FBAR: Goodbye Form TDF 90.22-1 and Hello FinCEN Form 114

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The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. On September 30, 2013, FinCEN posted on their internet site, a notice stating that the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the current FBAR form) would replace Form TD F 90-22.1 (the old FBAR form used in previous years). If you have a financial interest in, or you are signatory authority over foreign account(s) that total more than $10,000 at any time during the calendar year, you are required to file Form 114 no later than June 30th for the following year. The 2013 Form 144 is due June 30, 2014.

Some of the new features of Form 114 include:

1) The requirement that From 114 must be filed electronically. The old FBAR allowed paper filing but that is no longer the case with Form 114. It must be filed electronically.

2) An option where you can “explain a late filing”. You can also indicate whether the filing is made in conjunction with an IRS compliance program.

The electronic filing system on the FinCEN website is called the BSA E-Filing System (BSA standing for the Bank Secrecy Act) and it allows you to save changes to your form, track progress of the processing of your form and receive electronic notices. Either you or your tax preparer can file this form. By having your foreign account information submitted electronically to the U.S. Treasury, the government will be able to more quickly and effectively match this information to foreign sourced income reported on your current and past Federal income tax returns. Discrepancies would be identified by the government’s computer and those taxpayers would be referred for examination or investigation by the IRS.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

With the option for taxpayers to include why this Form for any prior year is being filed late, taxpayers may be tempted to use this process in an attempt to come into compliance for failing to report foreign income on prior year’s income tax returns and/or failing to disclose foreign bank accounts. Beware that such disclosure does not protect you from the heavy fines and possible criminal charges. Instead, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. 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.

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.

Opting-Out Of OVDI – Top Questions Answered

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IRS has established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).

On January 9, 2012 the IRS announced the terms of the 2012 OVDI which requires that taxpayers: (1) File 8 years of back tax returns reflecting unreported foreign source income; (2) Calculate interest each year on unpaid tax; (3) Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and (4) Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.

In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

With taxpayers still facing a rather large penalty, taxpayers are torn on whether or not they should participate in OVDI or “Opt-Out”. The “opt-out” process was first introduced in the 2011 version of OVDI and still continues to this day.  As our office has received many inquiries on opting-out. Here are top OVDI opt-out questions that we are routinely asked.

1.         Will the IRS prosecute me criminally if I opt-out of the OVDI? The IRS should keep your case in Civil because you are still within the structure of voluntary disclosure (a program which the IRS encourages taxpayers to come forward in exchange for avoiding criminal prosecution) but you are no longer subject to the standard penalty rates of OVDI.  Under the standard 2012 OVDI penalty cap, you pay one penalty either (a) 12.5% of account value, Offshore “FBAR equivalent” penalty for accounts under $75,000, or (b) 27.5% for accounts over $75,000.So that standard 12.5% / 27.5% penalty cap is all that you are “opting-out” of.

2.         Will the IRS charge me more than the standard 12.5% or 27.5% offshore penalty if I opt out? That’s possible and therefore one of the risks to consider in opting-out.

3.         What is the status and outcome of those cases that have opted out?The opt-out program is fairly new as it was first introduced in 2011.  So far only a few have closed out and the IRS has not announced any guidelines as to how these cases are being dispensed.  The reason: The IRS is trying to centralize all opt-out decisions for consistency especially given the hazards of litigation that the IRS would face if one of these cases went to Court and the Court ruled in favor of the taxpayer.  Another reason for the delay is that the IRS overestimated how many intentional tax evaders would use the program, while simultaneously underestimating how many innocent or at worst negligent filers like ex pats, dual citizens, Visa holders and resident aliens, would be entering OVDI.

4.         What if I disagree. Can I appeal or dispute the agent’s determination?Yes. There are means to dispute an agent’s determination that will be different whether within OVDI or having opted out.  When disputing a determination that is within OVDI, we still remain on more certain ground as to the downside if we cannot effect any change.  However, outside OVDI the law lets the IRS “raise the bar” by assuming willfulness and thus charge multiple 50% penalties that can wipe out your entire net worth.

