Important Changes to the U.S. Internal Revenue Service Offshore - - PowerPoint PPT Presentation

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
• thers 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
• Must 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 Voluntary Disclosure Program 2011 Offshore Voluntary Disclosure Initiative 2012 Offshore Voluntary Disclosure Program Modified 2012 Offshore Voluntary Disclosure Program CI protection Yes Yes Yes Yes Information required for preclearance by CI Name, address, date

• f birth and TIN

Name, address, date of birth and TIN Name, address, date of birth and TIN Name, address, date of birth, TIN, telephone 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

• ffshore penalty of

20% in lieu of other applicable penalties Miscellaneous Title 26

• ffshore penalty of 25% in

lieu of other applicable penalties Reduced penalty of 5%

• ffered to taxpayers meeting

certain criteria deemed to be non-willful conduct Reduced penalty of 12.5% for taxpayers with accounts with balances below $75,000 Miscellaneous Title 26

• ffshore penalty of 27.5% in

lieu of other applicable penalties Reduced penalty of 5%

• ffered to taxpayers

meeting certain criteria deemed to be non-willful conduct Reduced penalty of 12.5% for taxpayers with accounts with balances below $75,000 Miscellaneous Title 26 offshore penalty of 27.5% in lieu of other applicable penalties The miscellaneous offshore penalty increases to 50% if the taxpayer has or had an undisclosed foreign financial account held at a foreign financial institution or if the account was established with the help of a facilitator where the institution or facilitator has been publicly identified as being under investigation or cooperating with a government investigation. Covered period 6 years 8 years 8 years 8 years Closing agreement Yes Yes 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 No No Yes Yes

Summary of CURRENT Offshore Disclosure Options (Source: IRS)

• EFF. JULY 1,

2014

Offshore Voluntary Disclosure Program Streamlined Filing Compliance Procedures THIS IS A FILING PROCEDURE ONLY!!! Delinquent FBAR Procedure Delinquent International Information Return Procedure U.S. Persons Living Outside the United States U.S. Persons Living Inside the United States (YOU MUST HAVE FILED RETURNS.) Taxpayers for whom the compliance option is designed Taxpayers whose non-compliance conduct was willful Persons living

• utside the United

States who were not aware of their U.S. tax obligations Taxpayers whose non-compliance conduct was non- willful Persons not seeking treatment under OVDP or Streamlined Procedures but who failed to file FBARs Persons not seeking treatment under OVDP or Streamlined Procedures but who failed to file international information returns Penalty terms Miscellaneous Title 26 offshore penalty

• f 50% in lieu of
• ther applicable

penalties Delinquency penalties, accuracy- related penalties, information return penalties, and FBAR penalties are waived Miscellaneous Title 26 offshore penalty

• f 5% in lieu of
• ther applicable

penalties No automatic penalties; taxpayer provides statement of reasonable cause No automatic penalties; taxpayer provides statement of reasonable cause Covered period 8 years 3 years for income tax returns; 6 years for FBARs 3 years for income tax returns; 6 years for FBARs Varies Varies CI protection Yes No No No No Closing agreement Yes No No No No

Summary of *New* Streamlined Filing Compliance Procedure (Source: IRS)

Expanded Streamlined Filing Compliance Procedures

2012 Streamlined Filing Compliance Procedures U.S. Persons Living Outside the United States U.S. Persons Living Inside the United States Eligibility Non-Resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 who have not filed a U.S. tax return during the same period Individuals who are U.S. citizens or lawful permanent residents (i.e. "green card holders"): Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents filing income tax returns on behalf of the decedent, may use these Streamlined Procedures if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Individuals who are not U.S. citizens or lawful permanent residents (i.e. "green card holders"): Individuals, or estates of individuals, who are not U.S. citizens or lawful permanent residents may use this procedure if, 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) is past, the individual did not meet the substantial presence test of IRC section 7701(b)(3) Individual U.S. taxpayers, or estates

• f individual U.S. taxpayers, may use

these Streamlined Procedures if: (1) they are not eligible for treatment as a U.S. person living outside the United States; (2) they have previously filed a U.S. tax return for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) is past; and (3) they have failed 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 (FinCEN Form 114, previously Form TD F 90-22.1) and such failures resulted from non- willful conduct. Taxpayer certification Taxpayer required to complete a questionnaire designed to allow IRS to risk assess submissions Taxpayer required to certify that failure to report offshore accounts was due to non- willful conduct Taxpayer required to certify that failure to report offshore accounts was due to non- willful conduct Risk Assessment Submissions classified as high or low risk depending on the taxpayer's responses on a questionnaire; high risk submissions were sent to the field for examination No high/low risk assessment; all submissions to be subject to existing audit selection criteria No high/low risk assessment; all submissions to be subject to existing audit selection criteria Penalty terms Delinquency and accuracy- related penalties waived Delinquency and accuracy-related penalties waived 5% miscellaneous Title 26 offshore penalty imposed; all other penalties waived

Summary and Contact Information

• If you have pre-cleared into the 2012 OVDP but you have yet to

submit your OVDP letter and attachment to CI, contact your advisor immediately.

• If you have any undisclosed accounts or income-producing assets

and/or you may have unfulfilled filing obligations, please contact your advisor immediately.

• If you are in OVDP (e.g., accepted into prg; awaiting agent; awaiting

906; opting out*), contact your advisor to review options asap.

• Remember, OVDP (CI; 906) irrevocably changes as of July 1, 2014 –

the time to act is NOW!

Kelley C. Miller Direct 215.851.8855 – Mobile 215.704.3046 - Fax 215.851.1420 kmiller@reedsmith.com Jennifer S. Goldstein Direct: (212) 521-5406 – Fax 212.521.5450 jsgoldstein@reedsmith.com