshore banks so they would remain hidden to the U.S., according to the filing.

When it became clear in 2010 that the Justice Department was investigating the bank’s conduct, Mr. Holder said Credit Suisse “failed to retain key documents, allowed evidence to be lost or destroyed, and conducted an inadequate internal inquiry.”

“This conspiracy spanned decades,” Mr. Holder said. “Credit Suisse not only knew about this illegal, cross-border banking activity; they willfully aided and abetted it. Hundreds of Credit Suisse employees, including at the manager level, conspired to help tax cheats dodge U.S. taxes.”

Prosecutors have also charged eight former Credit Suisse employees with helping aid tax evasion.

The financial terms of the settlement include a $100 million payment to the Federal Reserve, more than $715 million to the New York Department of Financial Services, and about $1.8 billion to the Justice Department. Credit Suisse already has set aside more than $800 million, or about a third of the total settlement, to deal with the issue.

In addition Credit Suisse is handing over information that Deputy Attorney General James Cole said would lead to the IRS identifying specific non-compliant U.S. account holders.

The settlement marks the Justice Department’s biggest victory in its crackdown on tax evasion since UBS agreed to pay $780 million as part of a deferred-prosecution agreement in 2009. As part of that deal, UBS acknowledged aiding U.S. tax evasion but didn’t plead guilty.

Still, Credit Suisse’s relationships with its clients and partners may take a hit. Many pension and mutual funds have guidelines that prevent them from dealing with institutions that have pleaded guilty to criminal charges.

With big wins by the U.S. against UBS and Credit Suisse, the momentum to break Swiss Bank Secrecy Laws that historically fostered tax evasion grows stronger. Roughly a dozen Swiss banks are still subjects of criminal investigations by U.S. authorities and all of Switzerland’s 106 banks are taking part in a self-reporting program run by the U.S. Justice Department.

In response to a government crackdown on Americans hiding money overseas, more than 43,000 taxpayers joined a voluntary Internal Revenue Service disclosure program to acknowledge previously unknown accounts. The IRS estimates that Credit Suisse had more than 22,000 U.S. customers with Swiss accounts Although it is not clear how many of those were hidden from the IRS, a Congressional panel has concluded that Credit Suisse actively recruited Americans to open secret Swiss accounts.

Don’t think that only Swiss banks are being targeted. Federal prosecutors also are negotiating a multibillion-dollar settlement with French bank BNP Paribas to end an investigation into alleged evasion of sanctions.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). 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 Diego, San Francisco and elsewhere in California qualify you for OVDI.

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.