From the client’s perspective, discovering the stringent laws regarding the disclosure of offshore financial accounts is usually overwhelming in light of the severe civil and criminal penalties that can be imposed. The majority of our clientele have never violated a law and have been law abiding citizens throughout their entire lives. For many clients, the discovery that they are in non-compliance with the tax and bank secrecy laws happens by them reading a news article, having a casual conversation with a friend, listening to a radio or television program, browsing the Internet or receiving a letter from a financial institution where there assets are located. Other clients are familiar with the laws, but are unsure about how to comply with them. They may not have been concerned with getting caught because they thought that the United States could never discover the assets.
There are often various reasons for why the accounts were never disclosed. For example, we are frequently told that the client simply relied on the accountant for advice and was never told about these rules. Clients in many instances, simply used tax software incorrectly to prepare the tax return, and failed to check the “YES” box when asked about whether they had an offshore account. Sometimes, clients simply lacked a complete understanding of the rules, or were ignorant of the law, etc.
There are often other complexities involved in a client’s life as to why they are not in compliance with these laws. Such as, we frequently are told that a client’s family member (usually a parent) living in a foreign country, put their name on a bank account to transfer funds upon death without their knowledge. We are also told that adult children living in the United States set up accounts for elderly parents to help them in case of financial emergency. In most of these instances, the reason for the offshore account was usually not an intentional attempt to hide assets. We also represent clients that have intentionally kept funds offshore without paying a tax on the gains, who now are interested in bringing the funds back to the United States to clean up the situation before getting caught by the IRS. We hope this book is helpful and gives you the insight you hope to find.
Serious problems can arise for a U.S. person if the proper forms are not correctly completed under the current U.S. Bank Secrecy and Tax Laws. Furthermore, problems can arise if all worldwide income earned is not correctly reported on a U.S. tax return. Severe criminal and civil penalties can be asserted against any U.S. person who “willfully” fails to disclose foreign accounts and who “willfully” fails to include foreign income earned on one’s tax return. Large civil and criminal penalties exist for violation of these laws. These penalties can serve to invoke great fear in U.S. persons who have Offshore Foreign accounts and who have in the past not been compliant with the laws and the filing requirements; whether the reason for non-compliance is ignorance of the law or a deliberate choice to hide assets.
Recently, headlines have been made in national news regarding the U.S. government’s ramped up efforts to find U.S. persons “hiding” money overseas, and to punish not only the U.S. persons “hiding” the money, but to further penalize any person, entity and/or government that helped to facilitate this illegal act. United Bank of Switzerland (UBS) and HSBC Bank are just two of the larger financial institutions that have already been embroiled in heated legal battles with the U.S. government.
If you are reading this book, odds are you are in some way “connected” to a foreign account. You may have just received a letter from a foreign financial institution stating that the U.S. government requires the disclosure of certain personal information. Or you may have recently received a letter from a foreign financial institution stating that they do not feel comfortable “holding” assets of U.S. persons and request that you move your funds. Even more serious, you may have already received a notice from the IRS that you are under investigation for your failure to file required forms, or to report foreign income earned. In any event, now more than ever is the time to come forward to the U.S. government and voluntarily disclose your errors.
If you have an Offshore Foreign Account and you were recently made aware of the reporting requirements for Offshore Foreign Accounts and the United States (U.S.) rules regarding the taxation of foreign earned income, you probably realize that these rules and regulations are incredibly complex. Our goal in writing this book is to help simplify these laws for potential clients and others interested in understanding the law, and the serious consequences associated with having undisclosed foreign accounts and unreported foreign income. We hope to provide some insight as to how to get back on track with the IRS, and how to come back into compliance while at the same time, being assessed the least amount of penalties.
The Bank Secrecy Act
In 1970, Congress passed the Bank Secrecy Act (BSA). This was one of the U.S. government’s first laws instituted to fight money laundering in the United States. The BSA requires businesses to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters. These documents, which are required to be filed by businesses under the BSA, are consistently relied upon by law enforcement agencies, both domestic and international to identify, detect and deter money laundering, whether it is in furtherance of a criminal enterprise, terrorism, tax evasion or other unlawful activity.
The BSA gives the Department of Treasury authority to establish record keeping and filing requirements for United States persons with financial interests in/ signature authority/authority over financial accounts maintained with financial institutions in foreign countries. This provision of the law requires that a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) be filed if the combined balances of such foreign accounts exceed $10,000 at any time during the year.
- Investigating possible civil violations.
- Assessing and collecting civil penalties; and
- Issuing administrative rulings.
- Foreign Account Tax Compliance Act (FATCA)
Foreign Account Tax Compliance Act (FATCA)
If you think you can keep you foreign accounts hidden from the U.S. government, you must take into account the Foreign Account Tax Compliance Act.
The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts, and certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return. This form must be filed with any 2012 tax return and tax returns going forward.
In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
Many foreign countries have entered into multi-lateral and bi-lateral agreements with the United States, and more are coming on board every day. These agreements put the pieces in place for countries to easily comply with FATCA and the U.S. bank account disclosure rules. Those foreign financial institutions that do not want to comply with FATCA are beginning to turn away U.S. “customers” and demand that they move their money.
The existence of whistleblowers must be taken into account as well. Employees of foreign financial institutions are now persuaded by the U.S. government to turn in U.S. citizens. Once again, never assume your foreign accounts will be kept secret.
The anti-money laundering provisions of the Patriot Act affect everyone who opens a bank account. The Patriot Act was enacted in response to the Sept. 11 attacks, and covers many areas of anti-terrorism. Financial institutions are affected, in part, because the terrorists seemingly had no problem opening bank accounts in the U.S. with false Social Security numbers.
