Important Changes to the U.S. Internal Revenue Service Offshore Disclosure Program and Filing Procedures A Teleseminar Presented by: Reed Smith Federal Tax Controversy & Reed Smith State Tax Teams June 24, 2014/June 25, 2014 Kelley C. Miller Jennifer S. Goldstein
U.S. Internal Revenue Service & U.S. Department of Treasury Offshore Reporting Requirements (Overview) • U.S. taxpayers are required to report and pay tax on their worldwide income. • This includes reporting: investment income earned on financial accounts; interest income earned on cash accounts; and income earned from certain assets. • U.S. taxpayers are also required to disclose the existence of any foreign accounts on the Form 1040 (e.g., Schedule B; forms that ask for disclosure of signature authority/financial interest in an account) • Schedule B (2011) specifically asks taxpayers to declare if they are required to file an FBAR or Form 8938
U.S. Internal Revenue Service & U.S. Department of Treasury Offshore Reporting Requirements (Overview) • What are the penalties for non-compliance • Criminal penalties apply for a willful failure to report income and the willful filing of a false return • Additional civil penalties may apply, including: penalties up to 75% of any tax that was not stated on the return; failure to file; failure to pay; accuracy of filed returns; failure to file FBAR and/or Form 8938
U.S. Internal Revenue Service & U.S. Department of Treasury Offshore Reporting Requirements (Overview) • Foreign Bank Account Reporting • FinCEN Form 114, “FBAR” • Must be filed by June 30 each year; informational return; no extensions • Non-willful failure to file penalties = $10K per violation; willful penalties could be up to 50% of value of undisclosed accounts • SOL is 6 years • Could be possible penalties and implications for those who aid and assist others in a failure to disclose accounts. • Form 8938, Statement of Specified Foreign Financial Assets • By due date, including extension, if any, for income tax return • Penalties: Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply
U.S. Internal Revenue Service & U.S. Department of Treasury Report of Foreign Bank and Financial Account (“FBAR”) • In 2011, new rules regarding reporting requirements for U.S. residents with foreign bank accounts were issued. • In 2012, the IRS issued a new FBAR form and instructions. • Anyone who is considered to be a U.S. resident for tax purposes is obligated to file an FBAR, including those individuals who can “tie - break” residence to a foreign country. • This includes anyone who has a financial interest in, or signature or other authority over, foreign accounts (e.g., individuals with powers of attorney, U.S. employees of U.S. or foreign companies who have signature authority over corporate accounts).
U.S. Internal Revenue Service & U.S. Department of Treasury Report of Foreign Bank and Financial Account (“FBAR”) • Other individuals or entities that are required to file the FBAR include: • Anyone considered an owner of a foreign trust; • U.S. corporations, partnerships, and other entities; • Anyone with interests in foreign life insurance policies and annuities with accessible cash values; and • Persons with interests in accounts maintained by non-U.S. companies without an exemption under the U.S. tax code. • Anyone who causes the creation of an entity intending to evade the FBAR filing rules has a reportable “financial interest” (i.e., “anti - avoidance” provision).
U.S. Internal Revenue Service & U.S. Department of Treasury Report of Foreign Bank and Financial Account (“FBAR”) • Electronic Filing of FBARs • FinCEN Form 114 has replaced IRS Form TD F 90-22.1 • M ust be filed electronically via FinCEN’s online portal. • Must be received by June 30.
U.S. Internal Revenue Service & U.S. Department of Treasury Offshore Reporting Requirements (Overview) • “How will the U.S. government know if I have failed to comply?” • Whistleblowers and informants • Investigations of financial institutions and account holders • Summons served on financial institutions and account holders • Tax treaty requests of government information exchange • U.S. taxpayers coming forward in voluntary disclosure • Records obtained through indictment of foreign financial institutions • Foreign financial institutions entering into non-prosecutorial agreements (e.g., ‘Category 2 Swiss banks’) • FATCA
U.S. Internal Revenue Service & U.S. Department of Treasury Offshore Voluntary Disclosure Initiative (“OVDI”) • March 2009 – IRS announces first OVDI • Qualified U.S. taxpayers could avoid criminal prosecution and pay civil penalties. • Expired on October 15, 2009 • Proves largely successful with 15,000 taxpayers taking advantage of the program. • 2011 – IRS announces second OVDI • 2012 – IRS announces third OVDI • IRS information regarding the actions of bankers, financial advisors, and third parties affiliated with undisclosed foreign accounts have led to indictments and other enforcement actions involving foreign financial institutions.
Not Just a Federal Matter: State Amnesty Programs & Settlement Initiatives • In an effort to encourage taxpayers to report income from foreign bank accounts, several states have instituted amnesty programs or settlement initiatives. • The taxpayer will not face criminal prosecution and civil monetary penalties are often waived. • These states include: New York, Connecticut, Pennsylvania, Virginia, New Jersey, Ohio, and California.
Not Just a Federal Matter: The State Component • Impact on state filings • Requirement to file amended returns based on federal changes • State Voluntary Disclosure Programs • Independent disclosures and miscellaneous agreements
Not Just a Federal Matter: E.g., New York State • Generally, Taxpayers must report all federal changes within 90 days of the final determination or filing. N.Y. Tax Law §211(3). • Failure to file stops the SOL from beginning to run. • New York State and New York City – Voluntary Disclosure Programs • Available to eligible taxpayers • Full abatement of all civil penalties and protection from criminal prosecution, regardless of intent • Look back period equal to that required by the IRS under OVDI.
Comparison of the 2009 – 2011 OVDI Programs (Source: IRS) 2009 Offshore 2011 Offshore Voluntary 2012 Offshore Voluntary Modified 2012 Offshore Voluntary Voluntary Disclosure Disclosure Initiative Disclosure Program Disclosure Program Program Yes Yes Yes Yes CI protection Information required for Name, address, date Name, address, date of birth Name, address, date of Name, address, date of birth, TIN, telephone preclearance by CI of birth and TIN and TIN birth and TIN number, identifying information of all financial institutions at which undisclosed accounts were held, and identifying information of all foreign and domestic entities (e.g., corporations, partnerships, LLCs, trusts, foundations) through which undisclosed accounts were held Penalty terms Miscellaneous Title 26 Miscellaneous Title 26 Miscellaneous Title 26 Miscellaneous Title 26 offshore penalty of offshore penalty of offshore penalty of 25% in offshore penalty of 27.5% in 27.5% in lieu of other applicable penalties 20% in lieu of other lieu of other applicable lieu of other applicable applicable penalties penalties penalties The miscellaneous offshore penalty increases to 50% if the taxpayer has or had an Reduced penalty of 5% Reduced penalty of 5% undisclosed foreign financial account held at a offered to taxpayers meeting offered to taxpayers foreign financial institution or if the account certain criteria deemed to be meeting certain criteria was established with non-willful conduct deemed to be non-willful the help of a facilitator where the institution or conduct facilitator has been publicly identified as being Reduced penalty of 12.5% for under investigation or cooperating with a taxpayers with accounts with Reduced penalty of 12.5% government investigation. balances below $75,000 for taxpayers with accounts with balances below $75,000 Covered period 6 years 8 years 8 years 8 years Closing agreement Yes Yes Yes Yes No No Yes Yes Relief for taxpayers who did not timely elect to defer U.S. Income tax on undistributed Income earned by certain registered Canadian retirement and savings plans
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