District Court Sets Low Standard For Willfulness In Failing To File FBAR

Until just recently, not much has come out of the Courts defining that line between nonwillful and willful when it comes to not filing Foreign Bank and Financial Accounts Reports (“FBAR”).  But now we have a recent U.S. District Court case out of California which has vast repercussions on anyone who has undisclosed foreign bank accounts regardless of whether they came forward in a Voluntary Disclosure Program or the Streamlined Procedures.

U.S. v. Bohanec

Weeks ago a Federal District Court in California in the case of U.S. v. Bohanec, 2016 WL 7167869, 118 AFTR 2d ¶ 2016-5537(DC CA 12/8/2016)determined that the taxpayers’ failure to timely file a Foreign Bank and Financial Accounts Report (“FBAR”) was willful.  The tax law provides that U.S. citizens with accounts outside the U.S. must disclose those accounts on an FBAR if the aggregate amount is at least $10,000. 31 U.S.C. 5314. The reason the term “willful” is important is that if the failure is not willful, the penalty is set at $10,000 per violation but if the failure to disclose is considered “willful”, the penalty goes up to the greater of $100,000 or 50% of the highest account value for the year.

In 2010 the Bohanecs entered into the Offshore Voluntary Disclosure Program For Undisclosed Foreign Bank Accounts (“OVDP”). The Bohanecs’ submission was submitted under penalty of perjury, representing that the only undisclosed foreign bank accounts were in Switzerland and the source of funds deposited were after-tax earnings from a camera business operated by the taxpayers.  However, the IRS discovered that they did not even disclose all of their foreign accounts – leaving out accounts in Mexico and Austria. The IRS also discovered that the taxpayers’ statements that the funds were all from income duly reported and on which taxes were paid was untruthful.The Bohanecs were ultimately rejected by IRS for the OVDP and their case ultimate went to Federal Court where the only issue before the Court was whether the Bohanecs’ failure to file a 2007 FBAR was willful.

The Bohanecs asserted that “willfulness” encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties. The only cases the Bohanecs cited to support their argument that “willful” means that a defendant must have knowledge and specific intent Ratzlaf v. United States, (S Ct 1994) 510 U.S. 135 (structuring) and United States v. Eisenstein, (CA 11 1984) 731 F.2d 1540 (felonious failure to file currency transaction reports).  But the Court distinguished these criminal cases in that the Bohanecs case was a civil matter.

Court’s Holding.

The courtnoted that 31 USC 5321(a)(5) does not define willfulness but rejected the Bohanecs’ argument, concluded that the term “willful” included “reckless” for purposes of FBAR.The court said that, where willfulness is an element of civil liability, the Supreme Court generally understands the term as covering “not only knowing violations of a standard, but reckless ones as well.” (Safeco Ins. Co. of America v. Burr, (S Ct 2007) 551 U.S. 47) “Recklessness” is an objective standard that looks to whether conduct entails “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” (Safeco) Several other courts, citing Safeco, have held that “willfulness” under 31 USC 5321 includes reckless disregard of a statutory duty. See Williams, (CA 4 2012) 110 AFTR 2d 2012-5298 and Bussell, (DC CA 2015) 117 AFTR 2d 2016-439.

The court then went on to consider the issue of standard of proof. It said that the Supreme Court has held that a heightened clear and convincing burden of proof applies in civil matters “where particularly important individual interests or rights are at stake.” (Herman & MacLean v. Huddleston, (S Ct 1983) 459 U.S. 375) Such interests include parental rights, involuntary commitment, and deportation. The lower, more generally applicable preponderance of the evidence standard applies, however, where “even severe civil sanctions that do not implicate such interests” are contemplated. (Herman) The court here said that the monetary sanctions at issue here did not rise to the level of “particularly important individual interests or rights.” Accordingly, the court said, the preponderance of the evidence standard applied.

Following what I consider to be a strict liability approach, the Court concluded that IRS proved by a preponderance of the evidence that the Bohanecs were at least recklessly indifferent to a statutory duty, for the following reasons:

  1. The Bohanecs were reasonably sophisticated businesspeople as an exclusive Leica camera dealer with customers around the world.
  2. The Bohanecs were at least reckless, if not willfully blind, in their conduct with respect to their Swiss UBS account and their reporting obligations regarding the account. The Bohanecs never provided UBS with their home address, and never told anyone other than their children of the existence of the UBS account, including the tax preparers the Bohanecs hired to help them file tax returns. The Bohanecs never asked a lawyer, accountant, or banker about requirements regarding the UBS account and never used a bookkeeper or kept any books once the UBS account was opened.
  3. The Bohanecs’ representations that they were unaware of or did not understand their obligations were not credible. The Bohanecs directed customers to deposit payment into the Swiss account and made several transfers and withdrawals from the Swiss account to other foreign accounts.
  4. The Bohanecs’ credibility was further undermined by their conduct with respect to their application to participate in the OVDP when they made several misrepresentations under penalty of perjury.