5.         For small cases, OVDI seems like overkill. Why don’t I just do a “soft” or “quiet” disclosure?The decision to enter into the program is entirely yours. And honestly, the biggest threat of not entering into the program is the risk of an FBAR audit – not criminal charges (although it is possible). But if caught in an FBAR audit, the results could be disastrous.A “soft” or “quiet” disclosure to us makes no sense. The IRS is using its vast data collecting tools and is receiving information directly from foreign financial institutions under the Foreign Account Tax Compliance Act (“FATCA”).  Already IRS has discovered about 10,000 individuals and businesses that have made soft disclosures. The IRS claims they will track down all of those who have made soft or quiet disclosure.We have heard many people tell us they find the law unfair. Yet despite this unfairness, it is the law and our advice is to hire experienced tax counsel to take your case into OVDI and secure the best possible outcome within the OVDI guidelines.  We have found some “wiggle-room” in the guidelines that for some of our clients we used certain techniques that the IRS accepted resulting in lower penalties than what our clients thought they would be facing.

6.         If I made a soft disclosure can I still use the OVDI?Yes and you should. Again, the IRS has detected 10,000 people it suspects of making a soft disclosure. And these are only the accounts over $1 million. There are a lot more under $1 million.

7.         I started, or my CPA started my OVDI. But I am getting uncomfortable. I want to get a lawyer who specializes in this. Can you take over my case?We think that getting an OVDI / FBAR tax attorney is critical for your opt-out and from our experience each person’s case must be looked at separately to determine if opting-out is the best option.  If you have no evidence of willfulness, the sheer numbers may make opting out attractive especially where the proposed OVDI penalty is in the hundreds of thousands of dollars.  But for those taxpayers whose proposed OVDI penalty is let’s say $80,000 or less, opting out probably can’t save you too much, especially if by opting out you end up with non-willful penalties which over a six-year period can equate to about the same amount as this $80,000 guideline amount referred herein.

From a broad perspective OVDI is predictable but opting out is much less so. As the above considerations reflect, think about your facts. Ask whether the potential risks and additional legal fees of opting out offset the potential rewards. Individual advice about the particular facts is important.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. are highly skilled in handling OVDI cases and can effectively represent you no matter what is the make-up or circumstances of your unreported foreign assets and unreported foreign income.  We will keep you informed step-by-step of the progress in your case and present your case in the best possible way to avoid any pitfalls and gain the maximum benefits conferred by this program.

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 foreign account filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Bitcoin Tax Reporting Requirements

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Bitcoin has been in the news frequently lately, particularly since the collapse of the Japanese-based Bitcoin exchange, Mt. Gox. Bitcoin is a digital currency and peer-to-peer payment system created in 2009. Since 2009, the use of bitcoins has expanded significantly. Bitcoins can be bought and sold for various currencies, generally through a series of online exchanges where participants can bid on bitcoins from individuals or buy them at market price from companies.

The unique characteristics of Bitcoin as a digital currency leaves many questions about tax reporting requirements, such as whether users of Bitcoin must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).U.S. taxpayers who have an interest in, or signatory or other authority over a foreign financial account, such as a bank account, securities or other similar foreign accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30thof the year following the calendar year being reported. For example, toreport foreign accountsheld open in 2013, the taxpayer must file the FBAR by June 30, 2014.

The first major issue with whether a U.S. taxpayer must file an FBAR on a Bitcoin account is whetherthese accounts qualify as a “financial account” as defined on the FBAR form.  The FBAR instructions define a “financial account” to include “a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution).”

FinCEN could deem a Bitcoin account a financial account, particularly since FinCEN has required some exchanges to register as Money Service Businesses.  SeeFIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” March 18, 2013.  Furthermore, bitcoins can be spent like regular currency to purchase items or can be exchanged for various currencies that would be subject to the FBAR requirements if held in a financial account.

On the contrary, significant parallels can be drawn between bitcoins and a safety deposit box holding gold coins.  A user that owns bitcoins can essentially print out the bitcoins on paper and hold them physically, such as holding gold coins in a safety deposit box.  The IRS has stated that a U.S. taxpayer who owns gold coins in a safety deposit box has “direct ownership” of this asset, which means the taxpayer does not need to file an FBAR or a Form 8938, Statement of Specific Foreign Financial Assets (discussed below).  However, if the gold coins are held in an account at a foreign bank, the value of those gold coins, and possibly bitcoins, must be reported on the FBAR and Form 8938.