Banks are now being held more accountable for verifying the identity of any person seeking to open an account. The institutions must maintain detailed records of the information used to verify an identity. U.S. banks are further required to check your name against a list of known or suspected terrorists, or terrorist organizations provided by the government. If the institution deems it necessary, more intrusive questions may be asked. Under the Patriot Act, a banker has every right to ask you the nature of your business or occupation, the name and address of your employer, questions about your wealth and the source of your income, and the source of the money you’re using to open the account.
Although the Patriot Act applies to U.S. banks, the writing is on the wall. The U.S. government is ramping up efforts, within and outside of the U.S, requiring absolute transparency on the part of any bank or other financial institution that has U.S. persons as its customers. To achieve this goal, the U.S. government has an arsenal of weapons at its disposal, in the Bank Secrecy Act, FATCA, and the Patriot Act.
Typically, an attorney is the best suited to help analyze the specific facts of each taxpayer’s case. Existing statutory, regulatory, and case law must be taken into account. Complex legal issues such as “willful intent” and “reasonable cause” should not be left up to an accountant to analyze. Further, no “accountant/client Privilege” exists, whereas an attorney/client privilege does. Your accountant can be questioned, deposed, and called to testify against you if the government so desires. Any failure to file FBAR case and/or any potential tax evasion case can have criminal implications; and therefore an attorney, not an accountant, must be consulted.
Further, from our experience handling these types of cases, in situations where taxpayers have retained accountants in the past to advise them as to their tax filing requirements, it is usually the taxpayer’s accountant’s lack of knowledge regarding the intricacies and complexities of the reporting requirements for Foreign Financial Accounts/Holdings and foreign earned income, that led to the failure to report in the first place.
When choosing an attorney, an important consideration to take into account is that not all attorneys are created equal. An attorney experienced and knowledgeable in the field of international tax and banking laws, along with being experienced in dealing with the IRS for civil and criminal matters, is the only type of attorney that has the unique set of skills required in dealing with these complex and serious cases.
Many U.S. persons are unaware that as a U.S. citizen or resident alien, whether living in the U.S. or abroad, you are taxed on your worldwide income, not just income earned in the U.S. Under the existing law, if you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents.
Additionally, if you are a U.S. citizen or resident alien, the rules for filing income, estate, gift tax returns and for paying estimated tax are generally the same whether you are living in the U.S. or abroad2.
It is a fact that many United States citizens and resident aliens receive income from foreign sources. It is also a fact that many U.S. citizens and resident aliens with assets and financial accounts in foreign countries are not correctly reporting the existence of these accounts and/or correctly preparing and filing their U.S. tax returns, in regard to foreign earned income and foreign-held assets.
Recent published reports discuss the overwhelming interest the Internal Revenue Service (IRS) has in taxpayers with accounts in Switzerland, India, Israel and, Liechtenstein. The interest of the IRS, however, extends well beyond taxpayers with accounts in these countries to taxpayers with accounts anywhere in the world.
The U.S. government, realizing that a large source of revenue is not being captured, due to the failure of U.S. citizens or residents to report their foreign income earned to the U.S. government, and to pay the appropriate amount of tax to the U.S. government, has within the last several years made it an overriding mission to find those “hiding” assets offshore and “evading” paying tax.
The IRS is not stopping with individual Taxpayers. The Foreign Account Tax Compliance Act (FATCA), taking effect in 2014, grants the IRS the power to dictate to any Foreign Financial Institutions that desires to “do business with the U.S.,” the requirement that all U.S. citizens or resident aliens with accounts held in these institutions must be reported to the U.S. by the Foreign Financial Institution, otherwise the Foreign Financial Institution will suffer a harsh 30% withholding penalty.
Further, under the guise of combating terrorism, the U.S. government has broadened powers under the Patriot Act to subpoena bank records and issue John Doe summonses to foreign banks.
In light of the above Acts, now more than ever is the time to voluntarily come forward to the U.S. government, before they come to you and disclose any reporting/filing errors you may have made in the past regards to foreign financial assets/holdings.
If you have foreign financial accounts worth, in total, more than $10,000.00 in any given year, their existence MUST be reported to the U.S. government under the Bank Secrecy Act. Furthermore, if you are earning any income from foreign financial accounts or other foreign assets, you MUST report that income on a U.S. tax return, independent of whether or not tax was paid in a foreign country. Now is not the time to think you can “hide” your money from the U.S. government.
Are you Committing a Crime?
Doug Shulman, the former IRS Commissioner has over the years repeatedly stated that the IRS is looking for people “hiding” money offshore and “evading” paying tax. Legally, “hiding” and “evading” both require a level of intent. The mere fact that a taxpayer did not report the existence of an offshore account or did not include offshore income earned on a U.S. tax return, does not mean they are committing tax evasion. In order to prove tax evasion exists, the government must prove that a taxpayer “willfully” chose to violate the law.
In Cheek v. United States the U.S. Supreme Court sets forth the overriding standard for establishing willfulness:
Willfulness, as construed by our prior decisions in criminal tax cases, requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty
Further, unlike most criminal offenses, ignorance or a good faith misunderstanding of the law constitutes a defense to a criminal tax offense. According to the holding in U.S. v. Abboud, “a defendant may attempt to establish a good-faith misunderstanding of the law or a good faith belief that he did not violate the law to negate willfulness, even if his belief or misunderstanding is objectively unreasonable”.
Due to the fact that the government’s burden is very high when it comes to proving “willful” conduct, which could result in jail time, taxpayers should not be intimidated by the U.S. government based on a fear of being criminally prosecuted for their inadvertent errors or omissions while entering a Formal Disclosure Program. However, despite the fact that proving “willfulness” or tax evasion may be difficult, and jail time may not be a concern, there are numerous other civil penalties, including but not limited to a Negligence Penalty and/or a non-willful penalty, that the U.S. government can assess against a taxpayer for having undisclosed foreign accounts and/or unreported foreign income. Disclosure to the government prior to the commencement of a formal investigation is essential to getting the best result for a taxpayer. Due to FATCA, the Patriot Act, and the U.S. government’s overwhelming pursuit of finding “hidden” foreign assets, now is the time to disclose your errors and come back into compliance with the U.S. government.