What Should You Do?

Should the taxpayers appeal this case, who knows how the 9th Circuit will rule.  It will also take years before the Appeals Court disposes of such an appeal but for now we have much clearer guidance of the “strict liability approach” the Court seems to follow.  Taxpayers who have entered into the Streamlined Program whose case is weak on showing nonwilfullness have a huge risk of being picked by IRS and losing the favorable status offered by the Streamlined Procedures where the IRS feels that the non-willful standard is not met.  Such taxpayers will not then be able to enter into OVDP and can face the same battle as the Bohanec’s.  Likewise, anyone who has not come forward in voluntary disclosure and the issue of nonwilfullness is questionable would still have the opportunity to come forward under OVDP.  Keep in mind that any submission must be complete or else like the Bohanecs, the IRS will reject the settlement and look to assess the full penalties provided by law.You should talk with your counsel and be proactive with the IRS for any original submission or amendment so that you have the lowest risk possible to secure or keep the benefits you sought in Voluntary Disclosure.

IRS 2017 Tax Deductions

IRS Announces 2017 Inflation Adjusted Tax Benefits

It is hard to believe that we are just two months away from the year of 2016 and as always towards the end of each calendar year the IRS announces next year’s annual inflation adjustments. You can check for more than 50 tax provisions, including the tax rate schedules, and other tax changes for tax year 2017 in Revenue Procedure 2016-55. The tax year 2017 adjustments generally are used on tax returns filed in 2018.

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

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

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

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

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

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

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

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

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

What Should You Do?

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

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

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

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

Olympic Medals Taxable

Go For The Gold And Pay Your Victory Tax – Olympic Medals Taxable

Go For The Gold And Pay Your Victory Tax – Olympic Medals Taxable

While millions of Americans were glued to their televisions to watch American athletes compete in this year’s Summer Olympics, the Internal Revenue Service was getting ready to make sure that all our Olympic winners pay taxes on their victories.

The Internal Revenue Code mandates that if you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $100 prize in a marathon, you must report this income on your Form 1040. Now if you refuse to accept a prize, then you do not include its value in your income. All prizes and awards in goods or services that you accept must be included in your income at their fair market value.

The impact to a U.S. athlete who wins in the Olympics is that their prize is no different than you winning the lottery.  America’s Olympic medalists must pay state and federal taxes on the prize money they get for winning. The U.S. Olympic Committee awards $25,000 for gold medals, $15,000 for silver and $10,000 for bronze.

But besides picking up the prize money as income, Olympians also have to pay tax on the value of the medals themselves.  It’s not enough for the IRS to tax a U.S. athlete on the prize money but also to tax the metal.  Gold and silver medals are made mostly of silver, while bronze medals are composed of mostly copper. Rio’s medals are among the largest and heaviest ever and contain about 500 grams of either silver or copper.  The value of a gold medal is about $564; silver is worth about $305. Bronze is worth a negligible amount so it’s not taxed.  Any athlete who accepts his or her Olympic medal and does not have to forfeit it will have to report its value as income and pay taxes on it. It does not matter that the competition took place in Brazil and not the United States.

Winning Olympic athletes from most other countries don’t have to worry about their medals being taxed. This unfairness has resulted in considerable debate during each session of Congress when a Summer or Winter Olympics is held but any legislation to change the tax law has never made it out of Congress. Leading up the 2016 Summer Olympics there is proposed federal legislation that would make “the value of any medal or prize money” awarded during the Olympics or Paralympics exempt from income taxes. The bill was passed by the Senate in July 2016 but like its predecessors, will lose momentum as the Summer 2016 Olympics fades into the past.

You would think most Americans would be in favor of the legislation but there appears to be some backlash.  For example, should an Olympian who comes home with four medals conceivably make $100,000 tax free while millions of hard working Americans struggle to support their families on far less income yet have to pay taxes?  Then of course one should recognize that the U.S. is the only major country that doesn’t provide government funding to its Olympians. Now a handful of lucky athletes land lucrative endorsement deals. But most of them rely on small stipends from the USOC, support from local businesses or supplemental income from a day job.