As discussed above, the U.S. taxpayer who owns bitcoinsmay also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return, if the Bitcoin accounts are financial accounts.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.  For failing to file a correct Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

U.S. taxpayers who have bitcoins would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing bitcoins.

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.

What To Look For In Selecting A Tax Attorney For OVDI / FBAR

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With the full enforcement of the Foreign Account Tax Compliance Act (“FATCA”)starting July 1, 2014, all of the foreign banks have been requiring their U.S. account holders to disclose their social security numbers and other information so that the foreign bank may comply with this law and report their U.S. account holders to the IRS and avoidforced withholding on their U.S. investments.  That being the case, there has been an increase in inquiries to our office about going into the Offshore Voluntary Disclosure Initiative (“OVDI”) and filing missed FBAR’s.

In 2009 our firm was one of the first firms to offer assistance to those taxpayers looking to come into compliance under the first OVDI program (that one was called the Offshore Voluntary Disclosure Program or “OVDP”).  Since then a lot more companies have entered into the marketplacewith mass advertising on the internet offering their services to bring taxpayers into OVDI.  But with so many companies listed out there, who do you call?

Four Things You Should Consider In Making Your List Of Attorneys To Call:

  1. Only Deal With Tax Law Firms. Make sure the company is a tax law firm and not a CPA firm.  CPA firms typically do tax filings and other regular tax related stuff.OVDI applications involve legal issues which CPA firms cannot handle.  In addition, CPA’s do not have attorney-client privilege.  That is important because until you are accepted into OVDI, you could be subject to criminal prosecution or civil fraud.  So talk only to an attorney in a tax law firm for OVDI related stuff.
  2. Look At The Tax Law Firm’s Practice Area. Check out the firm’s website to determine the tax attorney’s major practice areas. Do they have information where they talk about FBAR, OVDI and other related stuff? Many of them have that in their blog or news area. That way you knew they have some idea and most likely experience in dealing with such cases.
  3. What Access To The Tax Attorney Is Being Offered. As most of the stuff can be done via email/phone/mail you do not need to be so focused on where the tax law firm is located. Instead be focused on getting access to speak with the tax attorney to get good feeling about your case.
  4. Does The Tax Attorney Offer A Free Initial Consultation? Most of the firms will have free initial phone consultation. Make use of it. If the receptionist answers your call tell you are looking for someone to consult about FBAR and OVDI.  A tax law firm who regularly does this kind of work will hook you up with the tax attorney you need to speak with for a confidential consultation.Some might be available right away but if they are really good at what they do youshould not be dissuaded if youhave to make an for the telephone conference.  Remember that the attorney is setting aside time so that he can exclusively devote full attention to your call. 

Some Things To Consider BEFORE You Make The Call.

Before you start making calls keep the following details handy:

  • Number of foreign financial accounts you have
  • When were they opened
  • The maximum balance at any point of time during each year and yearend balance in each accounts and the total balance of all account for each year. You can use the treasury department exchange rates to determine the $ equivalent.
  • If you haven’t reported the interest in those accounts in your tax returns then details of interest earned in those accounts for each year
  • Whether joint accounts or if anyone else has any authority to deposit or withdraw from those accounts.

What To Ask?

Here are few points

  • Discuss the situation. Let the attorney know that (a) you did not report interest in my foreign accounts and (b) you didn’t file FBAR for the years when the total of your foreign accounts exceeded $10,000. Once you tell that, the attorney should start asking more details and that’s when you will need information I suggested to collect in the above section.
  • The Process. Afterhearing your information, the attorney should suggest what he thinks is best in your case and tell you what the process would be like. If you are offered a free face-to-face consultation where you can see the attorney and let him review your documents(i.e., tax returns, bank statements, etc.), you should accept this offer.
  • Charges & Penalty.  Ask the attorney how bad is your situation. Ask how good the chances of you getting cleared from criminal charges are.  Ask what can be the maximum penalty and how good are chances of getting penalty waived or reduced. Ask what would be his strategy or reasoning to waive or reduce the penalty.
  • Time.  Ask the attorney how long will the entire process take.
  • Price. Ask the attorney what he would charge for the entire process. You should find that firms will either charge based on time spent and costs incurred or a set amount.  For those charging based on time spent and costs incurred, ask the attorney what would be the approximate time and costs. Firms who charge in this manner will usually have different levels of staff whose rates vary based on their level of skill or expertise so you should ask who else would be involved, their rates and impact to the total time charges.  For those firms who offer a set amount, ask what and all will they do and what you will have to do.  Some firms may even offer alternatives that if certain tasks are delegated to you or other third parties such as your accountant, the amount charged by the tax law firm can be less.

