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.

How Long Do Tax Records Need To Be Kept?

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.

The period of limitations (which we call the Statute Of Limitations or “SOL”) is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. The information below reflects the SOL that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

SOL’s that apply to income tax returns:

1. Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
4. Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
5. Keep records indefinitely if you do not file a return.
6. Keep records indefinitely if you file a fraudulent return.

For employment tax returns, you should keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property?

Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.

What should you do with your records for nontax purposes?

When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

IRS Generates $8 Billion from Voluntary Disclosure. Expect More FATCA Reporting in 2016 and Beyond

The Internal Revenue Service faces many challenges when it comes to enforcing compliance with U.S. tax laws for individuals with offshore assets and income sources. To strengthen these efforts, the IRS has implemented offshore voluntary disclosure programs (known as OVDP’s) as a way to encourage U.S. taxpayers to come forward to meet their tax obligations related to earning income abroad or having undisclosed offshore assets. The OVDP’s support comprehensive efforts to address tax evasion issues through targeted enforcement, prosecution and implementation of the Foreign Account Tax Compliance Act (“FATCA”). Results of voluntary disclosure programs and FATCA implementation have been encouraging to the extent that the IRS has vowed to expand FATCA and strengthen enforcement strategies. The programs have proven effective in helping taxpayers become current with their tax liabilities, raising IRS collections and discouraging offshore tax evasion for taxpayers with assets and income abroad.
Understanding FATCA

FATCA was introduced in March 2010 as part of a strategy to crack down on U.S. taxpayers who use foreign financial institutions (FFI’s) to conceal their assets to avoid paying U.S. taxes. This piece of legislation effectively gives the Department of Justice (“DOJ”) and the IRS blanket authority to investigate suspect accounts held by individuals and businesses in offshore institutions. FATCA forces FFI’s to comply with stringent reporting requirements for any accounts that may be held by U.S. taxpayers in countries that have signed inter-governmental agreements(IGA’s) or, to disclose specific account holder information to the DOJ and the IRS. Serious sanctions and penalties may be imposed for non-compliance.

The intent of FATCA was to go after high net worth individuals who were taking advantage of offshore tax havens to shield assets from U.S. tax obligations. However, FATCA provisions include disclosing information on all accounts held in the name of U.S. citizens. This had unintended consequences, including closure of accounts when businesses and individuals failed to meet stringent documentation requirements and denial of new account applications that affected even those who had limited income and assets. Countries that have signed IGA’s include Spain, France, Germany, United Kingdom, Singapore, Switzerland and Japan.

The IRS has indicated that FATCA Offshore compliance and FATCA provisions will top 2016 priorities. These efforts will include facilitating exchange of FATCA information worldwide to root out unreported and under-reported income and untaxed assets. Aside from reporting requirements, FATCA also obligates FFI’s to withhold taxes and to report account activities that may indicate fraud and tax evasion.
Compliance with FATCA Provisions

U.S. citizens who have assets held in FFI’s should use Form 8938 to report those assets as part of their annual tax returns. The reporting thresholds vary depending on certain factors.

• If you live in the U.S. and you are single, you may have to comply with FATCA requirements when your offshore financial assets are valued at $50,000 at year-end or $75,000 anytime during the year.
• If you are U.S.-based, married but filing separately, the same thresholds as outlined above applies.
• If you are married and living in the U.S., the value of your specified foreign assets must be reported starting at a year-end valuation of $100, 000 or if the value met or exceeded the $150,000 level during the tax year.
• If you live abroad, married and filing jointly, the threshold is $400,000 at year-end or $600,000 at any time during the year.
• If you live abroad and you are single, the foreign asset filing threshold is $200,000 at year-end or $300,000 during the year.

Filing Form 8938 does not take the place of other reporting requirements such as the FBAR, the Report of Foreign Bank and Financial Accounts, and FinCen Form 114. Failure to file Form 8938 and the FBAR may lead to hefty penalties, starting with $10,000 for failure to file. When the IRS sends a notification and you fail to file your Form 8938, another $50,000 is added to your accrued penalties. You could also be liable for an additional 40% penalty based on underpayment of taxes due to non-disclosure of offshore assets. Also, being compliant with these filing requirements now does not cure past non-compliance.
Impact of FATCA Reporting Requirements

Under FATCA provisions, banks, investment houses, brokers, specified insurance companies and some non-financial entities are required to report account information to the IRS and DOJ if the account holders are U.S. citizens. This means that when you set up new accounts with offshore entities, you will be asked to provide information about your citizenship. FATCA reporting requirements apply even when only one spouse is a U.S. citizen or only one spouse lives abroad.

To clarify, the OVDP’s implemented in 2009, 2011 and 2012 were intended to encourage taxpayers with offshore assets to comply with their tax obligations and become current on tax liabilities accruing to ownership of assets in FFI’s and any income earned abroad. The 2009 OVDP resulted in 18,000 disclosures and a $3.4 billion collection that covered back taxes, penalties and interest payments. In 2011, the OVDP generated 15,000 disclosures and revenue collections of $1.6 billion for 75 percent of the accounts that were finalized in that year. In 2012, a third program generated 12,000 disclosures, bringing total collections for all OVDP opportunities to $8 billion as of October 2015 according to Douglas W. O’Donnell, commissioner for the Large Business and International Division, which is part of the IRS.

A separate report prepared by the Treasury Inspector General for Tax Administration pointed out that the IRS stood to generate about $21.6 million more in penalties alone with more efficient enforcement action on taxpayers who were disqualified or who withdrew from the OVDPs. Taxpayers who participate in voluntary disclosure programs qualify for reduced penalties. When FATCA reports reveal the existence of unacknowledged accounts before the taxpayer applies for OVDP participation, the IRS may deny access to reduced penalties and other benefits of voluntary disclosure.