Consequences for Evading Taxes on Foreign Source Income
If the government thinks they can prove that your failure to file an FBAR and/ or to report the existence of an Offshore Account on your U.S. tax return, and/ or to include foreign income earned on your U.S. tax return was willful, the consequences are dire. These consequences can include not only payment of the additional back taxes owed, but also substantial tax related and failure to file FBAR penalties, along with interest, fines and even imprisonment.
Reporting Foreign Financial Accounts
Many U.S. citizens are lured into placing their money in foreign bank accounts based on the illusion that their accounts will be kept private. In the current political financial climate, nothing could be further from the truth. As a U.S. citizen or resident, in addition to reporting your worldwide income, you must also report on Schedule B of your U.S. tax return, whether you have any foreign bank or investment accounts. The Bank Secrecy Act further requires you to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if:
- You have a financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and
- The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
- If you are investing in a foreign country, with the intent to “hide” money and “evade” paying tax to the U.S. government, you are committing a crime. Furthermore, if you are “willfully blind” to the requirements to report foreign financial accounts to the U.S. government and/or to report foreign income earned on your U.S. tax return, you could also be held criminally liable or be held negligent. The most important thing to understand at this stage of the game is that even if your reasons for opening/maintaining foreign accounts/ assets are benign, the U.S. government is ramping up its efforts to find the accounts in order to obtain billions of dollars in non-captured tax revenue.
Purpose of the FBAR
The FBAR rules were established in order for the U.S. government to collect relevant and much-needed information pertaining to where U.S. citizens and residents money is held. The U.S. government’s reasons behind acquiring this information was twofold; (1) the U.S. government believed this information could potentially lead to successful prosecution and/or examinations in regards to criminal, tax, and other regulatory matters, and (2) the U.S. government believed that collecting this information would aid in intelligence gathering and/or counterintelligence activities including, having the ability to track funds overseas to protect against international terrorism.
The FBAR reports filed as a result of this regulation provide leads to IRS examiners and Department of Justice attorneys. These “leads” can facilitate the identification and tracking of illicit funds or unreported income, as well as providing additional prosecutorial tools to combat money laundering and other crimes.
Who Must File the FBAR?
A United States person must file an FBAR report if that person has financial interest in, signature authority or other authority over any financial account (s) in a foreign country, and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year. The account value is the largest amount of currency and/or monetary instruments that appear on any quarterly or more frequently issued account statement for the applicable year. If a periodic account statement is not issued, the maximum account value is the largest amount of currency and/or monetary instruments in the account at any time during the year. If the aggregate value of accounts exceeds $10,000 at any time during the calendar year an FBAR must be filed.
DEFINITION OF A UNITED STATES PERSON
- A “United States person” is:
- A citizen or resident of the United States.
- A domestic partnership.
- A domestic corporation.
- A domestic trust or estate.
DEFINITION OF FOREIGN FINANCIAL ACCOUNTS
Foreign financial accounts include the following types of accounts:
- Bank accounts such as savings accounts, checking accounts, and time deposits.
- Security accounts such as mutual funds, brokerage accounts, and securities derivatives or other financial instruments accounts.
- Accounts where the assets are held in a commingled fund that is a mutual fund. See IRS Notice 2010-23
- Any other account(s) maintained in a foreign financial institution or with a person doing business as a financial institution.
And are located outside the following:
- United States
- Northern Mariana Islands
- District of Columbia
- American Samoa
- Puerto Rico
- U.S. Virgin Islands
- Trust Territories of the Pacific Islands
DEFINITION OF FINANCIAL INTEREST
Financial interests include accounts for which the U.S. person is the owner of record or has legal title, whether the account is maintained on his or her own benefit or for the benefit of others including non-United States persons.
Financial interests also include accounts where the owner of record or holder of legal title is a person acting as an agent, nominee, or in some other capacity on behalf of a U.S. person.
John (a U.S. citizen living in Mexico) granted his brother, Paul (a U.S. citizen), Power of Attorney to access his Mexican bank accounts. Paul is the owner of record.
John has a financial interest in the account. Paul is acting only as an attorney on behalf of John. Paul also has a financial interest in the account, since he is the owner of record. Both John and Paul must file an FBAR.
Given the information in the above example, if Paul is a Mexican citizen, must he file the FBAR?
No, Paul is not considered to be a U.S. person.
Financial interest in an account also includes a corporation in which a U.S. person directly or indirectly owns more than 50 percent of the total value of the shares of stock.
A Florida corporation that owns 100% of a foreign company that has foreign financial accounts, has to file an FBAR because the corporation is a U.S. person and the owner of record or holder of legal title is a corporation that directly owns more than 50% of the total value of the shares of stock.
A U.S. person who owns 75% of the Florida corporation in the previous example has to file an FBAR because he indirectly owns more than 50% of the total value of shares of stock of the foreign corporation.
Financial interest also includes an account where the owner of record or holder of legal title is:
- A partnership in which the U.S. person owns interest in more than 50% of the profits; or
- A trust in which the U.S. person either has a present beneficial interest in more than 50% of the assets, or receives more than 50% of the current income.
DEFINITION OF SIGNATURE AUTHORITY
A U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank, or the other person with whom the account is maintained.
DEFINITION OF OTHER ACCOUNT AUTHORITY
A person with other authority over an account is one who can exercise power that is comparable to signature authority over an account by direct communication, either orally or by some other means to the bank or the other person with whom the account is maintained,.
A person who has the power to direct how an account is invested, but cannot make disbursements or deposits to the account does not have to file an FBAR because the person has no power of disposition.