How Do You Know Which Tax Attorney Is Best For You?

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. are highly skilled in handling OVDI cases and can effectively represent you no matter what is the make-up or circumstances of your unreported foreign assets and unreported foreign income.  We will keep you informed step-by-step of the progress in your case and present your case in the best possible way to avoid any pitfalls and gain the maximum benefits conferred by this program.

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.

Jeff Kahn hosted on Mr Credit ESPN talk show – Mar 12 2014

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Board certified tax attorney Jeffrey B. Kahn discusses the following issues on ESPN’s Mr. Credit.

Aired on March 12 2014

a. The Gingrich-Edwards tax loophole…Am I in danger? http://www.cnbc.com/id/101464691

b. What about this tax return software that seems to be everywhere now? Are these causing people the problems I’m assuming they are causing?

c. How is working with the IRS now that they have been short-staffed for some time? Do you expect things to get worse or better over time?

Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets”?

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In an effort to combat taxpayers who are not reporting income earned on foreign assets, the IRS has implemented a new Form 8938, Statement of Specified Foreign Financial Assets, that beginning with the 2011 tax year must be included with a taxpayer’s Form 1040 if the taxpayer holds specified foreign financial assets with an aggregate value exceeding $50,000.  Prior to 2011, taxpayers had to disclose foreign financial accounts with an aggregate value exceeding $10,000 in a separate filing with the U.S. Treasury using exclusively a form called the Foreign Bank Account Report (“FBAR”).  The FBAR filing requirement still applies even though a taxpayer is now required to include Form 8938 with his or her Form 1040.

The authority for this new form comes from Section 511 of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, adding new Sec. 6038D, which states that a specified person who holds an interest in specified foreign financial assets must attach Form 8938 to that person’s income tax return, provided the aggregate value of the person’s foreign financial assets exceeds $50,000. While the minimum threshold for filing a Form 8938 is $50,000.00 in foreign assets, higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad. 

The penalty for failure to file Form 8938 is $10,000. If a taxpayer does not file Form 8938 within 90 days of the IRS’s mailing a notice of failure to file the form, an additional penalty of $10,000 is imposed for each 30-day period or part of a 30-day period after the initial 90-day period the failure to file continues, up to a maximum amount of $50,000. In addition to a penalty for failing to file Form 8938, an accuracy-related penalty may be imposed. Taxpayers are subject to a penalty equal to 40% of the underpayment of tax if the underpayment results from a transaction that involved undisclosed specified foreign financial assets. Lastly, taxpayers must pay a penalty of 75% of the underpayment if the underpayment is due to fraud.

You must file Form 8938 if:

1.         You are a specified individual. 

A specified individual is:

  • A U.S. citizen
  • A resident alien of the United States for any part of the tax year
  • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico

AND

2.         You have an interest in specified foreign financial assets required to be reported. 

A specified foreign financial asset is:

  • Any financial account maintained by a foreign financial institution
  • Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: stock or securities issued by someone other than a U.S. person
  • Any interest in a foreign entity, and
  • Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

AND

3.         If you live in the U.S. and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
  • Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

OR

If you live abroad and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
  • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

The IRS deems a taxpayer to be living abroad where:

a.         You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or

b.         You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 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.  If you are not in OVDI, civil Penalties start at 50% of the value of the foreign assets and you could be subject to criminal charges. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

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

U.S. Taxpayers Owning An Interest In A Foreign Entity

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A U.S. taxpayer who holds an interest in a foreign entity may not realize that he or she must comply with complex tax reporting requirements as a result of holding an interest in the foreign entity.  First, a U.S. taxpayer who is a shareholder of a “controlled foreign corporation” (CFC), as defined in 26 U.S.C. § 957, must pay taxes on certain income of the CFC, such as foreign investment income.

