Report of Foreign Bank and Financial Accounts: Preparing for 2011 - - PowerPoint PPT Presentation

Presenting a live 110‐minute teleconference with interactive Q&A

Report of Foreign Bank and Financial Accounts: Preparing for 2011 Filing

Latest Developments and Practical Lessons From 2010 Compliance

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, FEBRUARY 9, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Igor Drabkin Principal Holtz Slavett & Drabkin Beverly Hills Calif Igor Drabkin, Principal, Holtz Slavett & Drabkin, Beverly Hills, Calif. Steven Toscher, Principal, Hochman Salkin Rettig Toscher & Perez, Beverly Hills, Calif. Scott Fink, Greenberg Traurig, New York Shannan Cuddy, Tax Counsellor, Moody Famiglietti & Andronico, Tewksbury, Mass.

For this program, attendees must listen to the audio over the telephone.

Shannan Cuddy, Tax Counsellor, Moody Famiglietti & Andronico, Tewksbury, Mass. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.

Continuing Education Credits

FOR LIVE EVENT ONLY

Attendees must listen to the audio over the telephone. Attendees can still view

the presentation slides online but there is no online audio for this program. Please refer to the instructions emailed to the registrant for additional

• information. If you have any questions, please contact Customer Service

at 1-800-926-7926 ext. 10. at 1 800 926 7926 ext. 10.

Tips for Optimal Quality

S d Q lit S

• und Qualit y

For this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted. There will be no sound over the web connection. co ect o . If you dialed in and have any difficulties during the call, press *0 for assistance. You may also send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem.

Viewing Qualit y

To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again press the F11 key again.

Report of Foreign Bank and Financial A t P i f Fili Accounts: Preparing for 2011 Filings Webinar

• Feb. 9, 2011

Shannan Cuddy, Moody Famiglietti & Andronico scuddy@mfa-cpa.com Scott Fink, Greenberg Traurig finks@gtlaw.com Steven Toscher, Hochman Salkin Rettig Toscher & Perez toscher@taxlitigator.com Igor Drabkin, Holtz Slavett & Drabkin idrabkin@hsdtaxlaw.com

Today’s Program

Relevant Background With FBAR

[S cot t Fink, S hannan Cuddy]

Slide 6 – Slide 32 Compliance Experiences From 2010 FBAR Filings

[S cot t Fink, Igor Drabkin]

Civil Litigation Over FBAR Slide 53 – Slide 59 Slide 33 – Slide 52

[Igor Drabkin]

Criminal Prosecutions Over FBAR

[S t even Toscher]

Slide 60 – Slide 83 FATCA Sect. 6038D Information Return

[S t even Toscher, S hannan Cuddy]

Slide 84 – Slide 97

S Fi k G b T i

RELEVANT BACKGROUND

Scott Fink, Greenberg Traurig Shannan Cuddy, Moody Famiglietti & Andronico

RELEVANT BACKGROUND WITH FBAR

Material Aspects Of The Report Of Foreign Bank And Financial Accounts (FBAR) (FBAR)

History

• Bank Secrecy Act of 1970 requires U S persons to file
• Bank Secrecy Act of 1970 requires U.S. persons to file

reports and keep certain records of information about their foreign accounts.

• Authority to enforce FBAR reporting and record keeping

Authority to enforce FBAR reporting and record keeping requirements was delegated to FinCEN, a bureau of the Treasury Department.

• In April 2003 FinCEN delegated the civil enforcement

In April 2003, FinCEN delegated the civil enforcement authority of FBARs to the IRS.

• IRS can impose civil penalties.
• IRS was tasked with revising FBAR form and

instructions.

• FBAR Form TD F 90-22.1 and its instructions were
• 7 -

revised in October 2008.

7

Who Must File An FBAR?

• Each U.S. person who has a financial interest in or

p signature or other authority over a foreign financial account must make a report of those relationships on an FBAR for each calendar year during any part of which the $ aggregate value of all the accounts exceeded $10,000.

• The FBAR must be filed with the Treasury Department on

b f J 30 f th di g

• r before June 30 of the succeeding year.
• There is no extension available for filing an FBAR.
• 8 -

8

Who Must File An FBAR? (Cont.)

Exceptions

• An officer or employee of a bank that is currently examined

by federal bank supervisory agencies for soundness and safety is not required to report having signature or other authority over a foreign account maintained by the bank, if the officer or employee has no personal interest in the account. l d h

• An officer or employee of a domestic corporation whose

equity securities are listed on a national exchange, or that has assets exceeding $10 million and at least 500 shareholders, is not required to report on an FBAR having shareholders, is not required to report on an FBAR having signature or other authority over a foreign account of the corporation, if the person has no personal financial interest in the account and has been advised by the CFO of the ti th t th ti h t d th t corporation that the corporation has reported the account

• n an FBAR.
• This exception also applies to an officer or employee (i) of a domestic

subsidiary of a domestic corporation and (ii) of a foreign subsidiary

• 9 -

subsidiary of a domestic corporation, and (ii) of a foreign subsidiary more than 50% owned by a domestic corporation.