REPORTING FOR JOINT ACCOUNTS
If two persons jointly maintain an account, or if several persons each own a partial interest in an account, then each U.S. person has a financial interest in that account and each person must file an FBAR.
A spouse having a joint financial interest in an account with the filing spouse, should be included as a joint account owner in Part III of the FBAR. The filer should write (spouse) on line 26 after the last name of the joint spousal owner. If the filer’s spouse is required to report only jointly owned financial accounts that are reported on the filer’s FBAR, the filer’s spouse need not file a separate FBAR but must also sign the filer spouse’s FBAR to fulfill his or her reporting obligation. If the filer’s spouse is required to file an FBAR for any account that is not jointly owned with the filer, the filer’s spouse must file a separate FBAR for all of the accounts, including those owned jointly with the other spouse.
FBAR records should be kept for five years from the due date of the report which is June 30 of the following calendar year. The records should contain the following:
- Name maintained on each account.
- Number or other designation of the account.
- Name and address of the foreign bank or other person with whom the account is maintained.
- Type of account.
- Maximum value of each account during the reporting period.
The following types of accounts and persons are exceptions from the FBAR filing requirement.
Accounts held in a military banking facility operated by a United States financial institution designated by the United States Government to serve U.S. Government installations located abroad.
Officers or employees of a bank under the supervision of the Controller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation are exempt from filing the FBAR, if that officer or employee has NO personal financial interest in the account.
Officers or employees of a domestic corporation whose equity securities are listed on national securities exchanges, or that have assets exceeding $10 million and 500 or more shareholders of record, need not file an FBAR concerning the other signature authority over a foreign financial account of the corporation, if:
- the officer or employee has NO personal financial interest in the account, and
- has been advised in writing by the chief financial officer of the corporation, that the corporation has filed a current report which includes that account.
The Penalties - What Could Happen If I Do Not File the FBAR?
Now that you are familiar with the requirements that the Bank Secrecy Act imposes, the following chart highlights the civil and criminal penalties that may be asserted for not complying with the FBAR reporting and record keeping requirements.
It is incredibly important to realize that you do have options. The facts of circumstance of each case differ. As was stated earlier, a taxpayer should not feel “compelled” to enter the Formal Offshore Voluntary Programs the IRS has “opened”, for fear of suffering harsh civil penalties or the threat of going to prison. In order for a taxpayer to make an informed decision as to which course is best to pursue, an assessment must be made prior to any decision regarding entering a Formal Disclosure Program, as to the taxpayer’s level of “willfulness” in regards to the filing errors and the potential presence of “reasonable cause” arguments.
On November 20, 2018, the Criminal Investigation Division issued a Memorandum updating their Voluntary Disclosure Practice. The memorandum addresses the process for all voluntary disclosures (domestic and offshore) following the closing of the Offshore Voluntary Disclosure Program (2014 OVDP) on September 28, 2018.
Background and Overview of Updated Procedures
The 2014 OVDP began as a modified version of the OVDP launched in 2012, which followed voluntary disclosure programs offered in 2011 and 2009. These programs were designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. They provided taxpayers with such exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations. Taxpayers with unfiled returns or unreported income who had no exposure to criminal liability or substantial civil penalties due to willful noncompliance could come into compliance using the Streamlined Filing Compliance Procedures (SFCP), the delinquent FBAR submission procedures, or the delinquent international information return submission procedures. Although they could be discontinued at any time, these other programs are still available.
What is the Voluntary Disclosure Practice of the IRS?
Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution. See I.R.M. 188.8.131.52. The memorandum issued on November 20, 2018 updates that voluntary disclosure practice. Taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the procedures mentioned above or by filing an amended or past due tax return. When these returns are examined, examiners will follow existing law and guidance governing audits of the issues.
Procedures in the IRS’ memo are effective for all voluntary disclosures received after the closing of the 2014 OVDP on September 28, 2018. All offshore voluntary disclosures conforming to the requirements of “Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers” FAQ 3 received or postmarked by September 28, 2018 will be handled under the procedures of the 2014 OVDP. For all other voluntary disclosures (non-offshore) received on or before September 28, 2018, the Service has the discretion to apply the procedures outlined in this memorandum. The objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.
Is Penalty Mitigation possible under the new Voluntary Disclosure Procedures?
Yes. Depending on the facts, a timely voluntary disclosure may mitigate exposure to civil penalties. Civil penalty mitigation occurs by focusing on a specific disclosure period and the application of examiner discretion based on all relevant facts and circumstances including prompt and full cooperation (see IRM 184.108.40.206.4) during the civil examination of a voluntary disclosure. Managers reviewing these cases must ensure that penalties are applied consistently, fully developed, and documented in all cases. It should be noted, however, that the terms outlined in the IRS memorandum are only applicable to taxpayers that make timely voluntary disclosures and who fully cooperate with the Service.
Pre-Clearance is Required by the IRS’ Criminal Investigation Division
Similar to the OVDP, IRS Criminal Investigation (CI) will screen all voluntary disclosure requests whether domestic, offshore, or other to determine if a taxpayer is eligible to make a voluntary disclosure. To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. IRM 220.127.116.11 will continue to serve as the basis for determining taxpayer eligibility. Specifically, Taxpayers must request preclearance from CI via fax or mail.
For all cases where CI grants preclearance, taxpayers must then promptly submit to CI all required voluntary disclosure documents using a forthcoming revision of Form 14457. This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance. Once CI has received and preliminarily accepted the taxpayer’s voluntary disclosure, CI will notify the taxpayer of preliminary acceptance by letter and simultaneously forward the voluntary disclosure letter and attachments to the Large Business and International (LB&I) Austin unit for case preparation before examination. CI will not process tax returns or payments.