A U.S. taxpayer who has a financial interest in a foreign entity may be required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the foreign entity is the owner of record or holder of legal title of foreign accounts, such as bank accounts or stocks, and the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.  As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported.  For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

Whether the U.S. taxpayer is deemed to have a financial interest in a foreign account and thus may be required to file an FBAR to report the entity’s foreign accounts depends in part on the type of entity involved and the taxpayer’s interest in the entity.  The U.S. taxpayer is deemed to have a financial interest in a foreign financial account if the owner of record of legal title is a corporation for which the U.S. taxpayer owns directly or indirectly (i) more than 50% of the total value of shares of stock, or (ii) more than 50% of the voting power of all shares of stock.  If the U.S. taxpayer has either (i) an interest in more than 50% of a partnership’s profits, or (ii) an interest in more than 50% of the partnership capital, then the U.S. person is deemed to have a financial interest in the foreign accounts held by the partnership.  Finally, a U.S. taxpayer is deemed to have a financial interest in a foreign financial account if the owner of record of legal title is any other entity in which the U.S. taxpayer owns directly or indirectly more than 50% of the voting power, total value of equity interest or assets, or interest in profits.  If the U.S. taxpayer falls into one of the above categories, he or she must report the foreign accounts on an FBAR if the aggregate balance exceeds $10,000 at any time during the year.

Certain U.S. taxpayers who own an interest in a foreign corporation may also be required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  Form 5471 gives several categories of persons who must file this form.  For example, a U.S. citizen or resident who acquires stocks in a foreign corporation and the stock interest is either (i) 10% or more of the total value of the foreign corporation’s stock, or (ii) 10% or more of the total combined voting power of all classes of stock with voting rights.  Depending on the category in which the taxpayer falls, he or she may be required to attach additional schedules to the Form 5471.  A taxpayer who may be involved in a foreign partnership must follow similar rules by filing a Form 8865.

In addition to filing the above forms form, the U.S. taxpayer must follow certain reporting requirements on his or her annual tax return.  First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return.  On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts, which asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account.  Schedule B also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.

The U.S. Taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return.  In the case of holding an interest in a foreign entity, the U.S. taxpayer may list as financial assets, for example, any stocks or securities issued by a foreign corporation and any partnership interest in a foreign partnership.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.

The penalties for failing to file a Form 5471 or Form 8865 depend in part on the category of taxpayer, but may include a $10,000 penalty for each failure to file, plus an additional $10,000 per month if the Form 5471 is not filed within 90 days of the deadline.  All taxpayers who fail to file a Form 5471 or Form 8865 also may be subject to criminal penalties and penalties for understating the financial assets.

For failing to report income received from a CFC and failing to file a correct Schedule B and Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

U.S. taxpayers who may have a financial interest in a foreign entity would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing an interest in a foreign entity.

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.

Required Disclosures To The IRS Of Indian Accounts – NRE, NRO and PPF

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The U.S. government requires U.S. tax persons to report their “worldwide income” from any source whether it is earned in the U.S. or abroad.  A U.S. tax person includes both U.S. citizens, green card holders and other persons satisfying the substantial presence in the U.S. standard.

Indian nationals residing in the U.S. who hold Indian accounts with an aggregate balance of over $10,000 (U.S.) are required to report those accounts on a Foreign Bank Account Report (“FBAR”).  In addition, any income earned on those accounts need to be included on any U.S. income tax returns.

There are different types of Indian accounts that an Indian national may hold.  A Non-resident Ordinary Account (“NRO”) is an account made for income earned in India.  Income earned on an NRO may be taxed by the Indian government.  There is a limit of $1 million (U.S.) net of taxes that can be repatriated from an NRO in any given year.

A Non-resident External Account (“NRE”) is an account which allows an Indian national to hold income earned outside of India and is not taxed by the Indian government.  There is no limit on the amount that can be repatriated.

Funds held in both NRO’s and NRE’s must be in Indian Rupees.

Taxes paid to the Indian tax authorities for interest income earned from an NRO may be claimed as foreign tax credit on the U.S. tax return to avoid “double taxation”.

Another type of account an Indian national may hold is a Public Provident Fund (“PPF”).  A PPF is savings vehicle that has restrictions on withdrawals and any earnings on a PPF are not taxed by the Indian government.  Only an Indian citizen residing in India may initially open a PPF but if he or she becomes a resident of another country while holding the PPF, he or she may be allowed to hold the PFF under certain circumstances.  While this type of account may be utilized as a retirement fund in India, it is not recognized by the U.S. as a tax-deferred retirement account.  Therefore, the U.S. requires that income on PPF’s be included on an Indian national’s U.S. income tax return.

