FBAR and FATCA Update: Latest Foreign Account Reporting Developments - - PowerPoint PPT Presentation

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FBAR and FATCA Update: Latest Foreign Account Reporting Developments Account Reporting Developments

New and Upcoming IRS Rules, First Form 8938 Filings, Upcoming FATCA Duties and Key Court Decision

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, SEPTEMBER 19, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Matthew D. Lee, Partner, Blank Rome, Philadelphia , , , p Michel Stein, Principal, Hochman Salkin Rettig Toscher & Perez, Beverly Hills, Calif. Randall Andreozzi, Partner, Andreozzi Bluestein Fickess Muhlbauer Weber Brown, Clarence, N.Y . Igor Drabkin, Principal, Holtz Slavett & Drabkin, Beverly Hills, Calif.

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FBAR and FATCA Update: Latest F i A t R ti Foreign Account Reporting Developments Seminar

• Sept. 19, 2012

Michel Stein, Hochman Salkin Rettig Toscher & Perez

stein@ taxlitigator.com

Matthew D. Lee, Blank Rome

lee-m@ blankrome.com g

Igor Drabkin, Holtz Slavett & Drabkin

idrabkin@ hsdtaxlaw.com

Randall Andreozzi, Andreozzi Bluestein Fickess Muhlbauer Weber Brown

rpa@ abfmwb.com

Today’s Program

Lessons Learned From First Form 8938, Revised FBAR Filings

[Mat t hew Lee]

Slide 8 – Slide 25 Applicable Penalties

[Michel S t ein]

Slide 26 – Slide 40 Relevant IRS Regulation And Guidance Developments

[Michel S t ein, Randall Andreozzi, Mat t hew Lee, Igor Drabkin]

Slide 41 – Slide 70 Potential IRS Perspective On How We Got Here

[Randall Andreozzi, Igor Drabkin]

Slide 71 – Slide 73

[Randall Andreozzi, Igor Drabkin]

N i Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation the tax treatment or tax structure or both of any transaction without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

LESSONS LEARNED FROM

Matthew D. Lee, Blank Rome

LESSONS LEARNED FROM FIRST FORM 8938, REVISED FBAR FILINGS

• Sect. 6038D Is Effective Now
• Sect. 6038D Is Effective Now
• Sect. 6038D is a new Internal Revenue Code provision enacted as

part of the Foreign Account Tax Compliance Act (FATCA), requiring annual reporting of foreign assets.

• Form 8938 “Statement of Foreign Financial Assets ” must be

Form 8938, Statement of Foreign Financial Assets, must be attached to the income tax return.

• Temporary regulations issued on Dec. 14, 2011 and effective Dec. 19,

2011 2011

• Individual taxpayers must file Form 8938 starting with their 2011

Form 1040s, if applicable.

• Filing by domestic entities has been deferred temporarily.
• See www.irs.gov/fatca for updates

9

Form 8938 Form 8938

10

Who Is Required To File Form 8938? Who Is Required To File Form 8938?

You must file Form 8938 if: 1. You are a “specified individual,” AND 2 You have an interest in “specified foreign financial assets” required 2. You have an interest in “specified foreign financial assets” required to be reported, AND 3. The aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.

11

Who Is A “Specified Individual”? Who Is A Specified Individual ?

A specified individual is:

• A U.S. citizen
• A permanent resident (green card holder)
• An individual satisfying the “substantial presence” test
• An individual satisfying the substantial presence test
• A non‐resident alien who makes an election to be treated as resident alien,

for purposes of filing a joint income tax return with a U.S. spouse

• A non‐resident alien who is a bona fide resident of a U.S. possession

12

What Is A “S ifi d F i Fi i l A ”? “Specified Foreign Financial Asset”?

A specified foreign financial asset (SFFA) is:

• Any financial account maintained by a foreign financial institution

– Foreign bank accounts Foreign mutual funds – Foreign mutual funds – Foreign hedge funds – Foreign private equity funds – Certain foreign insurance products

13

Form 8938 – Part I Form 8938 Part I

14

What Is A SFFA? (Cont.) What Is A SFFA? (Cont.)

• Other foreign financial assets held for investment that are not in an account

maintained by a U.S. or foreign financial institution, namely: – Stock or securities issued by someone other than a U.S. person – Any interest in a foreign entity Any interest in a foreign entity – Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person Foreign pensions and deferred compensation plans – Foreign pensions and deferred compensation plans – Foreign estates

15

Form 8938 – Part II Form 8938 Part II

16

Form 8938 – Part II (Cont.) Form 8938 Part II (Cont.)

17

Reporting Thresholds: D i T Domestic Taxpayers

• Unmarried taxpayers living in the U.S.: The total value of specified

f i fi i l t i th $50 000 th l t d f th foreign financial assets is more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year. M i d t fili j i t i t t d li i i th

• Married taxpayers filing a joint income tax return and living in the

U.S.: The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the tax year. y g y

• Married taxpayers filing separate income tax returns and living in

the U.S.: The total value of specified foreign financial assets is more $ $ than $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year.