Once the LB&I Austin unit receives information from CI, LB&I will route the case as appropriate to Revenue Agents that routinely handle this cases. The IRS will not require taxpayers to provide additional documents to the LB&I Austin unit. If a taxpayer or representative wishes to make a payment prior to case assignment with an examiner, payments may be remitted to the LB&I Austin unit. The LB&I Austin unit will establish the most recent tax year covered by the voluntary disclosure for examination. Then, the LB&I Austin unit will forward cases for case building and field assignment to the appropriate Business Operating Division and Exam function for civil examination. Civil examiners receiving the disclosure will establish any additional controls necessary on IRS systems.
All voluntary disclosures handled by examination will follow standard examination procedures. Examiners must develop cases, use appropriate information gathering tools, and determine proper tax liabilities and applicable penalties. Under the voluntary disclosure practice, taxpayers are required to promptly and fully cooperate during civil examinations. In general, the Service expects that voluntary disclosures will be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. In the event a taxpayer fails to cooperate with the civil examination, the examiner may request that CI revoke preliminary acceptance. See I.R.M. 18.104.22.168.4 (discussing cooperation).
Civil Resolution Framework
For all voluntary disclosures received after September 28, 2018, the Service will apply the civil resolution framework outlined below. At the Service’s discretion, this civil resolution framework may extend to non-offshore voluntary disclosures that have not been resolved but were received on or before September 28, 2018.
Examiners are authorized to resolve tax and tax related noncompliance of taxpayers who make voluntary disclosures in the following manner:
a) In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management.
In cases where non-compliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.
b) Taxpayers must submit all required returns and reports for the disclosure period.
c) Examiners will determine applicable taxes,interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
d) The Service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases.
e) All impacted IRM sections will be updated within two years from the date of the IRS November 20, 2018 memorandum.
With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).
Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.
Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.
Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
Taxpayers retain the right to request an appeal with the Office of Appeals.
On June 18, 2014 Commissioner of the IRS John Koskinen announced that the IRS would be implementing a new streamlined filing procedure for taxpayers who have accounts and assets offshore and who are residing in the United States or reside outside of the United States. The old streamlined procedure was limited to U.S. persons who:
- Have not resided in the U.S. since January 9, 2009;
- Have not filed a tax return for 2009 or later;
- Did not owe more than $1,500 in U.S. tax on any of the returns submitted to the program; and
- Go through a risk assessment process.
The new streamlined procedures cover a much broader group of U.S. taxpayers who believe that their conduct was non-willful. All funds must have a legal source of income, no civil examination must have been opened up against the individual and no criminal investigation must have been opened up against the individual in order for a taxpayer to enter this program.
INABILITY TO RAISE “REASONABLE CAUSE” ARGUMENTS
“Reasonable Cause” mitigates a taxpayer’s responsibility regarding a filing/ reporting error or failure penalties. Examples include a taxpayer’s death or serious illness, or reasonable reliance on a trained tax professional. This might could include other circumstances as well discussed below. As stated earlier, many of our clients have come to us after their accountants have made mistakes on their return or provided inaccurate advice regarding offshore accounts. If you hired an accountant, a tax preparation company, or even another attorney to advise you and they gave you incorrect advice for which you reasonably relied upon, and it led to your failure to file an FBAR and/or your failure to include offshore income earned on your U.S. tax return, you may have a legitimate reasonable cause argument.
Under I.R.M. 22.214.171.124.4.(2) if a taxpayer’s failure to file a FBAR was non-willful, the balance in the account has subsequently been properly reported on an FBAR and reasonable cause exists, no penalty should be imposed. Again, this fact situation is outside of the scope of the Streamlined Program. Under the Streamlined a taxpayer is not given the opportunity to argue reasonable cause. The 5% penalty is the penalty and is imposed irrelevant of the facts and circumstances of your case. If you reasonably relied on the advice of a trained tax professional and that reliance led to your error/omission, the program may not be the best option for you.
Interestingly, there are many other reasonable cause arguments exist that may apply to your case. According to IRS regulations, reasonable cause exists if you exercised ordinary business care and prudence and were nevertheless unable to file the return or pay the correct amount of tax within the prescribed time. In addition to reliance on a trained tax professional, the IRS has also accepted the following as evidence of reasonable cause:
- Destruction of your records;
- Incarceration or other significant disruption to your life;
- Improper advice from tax professional; and/or
- Erroneous written advice from the IRS personnel
An attorney experienced with these types of issues should be consulted in order to assess all arguments that could potentially be made outside of the Streamlined before a taxpayer chooses to enter the the Program in which these arguments cannot be raised.
FORM OVER SUBSTANCE
As the above two points serve to elucidate, the 2014 Streamlined Program is form over substance. A taxpayer will go through a certification process rather than an audit examination. The program treats all taxpayers that enter equally and independent of one’s level of non-willfulness, mitigating circumstances or reasonable cause arguments. The required forms must be filled out, then the penalty is calculated and is assessed. Absolutely no arguments for a lower penalty will be entertained. Absolutely no exceptions are made.
ABSOLUTELY NO APPEAL RIGHTS
Due to the fact that the 2014 Streamlined Disclosure Program is not a “law”, it is a “voluntary” program instituted by a government agency in which you are not forced to enter, due process does not need to be followed and appeal rights are not granted. If you enter the program and disagree with any of the examiners changes, requests, or assertions, your only option may be to opt out. Because of the seriousness of the issues, it is imperative that a taxpayer makes a fully informed decision and completely understands the limitations imposed by the program before they enter. Once a taxpayer has entered, if they opt out, it is likely that the IRS will pursue some level of examination against the taxpayer. Even though a taxpayer can avail themselves of normal IRS procedures and appeal rights after opting out, the decision to enter the program must be taken seriously because once in, even if you choose to opt out, you are now on the IRS radar and will probably undergo an audit.
Streamlined procedure for U.S. taxpayers residing in the United States
If an individual is living in the United States and has failed to meet their overseas reporting requirements they may qualify for the domestic offshore streamlined procedure if:
They fail to meet the applicable non-residency requirement (see below). Note: for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement;
Have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;
Have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset; and
Such failures resulted from non-willful conduct.