Despite which side of the argument you may stand, you need to remember that even income earned outside the U.S. may be taxable. Every year, thousands of U.S. taxpayers learn that lesson the hard way. If you live, compete or work outside the United States, you must still file tax returns here. In addition, if you win a prize or award, you must claim the value of that prize or award on your tax return as income.

I am not so convinced that an income exclusion for Olympians and Paralympians would change anything. Cutting taxes isn’t going to fix the fact that these athletes don’t get paid enough. And then how do you distinguish this from other individuals who win prestigious awards. Such is the case with Nobel prize winners who receive more prize money — around $1 million. Shouldn’t an award for such an accomplishment also be tax free? This is something maybe to write to your Congressman about.


mutual funds and offshore investing

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

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

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

Do You Have Foreign Mutual Funds?

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

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

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

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

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

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

Do You Have A Foreign Insurance Policy?

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

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

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

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

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

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

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


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




On August 2, 2016, the Treasury Department issued proposed regulations under the authorization contained in Section 2704(b) of the Code, with a hearing scheduled on December 1, 2016. The proposed regulations will essentially take away all valuation discounts for interfamily transfers of entities controlled by the transferor and his or her family.

I remember back during the Clinton (Bill) administration when the government was seeking to eliminate the ability for taxpayers to claim discounts on transfers of interests in family owned businesses and entities. The government was not able to pass this legislation but was successful in establishing a new Chapter in the Internal Revenue Estate Tax Code (Chapter 14, Sections 2701 to 2704) which restricted the ability of certain “estate freeze techniques” when transferring interests in family-owned businesses.

Now two decades later, it looks like the government is finally getting what it always wanted to eliminate or restrict the use of valuation discounts when it comes to transfers of assets to save on estate and gift taxes. The logic behind valuation discounts (minority interest and marketability discounts) is that if you give a 20% interest in your $100 million business to your child, you’re not giving away $20 million but in fact something worth less because the child cannot turn around and sell the interest for $20 million. Now it is likely that the proposed regulations will not take effect until sometime next year but that being the case it is imperative to complete any discount-related planning throughout the next several months.Some of the major changes that will be adopted in the proposed regulations are discussed below.

The proposed regulations give a broad definition of control. Specifically, control is holding 50% of equity in an entity (corporation, partnership or LLC). For a limited partnership, control is equivalent to having an interest in the general partner.

Under Section 2704(a) the lapse of a voting right or liquidation right in a family owned entity is treated as a transfer by the individual holding the right immediately before it lapses. The current regulations exempt such a transfer if the rights with respect to the transferred interest are not restricted or eliminated. The proposed regulations would deny such exemption for transfers occurring within three years of death if the entity is controlled by the transferor and members or his or her family immediately before and after the lapse.

The proposed regulations will significantly change valuations for transfer tax purposes of interests in family owned entities that are subject to restrictions on redemptions or liquidations. Specifically, such restrictions will be disregarded in valuing such an interest for gift/estate tax purposes when the interest in transferred by a family member. The reasoning for this is the fact that after the transfer the restriction will lapse or can be removed by the transferor or a member of his or her family.

The proposed regulations remove nearly all discounts by disregarding the interests held by non-family members as well. Interests held by non-family members that may otherwise give such non-family member the power to prevent the removal of a restriction will be disregarded unless those interests have been held for at least three years; make up at least 10% of the entity; the total combined non-family interests is more than 20% of all interests; or they hold a put interest in the entity to receive a minimum value.

The proposed regulations issued under Section 2704 would, if adopted in final form, have a significant impact on the wealth transfer tax valuation of interests in family controlled entities. Essentially, almost no minority discounts would be allowed. So if you are in a situation of having a large estate (over $5million of net value) with interests in entities, whether operating businesses or investment entities, you should contact counsel to see what planning can still be implemented before these benefitsdisappear.

Tax advice, tax tips

Tips If You Owe Taxes

Tips If You Owe Taxes

Mailed Tax Bills.If you owe taxes, you will first receive a bill in the U.S. mail from the IRS which tells you your balance owed through a certain date indicated on the bill. Don’t fall for those calls from people claiming to be the IRS threatening criminal action against you if you don’t pay the amount they are demanding. The IRS will never make an initial contact with you by telephone without first having sent you written notice that you owe the IRS or are under examination. Of course if you have the available funds, you should pay the balance no later than the date indicated in the bill to avoid any extra charges. If you can’t pay in full, keep in mind that interest and penalties continue to accrue on the balance so any payment made to IRS will result in lower accruals of interest and penalties for the future.