18

Reporting Thresholds: T Li i Ab d Taxpayers Living Abroad

• Taxpayers living abroad. You are a taxpayer living abroad if:

– You are a U.S. citizen whose tax home is in a foreign country, and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year; or – You are a U.S. citizen or resident who during a period of 12 You are a U.S. citizen or resident who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

• A taxpayer living abroad must file if:

f l h h d h l l f – You are filing a return other than a joint return, and the total value of your specified foreign assets is more than $200,000 on the last day

• f the tax year or more than $300,000 at any time during the year;
• r

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

19

IRS Basic Questions And Answers On F 8938 (I d F b A d J 2012) Form 8938 (Issued February And June 2012)

• Available at: ww.irs.gov/Businesses/Corporations/Basic‐Questions‐and‐

Answers‐on‐Form‐8938

• Foreign real estate

– Not reportable on Form 8938 Not reportable on Form 8938 – BUT, if held through foreign entity, the taxpayer’s interest in the foreign entity is SFFA reportable on Form 8938. Note that mortgage on foreign real estate or lease would be – Note that mortgage on foreign real estate or lease would be reportable as SFFA on Form 8938.

20

IRS Basic Questions And Answers O F 8938 (C ) On Form 8938 (Cont.)

• Interest in U.S. mutual fund that owns foreign stocks and securities

– Not reportable on Form 8938

• Interest in foreign social security or similar program

Not reportable on Form 8938 – Not reportable on Form 8938

• Accounts at U.S. branches of foreign banks

– Not reportable on Form 8938

• Accounts at foreign branches of U.S. banks

– Not reportable on Form 8938

21

IRS Basic Questions And Answers O F 8938 (C ) On Form 8938 (Cont.)

• Directly held tangible assets such as art, antiques, jewelry, cars and other

collectibles – Not reportable on Form 8938

• Directly held precious metals (such as gold)

Directly held precious metals (such as gold) – Not reportable on Form 8938 – BUT, gold certificates issued by foreign person are reportable on Form 8938 Form 8938. – BUT, if gold is sold, the sales contract with foreign person is reportable on Form 8938.

• Safe deposit box at foreign bank

– Not reportable on form 8938

22

Valuation Issues Valuation Issues

• Determining FMV of SFFAs

– No requirement to hire certified appraiser or actuary – May rely on periodic account statements if SFFA is held in a foreign account – May rely on periodic account statements if SFFA is held in a foreign account – If SFFA is not held in a foreign account, you may rely upon “information publicly available from reliable financial information sources or from other verifiable sources.”

• Jointly owned SFFAs

– If married filing separately, each owner includes 50% of the asset value when computing total value of his or her SFFAs. When filing Form 8938, each spouse has separate filing

• bligation and is required to report 100% of the jointly held asset.

– If married filing jointly, file one Form 8938 reporting the asset g j y, p g – If joint owners are not married, each includes 100% of the asset value when computing the threshold and reporting the asset on Form 8938.

• Foreign pension or deferred compensation plans

– In general, value is FMV of taxpayer’s beneficial interest on the last day of the year. – If FMV is unknown, use value of cash and/or other property distributed to taxpayer during the year. – If no distributions are received, then the value is zero. If no distributions are received, then the value is zero.

23

Form 8938 Vs. FBAR Form 8938 Vs. FBAR

• Domestic entities

– FBAR required – Form 8938 not required (yet)

• Different reporting thresholds
• Different reporting thresholds
• Determining interest in foreign asset

– FBAR: Financial interest or signature authority – Form 8938: Based upon tax attributes

• Foreign hedge funds and private equity funds

– Not reportable on FBAR Not reportable on FBAR – Reportable on Form 8938

24

Penalties For Non‐Filing Of Form 8938 Penalties For Non Filing Of Form 8938

• Failure to file Form 8938 may result in a $10,000 civil penalty as well as an

additional $10 000 continuation penalty for each 30‐day period after the additional $10,000 continuation penalty for each 30‐day period after the taxpayer is notified by the IRS of the failure to file (not to exceed $50,000).

• Exception, if failure to file is due to reasonable cause and not due to willful

neglect neglect

• The fact that a foreign jurisdiction would impose a civil or criminal penalty

for disclosing the required information is NOT reasonable cause. l l l l

• Criminal penalties may also apply.
• Failure to file Form 8938 or certain assets on Form 8938 may keep the

statute of limitations open for ALL items on a return, until three years after Form 8938 is filed.

25

APPLICABLE PENALTIES

Michel Stein, Hochman Salkin Rettig Toscher & Perez

APPLICABLE PENALTIES

FBAR Civil Penalties (Post 2004) FBAR - Civil Penalties (Post-2004)

• Non-willful - $10,000 per each non-willful failure to file (31

Non willful $10,000 per each non willful failure to file (31 U.S.C. § 5321(a)(5)(B))

• Willful failure to file or retain required records greater of
• Willful failure to file or retain required records – greater of

$100,000 or 50% of the balance in the account (31 U.S.C. § 5321(a)(5)(C))

27

Form 8938 Penalties Form 8938 Penalties

Failure to File Penalty - § 6038D(d)

• If a Form 8938 is not filed by the due date, a $10,000 penalty

may be imposed. If the taxpayer is notified by IRS and fails to correct an additional $10 000/month (up to $50 000) may be correct, an additional $10,000/month (up to $50,000) may be imposed.