If a taxpayer is eligible for the streamlined procedure they must submit:
For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621);
Include at the top of the first page of each amended tax return “Streamlined Domestic Offshore” written in red;
Complete and sign a statement on the Certification by U.S. Person Residing in the U.S. certifying: (1) that they are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed; (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate;
Attach copies of your certification to each tax return and informational statement;
For each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1);
Pay a 5% miscellaneous offshore penalty; and
Pay the full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.
The penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. In other words, the Offshore penalty applies in the following three scenarios:
The account should have been reported, but was not reported on the FBAR;
The asset should have been reported, but was not reported on the 8938; and/or
The asset was properly reported, but gross income was not reported on a tax return.
Calculating the offshore penalty is done by taking the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years. Then this amount is multiplied by 5%. A taxpayer who is eligible for this program will only pay the 5% offshore penalty and not be subject to accuracy-related penalties, information return penalties, or FBAR penalties.
Streamlined procedure for U.S. Taxpayers Residing Outside of the United States
If an individual has a tax filing obligation and they are living abroad they are eligible for the streamlined filing procedure if the following is true:
Meet the applicable non-residency requirement;
Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law and may have failed to file an FBAR; and
Such failure resulted from non-willful conduct.
The non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (Green Card holders) occurs if in any one or more of the most recent three years for which the U.S. tax return due date (or properly extended due date) has passed, the individual did not have a U.S. Abode. “Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. It does not mean a taxpayer’s principal place of business. The location of your abode often will depend on where you maintain your economic, family, and personal ties. Neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.
Example 1: Mr. W was born in the United States but moved to Germany with his parents when he was five years old, lived there ever since, and does not have a U.S. abode. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.
Example 2: Assume the same facts as Example 1, except that Mr. W moved to the United States and acquired a U.S. abode in 2012. The most recent 3 years for which Mr. W’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. Mr. W meets the non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents.
The non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents is satisfied in in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test under IRC section 7701(b)(3). The test is met if you were physically present in the United States for at least:
31 days during 2013, and
183 days during the 3-year period that includes 2013, 2012, and 2011 counting:
All the days you were present in 2013 and
1/3 of the days you were present in 2012, and
1/6 of the days you were present in 2011
Example 3: Ms. X is not a U.S. citizen or lawful permanent resident, was born in France, and resided in France until May 1, 2012, when her employer transferred her to the United States. Ms. X was physically present in the U.S. for more than 183 days in both 2012 and 2013. The most recent 3 years for which Ms. X’s U.S. tax return due date (or properly applied for extended due date) has passed are 2013, 2012, and 2011. While Ms. X met the substantial presence test for 2012 and 2013, she did not meet the substantial presence test for 2011. Ms. X meets the non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents.
Taxpayers eligible for the Streamlined procedure should submit:
For each of the most recent 3 years for which the U.S. tax return due date (or properly applies for extended due date) has passed, file delinquent or amended tax returns (along with previously filed returns), together with all required informational returns (e.g. forms 3520, 5471, and 8938);
Include at the top of the first page of each delinquent or amended tax return and the top of any informational return “Streamlined Foreign Offshore” written in red to indicate that the returns are to be processed through the streamlined process;
For each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114 previously filed Form TD F 90-22.1), and attach electronically filed copies with submission;
The full amount of tax and interest due in connection with these filings;
Complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (1) eligibility for the Streamlined Foreign Offshore Procedures is met; (2) that all required FBARs have now been filed; and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct;
Attach copies of the certification to each tax return and informational statement;
A taxpayer who is eligible for Streamlined Foreign Offshore procedures and who complies with all of its requirements will not be subject to failure-to-file and failure-to pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.
Advantages to the streamlined procedures
In lieu of the normal civil penalties that you may have to pay, if eligible, you could pay a 5% penalty or no penalty at all. This is very favorable in the eyes of many taxpayers. While the Streamlined procedure does not guarantee amnesty from criminal prosecution, under the governing principles of the Internal Revenue Manual if all of the appropriate procedures of a voluntary disclosure being truthful, timely, and complete criminal prosecution may not be recommended. I.R.M. 126.96.36.199 states:
“It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended...”;
A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.
Another advantage to the Streamlined procedure is the fact that like the prior Offshore Voluntary Disclosure Program (OVDP) an individual with Canadian RRSP or RRIF accounts can follow the same procedures outlined in the to seek relief to timely elect deferral of income.
Disadvantages to the streamlined procedures
The IRS has indicated that they will be utilizing information that they have received from other sources to decide whether or not a taxpayer is willful or not. The certification form states that: “I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.” Non-willful is defined within the streamlined program as conduct that is due to negligence, inadvertence, mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. The definition has been left ambiguous and open to interpretation. There is no indication whether willful blindness or reckless disregard arguments will be made when looking at an individual’s certification. Further, if a bad assessment of whether or not an individual was willful would not only subject them to civil or criminal penalties, but also the statement of non-willfulness under penalties of perjury is a separate crime. If a taxpayer incorrectly certifies that they are non-willful and they are found willful they are also then precluded from going into any other government amnesty programs.
Unlike the prior OVDP Initiative where you are in constant contact with the IRS and will be contacted if you did anything incorrectly in regards to your submission, if you accidentally fail to submit a certification statement or fill out the statement incorrectly your documentation will be processed normally. The streamlined process specifically states: “Failure to submit this [certification] statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of favorable terms of these procedures.” If this statement is filled in incorrectly and you should have received streamlined treatment then you have opened yourself up to more civil penalties and a possibility of criminal investigation. This is why it is very important that if you decide to utilize the streamlined procedure that you choose a legal team who is aware of the requirements of the streamlined procedure and will see that you adequately comply with all of its requirements.