Full Payment Agreements of up to 120 days. If you owe more tax than you can pay, you may qualify for more time -up to 120 days- to pay in full. You do not have to pay a user fee to set up a short-term full payment agreement. However, the IRS will charge interest and penalties until you pay in full.

Apply for an installment agreement.If you’re financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. Before applying for any payment agreement, you must file all required tax returns and if you are required to make estimated tax payments, you must be current in making those payments. The IRS calls this “being in current compliance”. By being in current compliance, the installment agreement can now cover all tax periods with outstanding balances.

“No Verification” Installment Agreements. For individuals who owe $50,000 or less in combined individual income tax, penalties and interest, OR businesses that owe $25,000 or less in payroll taxes, you can have an installment agreement set up with IRS without presenting any financial information.
“Full Verification” Installment Agreements. For individuals and businesses that exceed the thresholds of the No Verification Installment Agreements, the IRS will require that full financial disclosure be made with your payment plan proposal. Be careful though because the IRS does limit certain expenses and depending on the type of installment agreement entered, you may not be able to get full credit for your actual living expenses. So if you are in this situation, it is best to hire tax counsel to compile the proposal and financial disclosures. If you do it on your own first and fail, your representative will not be able to “undo” what was already disclosed by you to IRS and that could then limit the representative in getting the optimum result.

Understand Your Installment Agreement & Avoid Default. Keep in mind that your future refunds will be applied to your tax debt until it is paid in full. Pay at least your minimum monthly payment when it’s due and if paying by check include your name, address, SSN, daytime phone number, tax year and return type on your payment. Make sure the check is mailed to the right address for delivery no later than the payment due date. File all required tax returns on time & pay all taxes in-full and on time as any new liability will default your installment agreement. Make all scheduled payments even if the IRS applies your refund to your account balance.

If you don’t receive your statement from IRS, send your payment to the address listed in your installment agreement.
There may be a reinstatement fee if your agreement goes into default. Penalties and interest continue to accrue until your balance is paid in full. If you are in danger of defaulting on your payment agreement for any reason, it is a good idea to hire tax counsel who can seek reinstatement or even a medication where you can make lower monthly payments.

Check out an offer in compromise. An offer in compromiseor OIC may let you settle your tax debt for less than the full amount you owe. An OIC may also be helpful if full payment may cause you financial hardship. Not everyone qualifiesafter all, when you are looking for a discount on your IRS liability the government wants to make sure that collectability of the full liability plus interest and penalties is highly doubtful before granting a discount.
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.

The IRS will consider your unique set of facts and circumstances with a focus on your income and expenses to determine your ability to pay and your asset equity.
The IRS will generally approve an offer in compromise when the amount offered represents the most the IRS can expect to collect within a reasonable period of time.

Make sure you are eligible
Before the IRS can consider your offer, you must be current with all filing and payment requirements. You are not eligible if you are in an open bankruptcy proceeding and if you file for bankruptcy while your OIC is being evaluated, the IRS will stop evaluation and return the OIC.

Submit your offer
The form to use in filing an OIC is Form 656. You must include payment of an application fee of $186.00 and a deposit towards the amount offered. Additional you must include financial disclosures. The main forms to use are Form 433-A (OIC) (for individuals) or 433-B (OIC) (for businesses) and these forms list all required documentation that must be included. Like installment agreement requests, the IRS limits certain living expenses so it make sense to engage tax counsel to pursue this process.

Select a payment option
Your initial payment will vary based on your offer and the payment option you choose:
Lump Sum Cash: Submit an initial payment of 20% of the total offer amount with your application. Wait for written acceptance, then pay the remaining balance of the offer in five or fewer payments.
Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

Understand the process. While your offer is being evaluated:
1. Your non-refundable payments and fees will be applied to the tax liability;
2. A Notice of Federal Tax Lien may be filed;
3. Other collection activities are suspended;
4. The legal assessment and collection period is extended;
5. Make all required payments associated with your offer;
6. You are not required to make payments on an existing installment agreement; and
7. Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.

If your offer is accepted you must meet all the Offer Terms listed in Section 8 of Form 656, including filing all required tax returns and making all payments for the next five years; Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt; and Federal tax liens are not released until your offer terms are satisfied.

If your offer is rejected you may appeal a rejection within 30 days after the determination letter has been issued by IRS. If though your offer is returned, you do not have this right of appeal and must start the OIC process all over again.