9

Key Definitions On TD F 90-22.1

U.S. person

□ The 2008 revised FBAR instructions define a

U.S. person as a citizen or resident of the U.S.,

• r a person in and doing business in the U.S.

d f d S

□ Previous instructions defined a U.S. person as a

citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a p p, p , domestic estate or trust.

• 10 -

10

Key Definitions On TD F 90-22.1 (Cont.)

• Financial account

□

FBAR instructions define a financial account to include any bank securities securities derivatives or other financial bank, securities, securities derivatives or other financial instrument accounts. The term includes any savings, demand, checking, deposit or other account maintained with a financial institution or other person engaged in the business of a financial institution business of a financial institution.

□

The instructions provide that a financial account generally includes accounts in which the assets are held in a commingled fund with the account owner holding an equity commingled fund, with the account owner holding an equity interest in the fund.

□

Public comments by IRS officials after the issuance of the 2008 Form TD F 90-22.1 and its instructions indicated that 2008 Form TD F 90 22.1 and its instructions indicated that foreign hedge funds and private equity funds were foreign financial accounts.

□

Individual bonds, notes or stock certificates; and safe

• 11 -

, ; deposit boxes are not defined as financial accounts.

11

Key Definitions On TD F 90-22.1 (Cont.)

• Financial interest
• Financial interest

□

U.S. person has a financial interest in each financial account where such person is the owner of record or has legal title, whether the account is maintained for his or her own benefit

• r for the benefit of others.

□

U.S. person deemed to have a financial interest over financial accounts if the owner of record or holder of legal title is:

A i i i h

• A person acting as an agent, nominee, attorney or in some other

capacity on behalf of the U.S. person;

• A corporation in which the U.S. person owns directly or indirectly

more than 50% of the total value of shares of stock, or more than 50% of the voting power for all shares of stock; 50% of the voting power for all shares of stock;

• A partnership in which the U.S. person owns more than 50% of the

profits or the capital of the partnership;

• A trust in which the U.S. person either has a present beneficial

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.

□

A bank is not required to file an FBAR to report a financial interest in an international interbank transfer account

• 12 -

interest in an international interbank transfer account (“nostro” accounts).

12

Key Definitions On TD F 90-22.1 (Cont.)

• 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 p p y y y containing his signature.

• Other authority

□

Where a U.S. person can exercise power that is comparable to signature authority over an account by comparable to signature authority over an account by communication with the bank

• 13 -

13

IRS Guidance Granting Temporary Relief

• Revised FBAR form and instructions and IRS
• Revised FBAR form and instructions and IRS

public comments created uncertainty regarding who is a U.S. person and what is a financial account.

• In response to numerous questions and

comments received from the public, the IRS issued guidance granting temporary relief. issued guidance granting temporary relief.

• 14 -

14

Announcement 2009-51

• Suspended the reporting requirement with

respect to FBARs due on June 30 2009 for respect to FBARs due on June 30, 2009, for those persons who are not citizens, residents or domestic entities

• Directed people to disregard the expanded

definition of U.S. person provided in the 2008 revised instructions, and instead to refer to the definition provided in the prior version of the definition provided in the prior version of the FBAR instructions (U.S. citizen, resident or domestic entities)

• 15 -

15

Notice 2009-62

• IRS granted an extension of the deadline to file

FBARs for 2008 and earlier years to June 30, 2010 for:

Persons with no financial interest in a foreign financial

□

Persons with no financial interest in a foreign financial account but who had signature or other authority over that account

□

Persons with a financial interest, or signature authority

• ver, a foreign financial account in which the assets are

held in a commingled fund

• 16 -

16

Notice 2010-23

M difi d th d i i t ti li f t d d N ti

• Modified the administrative relief granted under Notice

2009-62

• U.S. persons with signature authority over, but no

fi i l i t t i f i fi i l t financial interest in, a foreign financial account were given a further extension of time from June 30, 2010 to June 30, 2011 to file FBARs for 2009 and earlier years. IRS ill t i t t th t “ i l d f d”

• IRS will not interpret the term “commingled fund” as

applying to funds other than mutual funds, with respect to FBARs for calendar year 2009 and prior years.