• Reasonable cause exception applies – IRC §6038D(g)

28

Form 8938 Penalties

New Component Of Accuracy-Related Penalty: “Undisclosed Foreign Financial Asset Understatement” (§6662(b)(7) and (j))

• 40% penalty
• Applies to portion of understatement attributable to an

pp p undisclosed foreign financial asset

• Applies to disclosures required by §6038D (foreign financial

Applies to disclosures required by §6038D (foreign financial assets)

29

Ob i F 8938 P l i Observations: Form 8938 Penalties

• Gives IRS assessment and collection remedies unavailable for

FBAR penalties (lien and levy available for these Title 26 penalties)

• Could create a bias within the IRS to impose these new

penalties, perhaps in lieu of FBAR penalties

• Imposes lesser burden of proof than willful FBAR penalty
• Creates a duplicate penalty regime for the non-disclosure of

foreign assets

30

Observations: Form 8938 Penalties (Cont.)

• The six-year SOL for omission of income gives the IRS a new

tool in situations in which small amounts of income (more than $5,000) from foreign assets has been omitted.

• Historically, a six-year SOL was reserved for the most egregious

situations (25% omissions) situations (25% omissions).

31

Willf l Willfulness

• Guidance on willfulness
• Guidance on willfulness

― IRM examples of willful (IRM 4.26.16.4.5.3.8) ― Chief Counsel Office Memorandum (CCA 200603026) ― Judicial considerations

• U.S

. v. Williams (4th Cir. 2012)

32

“Willfulness” Defined “Willfulness” Defined

“Willfulness” is shown by the person’s knowledge of the reporting requirements and conscious choice not to comply with the i t requirements. The person needs to know he has an FBAR reporting requirement. p p g q If a person has that knowledge, then the only intent needed to constitute a willful violation of the requirement is a conscious choice to not file the FBAR or to file a false FBAR. (IRM ( 4.26.16.4.5.3)

33

Willi

A Ci il FBAR C

Williams: A Civil FBAR Case

There are very few court cases addressing willfulness in the context of the FBAR reporting requirements. One recent case in which the Fourth Circuit found willfulness is United States v. Williams 2012 2 USTC P50 475 (4th Cir July 20 2012) Williams, 2012-2 USTC P50,475 (4th Cir., July 20, 2012). In the case, the government sought to enforce two FBAR penalties assessed against defendant Williams for his failure to report his interest in two Swiss bank accounts for tax year 2000 report his interest in two Swiss bank accounts for tax year 2000. Following a bench trial, the District Court concluded that the government fell short of meeting its burden in establishing that Williams willfully failed to disclose offshore assets in violation y

• f that statute. On Appeal, the Fourth Circuit reversed and

concluded that the lower court erred in finding that the government failed to prove that Williams was willful for that year

34

year.

34

Willi

F

Williams: Facts

• In 1993, Defendant Williams opened two foreign bank

accounts.

• Between 1993 and 2000, Williams deposited more than $7

etwee 993 a d 000, W ll a s depos ted

• e t a $

million in the account, earning more than $800,000 in income

• n the deposits.
• Williams did not report the income from the account nor his
• Williams did not report the income from the account, nor his

interest in the account.

• In 2000, Swiss authorities froze the account, and the U.S.

government became aware of the assets.

35

Willi

F (C )

Williams: Facts (Cont.)

• In January 2001, Williams completed an accountant’s organizer

regarding whether he had an interest in a foreign account, answering “No.”

• On his 2000 income tax return, Williams checked “No” in

response to Schedule B, Part III, Line 7a, question.

• Williams did not file a FBAR for 2000 by the June 30, 2001

deadline.

• Subsequently, on advice of counsel, Williams fully disclosed the

accounts to an IRS agent in January 2002.

• In June 2003, Williams pled guilty to tax evasion and agreed to

allocate to all the essential elements of the charged crime.

36

Ob i Observations

• The Williams opinion is an unpublished opinion.

― Unpublished opinions are not binding precedent. ― It can be persuasive in its reasoning. p g ― However, it is almost certain to be considered by the government in its review of FBAR cases.

• The sole issue whether the FBAR violation was willful This is

The sole issue whether the FBAR violation was willful. This is

• unique. There are very few FBAR cases.
• Willfulness requires “a voluntary intentional violation of a

known legal duty ” IRM 4 26 16 4 5 3 (07-01-2008) The court known legal duty. IRM 4.26.16.4.5.3 (07-01-2008). The court accepted that Williams may have not known about the FBAR reporting requirements. However, the court found that Williams was willfully ignorant of the FBAR obligations, and

37

Williams was willfully ignorant of the FBAR obligations, and therefore he was willful under the statute.

Ob i (C ) Observations (Cont.)

• The court used terms such as “willful blindness,” “actions

establish reckless conduct,” and “conscious effort to avoid learning about reporting requirements.” ― Showed willfulness from inferential conduct

• This opinion goes beyond the established precedent. Merely

signing a return alone should not establish willfulness as to any g g y item misreported or not reported on the return.

• Until Williams there had been no FBAR case finding on the
• Until Williams, there had been no FBAR case finding on the

basis of willful blindness.

38

Ob i (C ) Observations (Cont.)

• This case presents bad facts and represents the high-water
• This case presents bad facts and represents the high water

mark on willfulness, with perhaps limited applicability. ― Taxpayer pled guilty to tax evasion scheme utilizing foreign bank accounts bank accounts. ― Taxpayer answered “no” to tax organizer. ― Taxpayer answered “no” on Schedule B.