The Future of FATCA

Since FATCA was implemented in 2010, it has proven effective as an offshore asset tracking strategy and in raising tax compliance for taxpayers with offshore accounts. IRS collection figures demonstrate the value of voluntary reporting as a key component of compliance efforts. As such, the IRS is expected to put more muscle into FATCA and offshore compliance strategies in 2016 and beyond. These efforts may include automatic information exchange for FATCA-related issues, greater cooperation with FFIs, foreign governments and the IRS to pinpoint potential target accounts and improved tax withholding compliance by offshore financial institutions.

References:
https://www.irs.gov/pub/irs-utl/d11809–2016-01-00.pdf
https://www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-u-s-taxpayers
https://www.irs.gov/uac/newsroom/irs-offshore-voluntary-disclosure-efforts-produce-6-5-billion-45-000-taxpayers-participate
http://www.accountingtoday.com/news/tax-practice/irs-overlooks-noncompliance-in-offshore-voluntary-disclosure-program-78456-1.html

So you filed your income tax return which showed an overpayment and you requested a refund. Most people knowing that they have money coming back to them have probably figured how they are going to spend that money.

The IRS issues more than 9 out of 10 refunds in less than 21 days. However, it’s possible your tax return may require additional review and take longer. The IRS has a tool on its website called Where’s My Refund? This link has the most up to date information available about your refund. The tool is updated no more than once a day so you don’t need to check more often.

You can use Where’s My Refund? to start checking on the status of your return within 24 hours after the IRS has received your e-filed return or 4 weeks after you mail a paper return. Where’s My Refund? has a tracker that displays progress through 3 stages: (1) Return Received, (2) Refund Approved and (3) Refund Sent. You will get personalized refund information based on the processing of your tax return. The tool will provide an actual refund date as soon as the IRS processes your tax return and approves your refund.

Calling the IRS will not speed up your refund. The IRS phone and walk-in representatives can only research the status of your refund if it has been 21 days or more since you filed electronically, more than 6 weeks since you mailed your paper return, or Where’s My Refund?directs you to contact the IRS. If the IRS needs more information to process your tax return, the IRS will contact you by mail.

Ordering a transcript will not help you determine when you will get your refund. This is among the common myths and misconceptions that are often repeated in social media. The codes listed on tax transcripts do not provide any early insight into when a refund will be issued. The best way to check on your refund is by visiting Where’s My Refund?While transcripts include a lot of detailed information regarding actions taken on your account, the codes do not mean the same thing for everyone and they do not necessarily reflect how any of these actions do or do not impact the amount or timing of your refund. IRS transcripts are best and most often used to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation.

If you owe past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain federal nontax debts, such as student loans, all or part of your refund may be used (offset) to pay the past-due amount. Offsets for federal taxes are made by the IRS. All other offsets are made by the Treasury Department’s Bureau of Fiscal Services (BFS). For federal tax offsets, you will receive a notice from the IRS. For all other offsets, you will receive a notice from BFS. To find out if you may have an offset or if you have any questions about it, contact the agency to which you owe the debt.

Another reason your refund amount may be different is if the IRS made changes to your tax return that changed your refund amount. In this case you will get a notice in the mail from the IRS explaining the changes.

If you filed a joint return and you are not responsible for your spouse’s debt, you are entitled to request a portion of the refund back from the IRS. You may file a claim for this amount by filing Form 8379 (PDF), Injured Spouse Allocation. The IRS can process your Form 8379 before an offset occurs. If you file Form 8379 with your original return, it may take 11 weeks to process an electronically-filed return or 14 weeks if you filed a paper return. If you file the Form 8379 by itself after a joint return has been processed, then processing will take about 8 weeks.

When filing Form 8379 by itself, you must show both spouses’ social security numbers in the same order as they appeared on your joint income tax return. You, the injured spouse, must sign the form. Follow the instructions on Form 8379 carefully and be sure to attach the required Forms W-2 and 1099 showing federal income tax withholding to avoid delays. Do not attach the previously filed joint tax return to the Form 8379 when filing it by itself. Send Form 8379 to the Service Center where you filed your original return and allow at least 8 weeks for the IRS to process your request. The IRS will compute the injured spouse’s share of the joint refund. If you lived in a community property state during the tax year, the IRS will divide the joint refund based upon state community property law. Not all debts are subject to a tax refund offset. So to determine whether an offset will occur on a debt owed you should check with a tax professional.

Be careful not to count on getting your refund by a certain date to make major purchases or pay other financial obligations. Many different factors can affect the timing of your refund after the IRS receives it for processing. Even though the IRS issues most refunds in less than 21 days, it’s possible your tax return may require additional review and take longer. Also, if you are anticipating a refund, take into consideration the time it takes for your financial institution to post the refund to your account, or for mail delivery.

You should choose to have a direct deposit of your refund. Eight in 10 taxpayers get their refunds faster by using e-file and direct deposit. The IRS claims it is the safest, fastest way to receive your refund and is also easy to use. Just select it as your refund method through your tax software and type in the account number and routing number. Or, tell your tax preparer you want direct deposit. You can even use direct deposit if you are one of the few people still filing by paper. Be sure to double check your entry to avoid errors.

Your refund should only be deposited directly into accounts that are in your own name; your spouse’s name or both if it’s a joint account. No more than three electronic refunds can be deposited into a single financial account or pre-paid debit card. Taxpayers who exceed the limit will receive an IRS notice and a paper refund. Whether you file electronically or on paper, direct deposit gives you access to your refund faster than a paper check.