IRS getting more muscle in its fight against offshore tax evasion

IRS getting more muscle in its fight against offshore tax evasion

In a recent legal battle with UBS, the IRS has exerted its dominance once again by demanding transparency and exposure of international tax evasion and avoidance at some of the most powerful foreign financial institutions. The IRS previously reached an unprecedented settlement with UBS, one of the largest Swiss banks lauded for its powerful position in the foreign bank-secrecy landscape. Following that settlement UBS agreed to surrender client records for a U.S. citizen holding substantial assets in an account in Singapore. What happened in that case serves as a foreboding of what may be to come for many individuals with unreported foreign income or other offshore bank accounts.

With Thousands To Go, This Is Just The Tip Of The Iceberg

In the UBS case, authorities claimed rights to access this information as a means of appropriately addressing tax evasion by evaluating all relevant data. The client, Ching-Ye Hsiaw, had recently shifted assets from his UBS account in Switzerland to a new Singapore account in light of the increased focus of the IRS on the Swiss banking front. Indeed, the IRS has recently expanded efforts to detect, deter, and discipline instances of tax evasion in numerous international jurisdictions. In response to the Foreign Account Tax Compliance Act (FATCA), UBS turned over thousands of taxpayers’ records of accounts previously hidden from the IRS. In fact, UBS turned over nearly one-fifth of the American-sourced accounts held at the institution. These accounts represent many taxpayers who not only paid a premium for the secrecy they believed Swiss bank laws could protect, but also hoped that the IRS would not discover their willful efforts at tax evasion in the first place. Some taxpayers, whose accounts have been submitted to the IRS under these efforts to unveil both individual and corporate attempts at tax evasion, feared the discovery of their foreign bank accounts, but did not know how to properly bring these accounts back to the United States without facing steep civil penalties and even criminal persecution. These first few victories by the IRS under FATCA should alert individuals as cautionary tales of the importance of understanding the implications of holding assets in foreign financial institutions (FFIs).

One FAT check for FATCA

Upon the notable shift of American sourced income out of domestic financial institutions, the IRS sought out the money hidden in tax havens, tax shelters, and tax “nothings”. When Swiss bank-secrecy laws forbade FFIs from reporting American client’s account information without the client’s consent, the U.S. government passed the Foreign Account Tax Compliance Act or more commonly known as FATCA in 2010. The law presented a counter to bank-secrecy laws – if Switzerland would refuse to release information about income rightfully (or so the IRS believed) taxed by the U.S. government, the United States would implement a 30% withholding tax on American investments by other nations. The tax was, and still is, steep enough to prompt cooperation by FFIs if they want any access to the United States capital market. Effects on individuals with unreported foreign income represents only one facet of the effort; focus on multinational entities permeates the IRS agenda. FATCA mirrors other international efforts to eliminate international non-taxation of income, such as the Base Erosion And Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development. The BEPS project, much like FATCA, seeks transparency and full disclosure of the source and storage of monetary assets. With the spotlight on tax evasion constantly broadening and brightening, both American corporate entities with complex ownership structures and individuals with rather simple investments and income abroad must become and remain informed about similar IRS efforts.

Pay Up: Penalties and Fines for Tax Evasion

As the government becomes increasingly strapped for cash, the focus on derailing the effectiveness of foreign bank secrecy elevates. In order to place extreme emphasis on the priority the IRS has given FATCA enforcement, the government has placed steep civil and criminal penalties on those convicted of tax evasion, especially willful evasion. Tax evasion can result in prison sentences up to 5 years in duration as well as monetary fines of $250,000 for individuals and $500,000 for corporations. Failure to indicate on Schedule B of your Form 1040 that you hold assets in a foreign bank account, if discovered, may bear such repercussions.

The United States government acknowledges the difficulty of affording to bring assets back to the U.S. home soil, both from the perspective of facing an increased continuing tax rate on this income as well as facing steep civil and criminal charges. As such, the government has implemented occasional amnesties. An amnesty is somewhat comparable to forgiveness by the U.S. government, whereby a taxpayer can retrieve assets from foreign accounts and remit them to domestic banks while paying only a portion of usually assigned penalties or no penalties at all. However, these “Welcome Home!” gestures are not often as warm as they seem and often, not as frequent as tax evaders would hope. As referenced by many politicians and persecutors in Washington, there are many completely legal ways to participate in activities that avoid taxation either completely or to some smaller degree. However, as Mr. Hsiaw and UBS would likely agree, knowledge of the nature, legal landscape, and potential punishment for unreported foreign earnings and similar offshore bank accounts and investments are a necessity in the increasingly omniscient reach of the IRS.