• Williams case should be considered when advising clients

regarding voluntary disclosures and potential “opt outs.” For those who marked “no” on the organizer or Schedule B, the

Willi

id dd d t f illf l lt

Williams case provides added support for willfulness penalty.

39

Ob i (C ) Observations (Cont.)

• Dissent might be instructive.

Th id b th i f d i t illf l ― There was evidence both in favor and against willfulness, and the trial court not appellate courts should decide the issue. ― Williams was willful about tax evasion, but there was no evidence that Williams knew anything about FBARs.

40

Michel Stein, Hochman Salkin Rettig Toscher & Perez R d ll A d i A d i Bl i Fi k M hlb W b Randall Andreozzi, Andreozzi Bluestein Fickess Muhlbauer Weber Brown Matthew D. Lee, Blank Rome

RELEVANT IRS REGULATION

Igor Drabkin, Holtz Slavett & Drabkin

AND GUIDANCE DEVELOPMENTS DEVELOPMENTS

2012 Offshore Voluntary Disclosure y Program (OVDI): Jan. 9, 2012

2012 OVDP id tifi d i IR 2012 5 (J 9 2012)

• 2012 OVDP identified in IR-2012-5 (Jan. 9, 2012)
• IRS Criminal Investigation pre-clearance process remains.
• Eight years amended or original returns and FBAR

g y g

• The overall penalty structure is the same as in the 2011 OVDI.
• The penalty framework requires individuals to pay a penalty of

27 5% f h hi h b l f i 27.5% for the highest aggregate balance foreign. ― Taxpayers in limited situations can qualify for a 5% penalty. ― Smaller offshore accounts will face a 12.5% penalty. People whose offshore accounts or assets did not surpass $75 000 in any calendar year covered by the new OVDP

42

$75,000 in any calendar year covered by the new OVDP will qualify for this lower rate.

2012 OVDP R D l 2012 OVDP Recent Developments

• Newly released FAQs – posted June 26, 2012
• New ineligibility concerns – FAQ 21
• New submission deadline – FAQ 25

R i d l t di l i t k l tt

• Revised voluntary disclosure intake letter

43

N I li ibili C FAQ 21 New Ineligibility Concerns – FAQ 21

• Ineligible taxpayers under FAQ 21

― Government obtains information under John Doe summons, treaty request or other similar action about a specific taxpayer taxpayer. ― Taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information account information to the IRS and fails to provide notice to information to the IRS, and fails to provide notice to Attorney General of the U.S. (see 18 USC 3506). ― IRS announcement that certain taxpayer groups are ineligible that had accounts at certain financial institutions g will be ineligible due to U.S. government action against the bank.

44

N S b i i D dli 90 D New Submission Deadline – 90 Days

• The full voluntary disclosure submission to the Austin campus is

due within 90 days of date of the “preliminary acceptance l tt ” f C i i l I ti ti (FAQ 25) letter” from Criminal Investigation. (FAQ 25)

• A taxpayer may request an extension of the deadline to

l t hi h b i i A t t b it complete his or her submission. A taxpayer must submit: ― Name, date of birth and Social Security number, AND ― At a minimum, the properly completed and signed agreement to extend FBAR and income assessment agreement to extend FBAR and income assessment statutes.

• Note: 90 days from the issuance of the FAQs is Sept. 24, 2012,

which some may interpret as the earliest possible initial

45

which some may interpret as the earliest possible initial deadline.

Revised Voluntary Disclosure I k L Intake Letter

Changes to optional intake letter to address eligibility requirements, Changes to optional intake letter to address eligibility requirements, include:

• “Type of voluntary disclosure - Offshore or Offshore and Domestic”
• “Have any of the offshore accounts you are disclosing been identified

b h RS i li ibl f hi ?” by the IRS as ineligible for this program?”

• “Has anyone, including the foreign government or a foreign financial

institution, advised you that your offshore account records, which are the subject of this voluntary disclosure, were susceptible to being j y , p g turned over to the U.S. Government pursuant to an official request?”

• “If yes, did you or anyone on your behalf submit documents in
• pposition?”

“If i f th d t id d t th Att

• “If yes, were copies of those documents provided to the Attorney

General of the United States as required by 18 USC §3506?”

• New attachment to optional intake letter (one for each bank)

46

Offshore Voluntary Disclosures: NOW WHA T? NOW WHA T?

• IRS pressure on Swiss banks and banks in other jurisdictions

continues.

• Ongoing civil investigations of taxpayers who did not

participate in programs

• Taxpayers are opting out of programs, because “one size fits

all” approach does not fit.

• OVDP door remains open for most taxpayers.

47

Offshore Voluntary Disclosures NOW WHA T? (Cont ) NOW WHA T? (Cont.)

• Taxpayers with previously undisclosed interests in foreign financial

accounts MUST get into compliance. Civil penalties may not seem reasonable but will be less than if the

• Civil penalties may not seem reasonable – but will be less than if the

taxpayer is discovered by the government before coming into compliance.

• Criminal prosecutions of taxpayers previously undisclosed interests in

p p y p y foreign financial accounts will continue.

48

Offshore Voluntary Disclosures NOW WHA T? (Cont ) NOW WHA T? (Cont.)

• The vast majority of 35,000+ taxpayers participating in the 2009, 2011

and 2012 IRS Offshore Voluntary Disclosure Programs previously filed returns prepared by preparers.