The gap is still left open for individuals who would rather pay the 5% miscellaneous offshore penalty and do not qualify for either of these streamlined programs. For example if you were living in the United States and were required to file a tax return in any of the prior 3 years and failed to do so then you are technically ineligible for the domestic streamlined process. This is particularly problematic for individuals who placed foreign earned income into an account while living overseas, came to the United States, were unaware of their worldwide reporting requirement, did not generate enough U.S. source income to be required to file a tax return, and were required to file tax returns based on their worldwide income.
Transitional treatment under the OVDP to use streamlined penalty if in the OVDP prior to July 1, 2014
If a taxpayer submitted their Offshore voluntary disclosure letter to the IRS before July 1, 2014 and have not received their 906 closing document or if they have opted out of the program and their letter initiating an examination and enclosing a notice 609, then they may be entitled to favorable treatment under a modified streamlined and OVDP approach. Transitional treatment under the OVDP will allow taxpayers currently participating in OVDP who meet the eligibility requirements for the expanded Streamlined Filing Compliance Procedures announced on June 18, 2014, an opportunity to remain in the OVDP while taking advantage of the favorable penalty structure of the expanded streamlined procedures.
A taxpayer who, as of July 1, 2014, has completed the OVDP certification process where a Form 906 closing Agreement has been fully executed by the IRS will not be considered currently participating in an OVDP and thus will not be eligible for transitional treatment.
A taxpayer whose case has been removed from the OVDP by the IRS is no longer participating in the OVDP and thus is not eligible for transitional treatment. Taxpayers are not required to Opt-out of the program to take advantage of the streamlined procedure if they were in prior to July 1, 2014. However, transitional treatment is not automatic and taxpayers must take the following steps to qualify:
If not already submitted, submit all submission documents required under the voluntary disclosure program in which the taxpayer is currently participating;
A written statement in the appropriate certification form that would be required under the Streamlined Filing Compliance Procedures signed under penalty of perjury certifying the taxpayer’s non-willfulness with respect to all foreign activities/assets, specifically describing the reasons for the failure to report all income, pay all tax, and submit all required information returns, including FBARs, and, if the taxpayer relied on a professional advisor, includ- ing the name, address, and telephone number of the advisor and a summary of the advice; and Full payment of tax, interest, and any accuracy-related, failure-to-file, and/or failure-to-pay penalties that would be due under OVDP, if not already made.
If a taxpayer is currently in the process of working with an examiner then they should submit this documentation to them. If a taxpayer is not working with an examiner then all of this documentation should be submitted to the IRS Austin Campus. Each request for transitional review will be reviewed to determine if the taxpayer is eligible for transitional treatment, the taxpayer’s certification of non-willfulness is complete, and the available information is consistent with the taxpayer’s certification. The examiner assigned to the taxpayer’s case will make the initial determination of whether or not the taxpayer is able to qualify and if the taxpayer was non-willful. The approval will then be passed on to the examiner’s manager and they must concur with the examiner’s decision in order for the taxpayer to qualify for streamlined treatment.
Some cases may also be assigned off to a central review committee after the examiner’s determination is made. For cases assigned off to a central review committee, the examiner must then document the facts and rationale for determination, document the Taxpayer’s statement of facts, and prepare a summary of the case. The central review committee will then review the documentation and the rationale for the decision and whether or not the examiner’s decision is consistent with decisions made in similar cases. The central review committee will then make its determination as to whether they concur, do not concur, or if they request additional actions be made by the examiner
If the taxpayer’s case is approved then the process becomes a modified OVDP streamlined approach. They will still be treated as if they were in the OVDP, but if approved for Streamlined Foreign Offshore treatment will not be required to pay a miscellaneous offshore penalty and if approved for Streamlined Domestic Offshore treatment will be required to pay the 5% miscellaneous offshore penalty that governs the streamlined procedure. All other terms of the OVDP remain and all required documentation must be completed
The OVDP disclosure period is the same, the execution of form 906 must be completed, payment of accuracy-related, failure-to-file, and/or failure to pay penalties are required, and Mark to Market PFIC resolution is still available.
Advantages to Transitional Treatment
There are several advantages to receiving transitional treatment. One of them is the fact that 27.5% miscellaneous offshore penalty that would normally have to be paid is either replaced by a 5% miscellaneous offshore penalty or no penalty at all. This is a huge advantage for those taxpayers who are not culpable and came forward prematurely and entered the 2009, 2011, or 2012 program. Another huge advantage is the fact that a taxpayer can still take advantage
of the Mark-to-Market approach to resolving their PFIC issues. This is very favorable in the eyes of taxpayers who would otherwise be severely burdened without such an approach outside of the program. Another huge advantage is the almost guaranteed amnesty that you will receive from criminal prosecution because you are still considered as completing all aspects of the OVDP in addition to the Streamlined aspects.
Disadvantages to Transitional Treatment
Outside of the program, if you qualify for streamlined treatment then you are not subject to accuracy-related, failure-to-file, and/or failure to pay penalties. However, with a modified OVDP streamlined approach you must pay these penalties. This could amount to hefty penalties that a taxpayer would not be subject to outside of the OVDP. Essentially this can be looked at as a punishment for those who were non-willful, but entered the program before the streamlined process was available.
In addition, because your case stays in the OVDP the length of time to complete this process is much longer than if you had opted to do streamlined or a traditional disclosure from the start. In addition, you are almost guaranteed more accounting and legal fees as opposed to the Streamlined or traditional disclosure that is a less involved process. Also, if you wanted to opt out and take advantage of the streamlined approach you are specifically precluded from doing so. Once you have entered the OVDP you may not take advantage of the streamlined process and vice versa. Further, no appeals are given for decisions regarding transitional treatment denial. If you are denied and still believe you were non-willful, you must complete all of the steps of the Program and Opt out at the end.