Recently, the IRS has announced more aggressive efforts in cracking down on Indian account holders, particularly in Northern California.  If you have never reported income from your foreign accounts or foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (“OVDI”) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  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.

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.

Court Authorizes IRS to Issue Summonses for Records Relating to U.S. Taxpayers with Offshore Bank Accounts

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A number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at Zurcher Kantonalbank and its affiliates (collectively, ZKB) in Switzerland, and The Bank of N.T. Butterfield & Son Limited and its affiliates (collectively, Butterfield) in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom, have admitted failing to report income earned from their offshore accounts on their federal tax returns.  The IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield, and their affiliates have done the same in violation of federal tax law.  In December 2012, three employees of ZKB were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.

On November 7, 2013, U.S. District Judges in the Southern District of New York entered orders authorizing the IRS to issue summonses requiring Bank of New York Mellon (Mellon) and Citibank NA (Citibank) to produce information about U.S. taxpayers who may be evading or have evaded federal taxes by holding interests in undisclosed accounts at ZKB; and requiring Mellon, Citibank, JPMorgan Chase Bank NA (JPMorgan), HSBC Bank USA NA (HSBC), and Bank of America NA (Bank of America) to produce similar information in connection with undisclosed accounts at Butterfield.

In these actions, the Court granted the IRS permission to serve what are known as “John Doe” summonses on Mellon, Citibank, JPMorgan, HSBC, and Bank of America.  The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown.  The John Doe summonses direct these five banks to produce records identifying U.S. taxpayers with accounts at ZKB, Butterfield and their affiliates, including other foreign banks that used ZKB and Butterfield’s U.S. correspondent accounts at Mellon, Citibank, JPMorgan, HSBC, and Bank of America to service U.S. clients.

The information that the banks are required to turn over to the IRS will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations.  As the U.S. government is continuing its commitment to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes, U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it is too late.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide.  U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year.  Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 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 San Francisco, Los Angeles 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.

HSBC Clients With Asian Accounts Said to Face U.S. Tax Probe

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The Justice Department is conducting a criminal investigation of HSBC Holdings Plc clients who may have failed to disclose accounts in India or Singapore to the IRS.  Already some U.S. taxpayers have received a letter from the Justice Department that said prosecutors had “reason to believe that you had an interest in a financial account in India that was not reported to the IRS on either a tax return or a Treasury Department report disclosing foreign accounts”.  The letter goes on to state “You are advised that you are a subject of a criminal investigation being conducted by the Tax Division. Destroying or altering documents relating to the probe constitutes a serious violation of federal law, including but not limited to obstruction of justice”.

The letters went to U.S. residents who have ties to India, including people who inherited money from relatives or maintained assets there after leaving the country. Some letters referred to undisclosed bank accounts in Singapore.

This probe shows how the U.S. is expanding its crackdown on offshore tax evasion beyond Switzerland its largest bank, UBS. London-based HSBC is Europe’s biggest lender by market value and appears to be IRS’ next big target.  For the IRS to be sending letters to U.S. taxpayers means that prosecutors got data on HSBC account holders from the bank.

UBS avoided prosecution by admitting it aided tax evasion from 2000 to 2007, paying $780 million, and agreeing to disclose secret account data on more than 250 clients. It later agreed to disclose data on another 4,450 clients.  Officials at HSBC are likely cooperating with IRS in releasing data in an effort to avoid the same magnitude of fines that UBS had to pay.

The IRS is placing more than 800 people to analyze data from foreign banks and compare it to what was reported on U.S. taxpayers’ tax returns.  The IRS is also increasing staff in eight overseas offices, including Hong Kong and the IRS is opening offices in Beijing, Sydney and Panama City.

The IRS boasts that they just took down the largest private wealth management bank in the world (UBS).  Do you really think they are going to have trouble doing the next one?  The Asian banks recognize this and do not want to have a UBS-type situation. They want to do it nice and quiet. They don’t want to be the focus of attention. The Department of Justice and IRS are devoting a ton of resources to this issue.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 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.

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.