• Practitioners must exercise due diligence re: preparation of returns and

documents and in determining the correctness of representations to the client and to the IRS – CIR 230 §10.22. client and to the IRS CIR 230 §10.22.

49

Instructions For New Streamlined Filing Compliance: Instructions For New Streamlined Filing Compliance: Procedures For Non Procedures For Non‐Resident, Non Resident, Non‐Filer U.S. Taxpayers Filer U.S. Taxpayers

On June 26, 2012, the IRS announced new, streamlined filing compliance procedures for non‐resident U.S. taxpayers to go into effect on Sept. 1, 2012. These procedures are being implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90‐22.1, but recently have become aware of their filing obligations and now seek to come into compliance with the law. These new procedures are for non‐residents including, but not limited to, dual citizens who have not filed U S income tax and information returns U.S. income tax and information returns.

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 50

Description Of The New Streamlined Procedure Description Of The New Streamlined Procedure

This streamlined procedure is designed for taxpayers that present a low compliance risk. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low p p y p y p g compliance risk, the review will be expedited, and the IRS will not assert penalties or pursue follow‐ up actions. Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination (which in some cases may include more than three years, in a manner similar to opting y y p g

• ut of the Offshore Voluntary Disclosure Program, or OVDI).

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g., forms 3520 or 5471), for the past three years and to file d li t FBAR (F TD F 90 22 1) f th t i P t f th t d i t t if delinquent FBARs (Form TD F 90‐22.1) for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS‐2011‐13 (December 2011). In addition, retroactive relief for failure to timely elect income deferral on certain retirement and savings plans, where deferral is permitted by relevant treaty, is available through this process. The proper deferral elections with respect to such arrangements must be made with the submission. See instructions below. See instructions below.

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 51

Eligibility Eligibility

This procedure is available for non‐resident U.S. taxpayers who have resided outside of the U.S. since Jan. 1, 2009 and who have not filed a U.S. tax return during the same period. These taxpayers must present a low level of compliance risk as described below must present a low level of compliance risk as described below Amended returns submitted through this program will be treated as high‐risk returns and be subject to examination, except for those filed for the sole purpose of submitting late‐filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans, where deferral is permitted by relevant treaty. It should be noted that this relief is also available under the Offshore Voluntary Disclosure Program. See below for the information required to be submitted with such requests (If you need to file an amended return to correct previously reported or unreported income, deductions, credits, tax, etc., you should not use this streamlined

• procedure. Depending on your circumstances, you may want to consider participating in the

Offshore Voluntary Disclosure Program.). All tax returns submitted under this procedure must have a valid taxpayer identification number (TIN) For U S citizens a TIN is a Social Security number (SSN) For individuals who are not eligible (TIN). For U.S. citizens, a TIN is a Social Security number (SSN). For individuals who are not eligible for an SSN, an individual taxpayer identification number (ITIN) is a valid TIN. Tax returns filed without a valid SSN or ITIN will not be processed. For those who are ineligible for an SSN, but who do not have an ITIN, a submission may be made through this program if accompanied by a complete ITIN application complete ITIN application.

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 52

Compliance Risk Determination Compliance Risk Determination

The IRS will determine the level of compliance risk presented by the submission, based on information provided on the returns filed and based on additional information provided in response to a questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U S tax due Absent any high risk factors if the submitted returns and application with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner. The risk level may rise if any of the following conditions are present: y y g p

• If any of the returns submitted through this program claim a refund
• If there is material economic activity in the U.S.
• If the taxpayer has not declared all of his/her income in his/her country of residence
• If the taxpayer is under audit or investigation by the IRS

If the taxpayer is under audit or investigation by the IRS

• If FBAR penalties have been previously assessed against the taxpayer, or if the taxpayer has

previously received an FBAR warning letter

• If the taxpayer has a financial interest or authority over a financial account(s) situated outside

his/her country of residence his/her country of residence

• If the taxpayer has a financial interest in an entity or entities situated outside his/her country
• f residence
• If there is U.S.‐source income
• If there are indications of sophisticated tax planning or avoidance

If there are indications of sophisticated tax planning or avoidance

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 53

Instructions For Using This Procedure Instructions For Using This Procedure

Taxpayers wishing to use these streamlined procedures must:

• 1. Submit complete and accurate delinquent tax returns, with appropriate related information returns, for the last

three years for which a U.S. tax return is due (please note that all delinquent information returns being filed under this procedure should be sent to the address below with the rest of the submission) procedure should be sent to the address below with the rest of the submission)

• 2. Include “Streamlined” at the top of the first page of each tax return to indicate that the returns are being submitted

under this procedure; this is very important to ensure that your returns get processed through these procedures

• 3. Submit payment of all tax due and owing as reflected on the returns, and statutory interest due and owing

p y g y g 1. For returns determined to be high‐risk, failure to file and failure to pay penalties may be imposed in accordance with U.S. federal tax laws, and FBAR penalties may be imposed in accordance with U.S.

• law. Reasonable cause statements may be requested during review or examination of the returns

determined to be high‐risk. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties see IRS Fact Sheet FS 2011 13 (December 2011) requirements and potential penalties, see IRS Fact Sheet FS‐2011‐13 (December 2011).

• 4. Submit complete and accurate delinquent FBARs for the last six years for which an FBAR is due

1. Please note that all delinquent FBARs being filed under this procedure should be sent to the address below with the rest of the submission, and not to the Detroit address where timely filed FBARs are submitted.