If you have pre-maturely entered the OVDP, were non-willful, and meet the requirements of one of the streamlined processes, then you should call us for a consultation. We are experts in this field and will be able to help assist you obtain the best result for your situation.
Option 4: Disclose Without Entering a Formal Program
There is a middle ground where a Taxpayer can come forward and disclose their errors/omissions without entering the Formal Program. We have used this approach successfully in the past for our clients when no other viable programs were available.
In the absence of any of the Formal Offshore Disclosure Programs, the IRS has instituted over the last several years, a Voluntary Disclosure process set forth in I.R.M. 188.8.131.52. This “Traditional” Voluntary Disclosure Process is a matter of IRS practice. It does not create any substantive or procedural rights for taxpayers, however it is a practice that for almost a decade now, that the IRS has internally followed.
A timely, complete, and truthful voluntary disclosure under this process does not guarantee immunity from criminal prosecution, however, historically the IRS will not recommend criminal prosecution for voluntary disclosures submitted under this I.R.M. section, as long as the taxpayer is honest and cooperative with the IRS and makes good faith arrangements with the IRS to pay in full the tax, interest, and any penalties determined by the IRS to be applicable.
Under this process, a taxpayer’s disclosure is examined under already existing IRS procedures. Appeal rights are provided and arguments regarding reasonable cause and lack of willfulness can be made, and examiners are not only allowed, but are encouraged to take into account all facts and circumstances when assessing penalties in these types of cases.
If you feel that this is a path you are interested in taking, we encourage you to call us so that we can discuss the specific facts of your case and completely inform you of all options available to you.
As attorneys, we will never advise a client to knowingly violate the law. Many clients often ask, “what if I simply do nothing”. If a taxpayer knows that legally they have to file an FBAR and include foreign income earned on their U.S. tax return and they deliberately, intentionally, and knowingly, choose not to comply with the letter of the law, their behavior is willful and they are committing a crime.
As has been discussed previously, with the Patriot Act, the Bank Secrecy Act, The Swiss-DOJ Program, and now FATCA, the odds of your account being discovered by the U.S. Government are good and now is the time to disclose your errors before you are caught.
Further more recently, the Department of Justice has been targeting bank executives that are not complying with FATCA reporting requirements for their customers. The first bank employee recently was convicted of criminal charges.
Adrian Baron, the former Chief Business Officer and former Chief Executive Officer of Loyal Bank Ltd, an offshore bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines, plead guilty to conspiring to defraud the United States by failing to comply with the Foreign Account Tax Compliance Act (FATCA). Baron was extradited to the United States from Hungary in July 2018.
According to court documents, in June 2017, an undercover agent met with Baron and explained that he was a U.S. citizen involved in stock manipulation schemes and was interested in opening multiple corporate bank accounts at Loyal Bank. The undercover agent informed Baron that he did not want to appear on any of the account opening documents for his bank accounts at Loyal Bank, even though he would be the true owner of the accounts. Baron responded that Loyal Bank could open such accounts and provide debit cards linked to them.
In July 2017, the undercover agent again met with Baron and described how his stock manipulation scheme operated, including the need to circumvent the IRS’s reporting requirements under FATCA. During the meeting, Baron stated that Loyal Bank would not submit a FATCA declaration to regulators unless the paperwork indicated “obvious” U.S. involvement. Subsequently, in July and August 2017, Loyal Bank opened multiple bank accounts for the undercover agent. At no time did Baron or Loyal Bank request or collect FATCA Information from the undercover agent.
Baron’s guilty plea represents the first-ever conviction for failing to comply with FATCA. When sentenced, Baron faces a maximum of five years in prison.
Baron is the second defendant to plead guilty in this case. On July 26, 2018, Arvinsingh Canaye, formerly the General Manager of Beaufort Management Services Ltd. in Mauritius, pleaded guilty to conspiracy to commit money laundering.
Relying on the banker to protect you was once a strategy that many taxpayers have relied upon in the past. This is clearly not an approach we would advise in the future due to increased scrutiny the bankers are under. Would your banker really protect you before protecting themselves? This is not a bet that is worth taking.
About Freeman Tax Law
Freeman Tax Law is a boutique law firm dedicated to providing the highest level of representation to clients involved in criminal and civil tax controversies. The firm has provided representation and counsel to hundreds of clients that have undisclosed foreign bank and other financial accounts over the years.
We help our clients navigate through the decision process in determining how to disclose offshore assets, and represent them before the IRS with the ultimate goal of cleaning up this problem without significant civil penalties or criminal prosecution.
Jeffrey S. Freeman, JD, LL.M.
Since 1994 I have worked to specialize my practice in the area of tax law. Over the years, I have represented thousands of clients with civil and criminal tax controversies, both before the IRS and in the United States Tax Court and Federal District Courts.
I became a tax lawyer because the Internal Revenue Code fascinated me. I have always had a high interest in law and accounting,
and when I discovered that I was able to use my knowledge and training to help clients in resolving complex civil and criminal controversies before the IRS, the area of tax law become even more exciting, and has kept me busy for the past 20 years.
I earned a Bachelor of Arts in Accounting, with honors, from Michigan State University. I then attended law school at Michigan State University School of Law and graduated with my Juris Doctor, Cum Laude. I also obtained a Masters of Laws in Taxation (LL.M.) from Georgetown University School of Law.
For the first decade of my career, I worked and trained in the International Tax Services practice of KPMG, LLP, one of the world’s largest tax and accounting Firms. I was fortunate to have lived and worked throughout the world in many of the KPMG’s offices, including rotations in London, England, the Washington National Tax practice, New York City, Los Angeles, and Detroit offices. This experience has provided me with the opportunity to deliver tax advice to multinational companies and high net worth individuals with respect to their cross border investments, and has also enabled me to develop a deep understanding of U.S. and international tax laws.