Germany/U.S.A. Current legal, wealth and tax developments 2 - - PowerPoint PPT Presentation

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4th Conference STEP Deutschland e.V.

Germany/U.S.A.

Current legal, wealth and tax developments

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Bringing Non-Compliant U.S. Taxpayers Back into the System Michael G. Pfeifer

Caplin & Drysdale, Chartered Washington, DC

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Scope of U.S. Tax Reporting

• Reporting by U.S. Citizens and Residents
• Income tax return on Form 1040
• Tax information returns – foreign activities
• Foreign corporations – Forms 5471 and 8621
• Foreign partnerships – Form 8865
• Foreign „disregarded entities“ – Form 8858
• Foreign trusts – Forms 3520 and 3520-A
• Non-tax information returns
• Foreign financial accounts – Form TDF 90-22.1 („FBAR“)

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Scope of U.S. Tax Reporting

• Reporting by Nonresident Aliens
• Income tax return on Form 1040NR
• Effectively connected income
• U.S. source income
• Withholding tax certifications
• Forms W-8BEN et seq.
• Forms 1042 and 1042-S
• Possible need of Tax Identification Numbers
• ITIN – Form W-7
• EIN – Form SS-4

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Current Offshore Enforcement Climate

• Unreported Offshore Financial Accounts – the FBAR

Crisis

• Bank Julius Baer and WikiLeaks.org
• LGT Bank in Liechtenstein
• Financial and tax reforms promised
• UBS
• Birkenfeld clients
• Announced limitations on U.S.-related business
• Senate Permanent Subcommittee on Investigations Hearings
• Possible enactment of Stop Tax Haven Abuse Act (S. 681)

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IRS Voluntary Disclosure Policy

• 5 Key Conditions for Good “V.D.”
• Legal source
• Assets can’t derive from unlawful activity
• Disclosure must be timely
• Before IRS has opened civil or criminal file or is in receipt of third

party information

• Disclosure must be complete
• Taxpayer must file true and accurate amended or delinquent

returns; can’t correct past failures “selectively”

• Good faith efforts to pay tax and interest due

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IRS Voluntary Disclosure Policy

• Taxpayer must fully cooperate
• Full audit unlikely but must comply fully with tax and related

filings, e.g., FBAR’s

• No promise of immunity but generally no prosecution
• Penalties frequently abated without show of “reasonable cause” if

good faith effort

• Manner of proceeding
• Depends on circumstances and seriousness of issues
• Generally file 3 or 6 years of amended or delinquent returns
• In serious cases, walk through with IRS (the “open kimono”)

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When Voluntary Disclosure Fails

• Difference in burden of proof
• Civil standard
• IRS position presumed correct
• Taxpayer must disprove by preponderance of evidence
• Criminal standard
• Taxpayer presumed innocent
• IRS must prove each element of crime “beyond a reasonable doubt”
• When civil case goes criminal everything must be reviewed!

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Related Developments

• U.S. has enhanced “whistle-blower” program (and new

Whistle-Blower Office)

• IRS has long rewarded informers providing good information on

taxpayers suspected of non-compliance

• Generally takes years to develop; IRS tries to protect informers’

confidentiality; historically, rewards paid from collected proceeds might range from 1% to 15% with $10 MM “cap”

• Under 2006 legislation, informer gets 15-30% for good information
• n corporate taxpayer with > $2 MM in of taxes, penalties and

interest in dispute or individual taxpayer with > $200,000 of gross income

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Related Developments

• New standards for tax preparers
• Under 2007 legislation, tax preparer standard and penalties

increased

• Preparer position must now generally be “more likely than not”

(i.e., > 50% chance of prevailing, if challenged)

• With adequate disclosure, preparer standard back to “reasonable

basis” (i.e., 25% chance)

• Taxpayer still has former “realistic possibility of success” standard

(i.e., one-in-three chance)

• New standard applies to some information returns, if taxpayer

willfully understates tax or acts with reckless disregard of law

• Congress, Treasury considering further change

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Bringing Non-Compliant U.S. Taxpayers Back into the System Michael G. Pfeifer

Caplin & Drysdale, Chartered One Thomas Circle, N.W., Ste. 1100 Washington, DC 20005 www.caplindrysdale.com (202) 862-5000 (202) 429-3301

U.S.