• 5. Submit a complete, accurate and signed questionnaire
• 6. If the taxpayer must apply for an ITIN in order to file delinquent returns under this procedure, the application and
• ther documents required for applying for an ITIN must be attached to the required forms, information and

documentation required under this streamlined procedure documentation required under this streamlined procedure.

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 54

Instructions For Using This Procedure (Cont.) Instructions For Using This Procedure (Cont.)

• 1. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans,

for which deferral is permitted by relevant treaty, will be required to submit: 1. A statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty provision; 2 For relevant Canadian plans a Form 8891 for each tax year and each plan and a description of the type of 2. For relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission; and 3. A dated statement signed by the taxpayer under penalties of perjury describing:

• 1. The events that led to the failure to make the election,
• 2. The events that led to the discovery of the failure, and

3 If the taxpayer relied on a professional advisor the nature of the advisor’s engagement and

• 3. If the taxpayer relied on a professional advisor, the nature of the advisor s engagement and

responsibilities.

• 2. This program has been established for non‐resident non‐filers. Generally, amended returns will not be accepted

in this program. The only amended returns accepted through this program are those being filed for the sole purpose of submitting late‐filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain purpose of submitting late‐filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans, for which deferral is permitted by relevant treaty. Non‐resident taxpayers who have previously filed returns but wish to request deferral provisions will be required to submit: 1. An amended return reflecting no adjustments to income deductions or credits, and 2. All documents required in Item 7 above.

• 3. The documents listed above must be sent to:

Internal Revenue Service 3651 South I‐H 35 Stop 6063 AUSC Attn: Streamlined Austin TX 78741 Austin, TX 78741

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 55

Other Considerations Other Considerations

Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution, if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware f d l h l l d b h ff h l l

• f and consult their legal advisers about the Offshore Voluntary Disclosure

Program (OVDP), announced on Jan. 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. For additional information go to the OVDP page It should be noted however that additional information, go to the OVDP page. It should be noted, however, that

• nce a taxpayer makes a submission under the new procedure described in this

document, OVDP is no longer available. It should also be noted that taxpayers who are ineligible to use OVDP are also ineligible to participate in this procedure who are ineligible to use OVDP are also ineligible to participate in this procedure.

http://www.irs.gov/uac/Instructions‐for‐New‐Streamlined‐Filing‐Compliance‐Procedures‐for‐Non‐Resident‐Non‐Filer‐US‐Taxpayers 56

Form 8938 Filing By Domestic Entities Form 8938 Filing By Domestic Entities

• IRC 6038D applies to any domestic entity that is formed or availed of for

purposes of holding, directly or indirectly, specified foreign financial assets (SFFAs), in the same manner as if the entity were an individual.

• Treasury issued proposed regulations on Dec. 14, 2011.
• Domestic entities are not required to file Form 8938 until final regulations
• Domestic entities are not required to file Form 8938 until final regulations

are issued, which is expected to be sometime before the end of 2012.

57

“Specified Domestic Entities” Specified Domestic Entities

• Domestic entities subject to Form 8938 reporting are designated as

“specified domestic entities.”

• Includes corporations, partnerships and trusts (but not estates)

Includes corporations, partnerships and trusts (but not estates)

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Requirements For Domestic Corporations A d P hi And Partnerships

• Domestic entity must have an interest in a specified foreign financial asset, with an

aggregate value exceeding $50 000 on the last day of the tax year or more than aggregate value exceeding $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

• Domestic entity is “closely held” by one U.S. individual taxpayer.

– “Closely held” means 80% of the vote or value of the stock, capital interests fit i t t i h ld b U S i di id l t

• r profits interests is held by one U.S. individual taxpayer.

– Direct, indirect and constructive ownership rules apply.

• Either:

– At least 50% of the U S entity’s gross income for the tax year is passive At least 50% of the U.S. entity s gross income for the tax year is passive income, or 50% of the U.S. entity’s assets at any time during the tax year produce or are held for the production of passive income; or – At least 10% of the U.S. entity’s gross income is passive income, or at least 10% of the assets held by corporation or partnership are assets that produce 10% of the assets held by corporation or partnership are assets that produce

• r are held for the production of passive income; and the entity is formed or

availed of by a specified individual with a principal purpose of avoiding reporting obligations under IRC 6038D.

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Aggregation Rules For S ifi d D i E i i Specified Domestic Entities

• For purposes of determining whether a domestic entity meets the reporting

thresholds, entities that are closely held by the same specified individual are treated as a single entity.

• For purposes of determining whether the entity meets the passive income
• r asset test, entities that are closely held by the same individual, and that

are connected through stock or partnership interest with a common parent corporation or partnership, are treated as a single entity.

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Circular 230 Notice Circular 230 Notice

To ensure compliance with IRS Circular 230, you are p , y hereby notified that any discussion of federal tax issues in this presentation is not intended or written to be used and it cannot be used by any person for to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Code, and (B) p ( ) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules This disclosure is made in accordance with the rules

• f Treasury Department Circular 230 governing

standards of practice before the Service.

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Model Intergovernmental Agreements For Implementing FATCA For Implementing FATCA

• On July 26, 2012, the U.S. Department of Treasury released two versions of a

model intergovernmental agreement (IGA).

• The model IGA memorializes a February 2012 joint statement with France,

Germany, Italy, Spain and the United Kingdom on how to implement FATCA.

• IGAs will be entered into between the U.S. and foreign countries (FATCA partners).
• IGAs establish a framework for foreign financial institutions (FFIs) to report certain

account information to their home tax authorities which will provide information to account information to their home tax authorities, which will provide information to the IRS.

• The FATCA partner will transmit gathered information automatically to the IRS

d h b l l f h under either existing bilateral tax treaties or tax information exchange agreements.

• Such financial institutions will be treated as participating FFIs and will not be

subject to FATCA withholding. j g

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Versions Of Model IGA

Two versions of model IGA:

• Reciprocal
• Under the reciprocal version, the IRS will collect and exchange information on

certain accounts that are held with U S financial institutions by residents of certain accounts that are held with U.S. financial institutions by residents of the FATCA partner.

• The reciprocal version also includes a commitment by the U.S. government to

pursue regulations and to support legislation that would achieve the proper pursue regulations and to support legislation that would achieve the proper levels of automatic exchange.

• Non‐reciprocal
• The IRS will not be obligated to transmit information to the FACA partner.
• Non‐reciprocal IGAs will be available only to countries with which the U.S.

l d h i t t t t i f ti h t already has an income tax treaty or tax information exchange agreement.

63

Information Requirements Under IGA

• Information requirements in the model IGA are phased in from 2013 to 2016.
• For 2013 and 2014, for reportable accounts, FFIs under the IGA must provide:

 The account holder’s name, address and U.S. taxpayer identification number;  The account number;  The account number;  The name and identifying number of the FFI; and  The account balance or value.

• Additional information on certain income of custodial accounts must be reported starting in 2015.
• As of 2016, FFIs will have to report:

 Gross proceeds in custodial accounts,  Gross interest paid or credited in depository accounts, and  Gross amounts paid or credited with respect to other accounts, if the FFI is the obligor or p p , g debtor.

• In general, information is to be exchanged within nine months after the end of the calendar year to

which the information pertains.

• For 2013, the deadline for reporting information is Sept. 30, 2015.

For 2013, the deadline for reporting information is Sept. 30, 2015.

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Differences Between IGA And FATCA Rules

Model IGAs modify certain FATCA rules:

• U d

FATCA d b i i i FFI l i h ld ld b bj

• Under FATCA, payments made by participating FFIs to recalcitrant account holders would be subject to
• withholding. Under the model agreements, the withholding obligations with respect to recalcitrant

account holders will be suspended, and the FATCA partner financial institution will not be required to withhold tax with respect to payments made to an account held by a recalcitrant account holder.

• FATCA provisions generally require all members of a foreign financial group to be participating or deemed‐
• FATCA provisions generally require all members of a foreign financial group to be participating or deemed

compliant FFIs after a two‐year transition period. Under the model IGA, if a FATCA partner financial institution has a related entity or branch that is a non‐participating FFI operating in a jurisdiction that prevents such related entity/branch from becoming a participating FFI or deemed‐compliant FFI, then the FATCA partner financial institution will continue to be treated as a participating FFI (regardless of the l d i /b h’ li ) l i i i h i d d related entity/branch’s non‐compliance), as long as it meets certain requirements that are intended to avoid abusive situations and takes steps to identify its U.S. accounts.

• The model IGA addresses concerns that foreign retirement plans could be required to apply FATCA to their

individual plan participants and beneficiaries. The model IGA provides that foreign retirement plans identified in an annex to the agreement will be treated as deemed compliant (and therefore functionally identified in an annex to the agreement will be treated as deemed compliant (and therefore functionally exempt from FATCA).

• Under the model IGA, the competent authorities are responsible for addressing non‐compliance issues in

their jurisdiction.

65

Due Diligence Provisions Due Diligence Provisions

• An annex to the model IGA delineates due diligence obligations for

identifying reportable accounts.

• Similar to the proposed regulations, it provides different procedures

Similar to the proposed regulations, it provides different procedures depending on the value of the account, regardless of whether the owner is an individual or entity or whether the account is pre‐existing (maintained as of Dec. 13, 2013) or new.

• Unlike under the proposed regulations, for new individual accounts, FFIs

must obtain a self‐certification that allows the institution to determine must obtain a self certification that allows the institution to determine whether the account holder is a U.S. person and confirm the certification’s reasonableness.

66

IGAs: What To Expect

• Negotiating individual IGAs: The U.S. expects to execute agreements

based on the newly released model IGA soon. It is likely that financial i i i ill h i i IGA l institutions will encourage their governments to negotiate IGAs promptly.

• Release of a second Model IGA: Treasury is also developing alternative

inter‐governmental approaches with Japan and Switzerland, which may further address issues for multi‐national FFIs.

• The Australian government announced on Aug. 28 that it is exploring the

feasibility of an IGA with the U.S. in order to minimize the costs of complying with FATCA.

67

Updated IRS Forms

• FATCA added a requirement that generally provides that a foreign financial

institution (FFI) will need to be registered with the IRS in order to avoid a ( ) g 30% withholding tax on certain payments (generally U.S.‐source passive income and gross proceeds from the sale of U.S. securities) starting in 2013.

• On Feb. 8, 2012, the Treasury Department issued proposed regulations

governing FATCA and the implementation of FATCA, which require foreign persons to document their status to their FFI. The new requirement is very similar to the longstanding requirement under which U S withholding similar to the longstanding requirement under which U.S. withholding agents are required to document the status of foreign beneficial owners of payments on U.S.‐source income, which they satisfy by obtaining the applicable Forms W‐8.

• The IRS has released new draft forms incorporating all of the information

necessary to address both the prior and new FATCA requirements, so that withholding agents and FFIs will not have to maintain two separate forms:

68

Updated IRS Forms (Cont.) Updated IRS Forms (Cont.)

• On Aug. 14, the IRS issued a draft version of Form W‐8IMY (certificate of foreign intermediary,

foreign flow‐through entity, or certain U.S. branches for United States tax withholding). foreign flow through entity, or certain U.S. branches for United States tax withholding).  This form is used by foreign intermediaries, flow‐through entities and certain branches under FATCA to identify U.S. persons or entities receiving U.S.‐source income in foreign accounts, and to certify the status of a foreign intermediary, foreign flow‐through entity or certain U.S. branches for U.S. withholding tax purposes.  The new version of the Form W‐8IMY now identifies U S persons or entities receiving U S ‐  The new version of the Form W 8IMY now identifies U.S. persons or entities receiving U.S. source income in foreign accounts, whereas the previous version only identified foreign persons and entities receiving U.S.‐source income. Accordingly, what once was a straightforward, two‐page information return is now a complex, seven‐page information return.

• In June, the IRS also released modified draft versions of Form W‐8BEN (certificate of foreign status
• f beneficial owner for United States tax withholding) for individuals, and Form W‐8BEN‐E

(certificate of foreign status of beneficial owner for United States tax withholding) for entities.  The new forms W‐8BEN reveal an FFI employment identification number (FFI‐EIN) and a FATCA ID for participating FFIs and deemed‐compliant FFIs ID for participating FFIs, and deemed‐compliant FFIs.  In order to protect taxpayer confidentiality, the IRS decided that it will issue to entities the two different numbers to serve different roles. The FFI‐EIN will be used for filing purposes, and the FATCA ID will be used for public verification purposes. A foreign tax identifying number will now also be required on all forms W‐8BEN.

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Forms W 8BEN And W 8BEN E Forms W‐8BEN And W‐8BEN‐E

• New W‐8BEN: New W‐8BEN will simplify the declarations required to be made by foreign
• individuals. It will only require basic identifying information, declarations with respect to

treaty status (as relevant), and a general certification as to foreign status. Although new W‐ y ( ), g g g 8BEN is a welcome simplification of the information reporting that will be required of foreign individuals, it should be noted that foreign individuals will now be required to provide a foreign tax identifying number (e.g., the United Kingdom national insurance number), if applicable, since not all countries presently issue such numbers.

• New W‐8BEN‐E: New W‐8BEN‐E will require each foreign entity to make two distinct
• New W‐8BEN‐E: New W 8BEN E will require each foreign entity to make two distinct

declarations.

• The first declaration will be the foreign entity’s status for purposes of the U.S. outbound

withholding tax regime (e.g., the 30% withholding tax generally imposed on U.S.‐source dividends paid to non‐U.S. persons, unless reduced by an applicable income tax treaty). This declaration will be the same as the declaration required in the current IRS Form W This declaration will be the same as the declaration required in the current IRS Form W‐ 8BEN, as last revised in 2006.

• The second declaration will be the FATCA‐related declaration, which will require an

entity to provide substantial detail, by declaring its overall status for FATCA purposes from among 24 different categories and in many cases making supplementary d l i i l i f 8 declarations in later sections of new W‐8BEN‐E.

• In addition to these declarations, new W‐8BEN‐E will require a foreign entity to provide

its “foreign financial institution employer identification number” and “FATCA ID,” as applicable.

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Randall Andreozzi, Andreozzi Bluestein Fickess Muhlbauer Weber Brown

POTENTIAL IRS PERSPECTIVE

Igor Drabkin, Holtz Slavett & Drabkin

ON HOW WE GOT HERE

IRS Goals And Perspective On FBAR And FATCA Reporting

• Goals of FATCA and FBAR reporting:

Goals of FATCA and FBAR reporting: – Compliance – Gathering of Information – Piercing the veil of bank secrecy

• International tax compliance is a top priority of the IRS.

p p p y

• IRS Commissioner Doug Shulman: “The IRS will vigorously pursue tax cheats around the

world, no matter how remote or secret the location. And we will work with other governments where possible to obtain the information we need”.

• Increased enforcement

– More indictments and criminal prosecutions

• Wegelin ‐ indictments of taxpayers with Israeli bank accounts; more UBS

Indictments

• Questioning taxpayers in OVDI program

Coordination with other countries – Coordination with other countries – Increased pressure on foreign banks and governments

• On Jan. 31, 2012, the Swiss Finance Ministry handed over to the U.S. secret banking

data that was encrypted. Recent news articles suggest that the IRS was able to access information.

• 72

Streamlined Filing Compliance Procedures For Non Streamlined Filing Compliance Procedures For Non‐Resident, Resident, Non Non Filer Taxpayers Questionnaire Filer Taxpayers Questionnaire Non Non‐Filer Taxpayers Questionnaire Filer Taxpayers Questionnaire

http://www.irs.gov/pub/irs‐utl/non‐resident_questionnaire.pdf

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