IRS stated that it will not apply its enforcement authority

□

IRS stated that it will not apply its enforcement authority adversely in cases where persons possess a financial interest in,

• r signature authority over, a foreign hedge fund or private

equity fund for the calendar year 2009 and earlier years.

• Taxpayers that qualify for relief under the notice should

check “No” in response to FBAR-related questions found

• n their federal tax forms for 2009 and earlier years.

(S h d l B)

• 17 -

(Schedule B).

17

Announcement 2010-16

• Suspends the June 30, 2010 FBAR filing

requirement for persons who are not U S requirement for persons who are not U.S. citizens, residents or domestic entities

• Provides that all persons may rely on the

p y y definition of “U.S. person” found in the old FBAR instructions, to determine if they have an FBAR filing requirement for 2009 and earlier years filing requirement for 2009 and earlier years

• All other requirements of the 2008 revised FBAR

form and instructions (as modified by Notice form and instructions (as modified by Notice 2010-23) remain in effect.

• 18 -

18

P d FBAR R Proposed FBAR Regs

• Material terms of the proposed FBAR regs in Treasury FinCEn

Release (IRS Notice 2010-23) ― Resolve uncertainty over “U S person” definition Resolve uncertainty over U.S. person definition ― Specify what financial accounts must be reported ― Expand signature authority over accounts p g y ― Other changes

19

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• Resolve uncertainty Over “U.S. person” definition

― FBAR instructions issued in 2008 greatly extended the reach of those required to file an FBAR reach of those required to file an FBAR. ― Announcement 2010-16, issued Feb. 26, 2010 ― Temporarily suspended FBAR reporting requirements p y p p g q for persons who are not U.S. citizens, U.S. residents or domestic entities A li bl t FBAR t d J 30 2010 d ― Applicable to FBAR reports due on June 30, 2010 and earlier years ― Proposed regulations would codify these requirements p g y q

20

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• Under the proposed regulations, the definition of a ”U.S.

person” required to file the FBAR would include: ― Citizens of the U S Citizens of the U.S. ― Resident aliens of the U.S. (including individual that live in Puerto Rico) ― Domestic corporations, partnerships, trusts and limited liability companies F i / titi ld t b i d t fil ― Foreign persons/entities would not be required to file an FBAR.

21

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• Specify what financial accounts must be reported

― Proposed regulations ― Foreign financial accounts subject to FBAR reporting include any of the following accounts that are located in a foreign country ― Bank accounts (i.e., demand, checking, time deposit) ― Security accounts (i.e., brokerage account) y ( , g ) ― Other financial accounts ― Excluded from the definition of financial account are: A f U S d I di ib ― An account of a U.S. agency or department, an Indian tribe, or any state or political subdivision of a state (or a wholly-owned entity, agency, or instrumentality of any of these) An account of an international financial institution of which ― An account of an international financial institution of which the U.S. is a member

22

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• The definition of other financial accounts includes:

― Accounts with an entity in the business of accepting deposits as a “financial agency” ― Insurance policies with a cash or annuity value policy ― Unclear under the proposed regulations when an insurance policy or annuity is deemed in a foreign country (e.g., is it dependent on location of the insurance provider, owner, branch where policy is issued, location where policy is held) ― Commodity futures and options accounts ― Interests in mutual funds and similar pooled funds that: ― Issue shares to the general public ― Determine a regular net asset value g ― Regularly redeem their shares

23

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• In prior (informal) guidance, the IRS has taken the position that foreign hedge

funds and foreign equity funds are foreign financial accounts.

• Notice 2010-23, issued Feb. 26, 2010

― Announced that the IRS would not enforce FBAR filing requirements with respect to interests in foreign investment funds other than mutual funds, such as hedge funds and private equity funds, held during 2009 and earlier years earlier years

• Proposed regulations reserve on the treatment of foreign hedge funds and

equity funds P bl b t th l k f g l ti d t ti l t ― Preamble expresses concern about the lack of regulation and potential to use these types of funds to evade taxes, but refers to pending legislative proposals that would apply additional regulation and oversight.

• Note that Notice 2010-23 does require persons with a financial interest in or
• Note that Notice 2010-23 does require persons with a financial interest in, or

a signature authority over, a foreign comingled fund that is a mutual fund to file an FBAR

24

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• Expand signature authority over accounts

― Under the Bank Secrecy Act, any U.S. person with signature authority

• ver a foreign financial account is generally required to file an FBAR

ith t t th t t with respect to that account. ― There are three limited exceptions from these filing requirements for persons who have signature authority over, but not a financial interest in the account including: in, the account, including: ― Officers/employees of banks currently examined by federal bank agencies Offi / l f U S ti th t bli l t d d ― Officers/employees of U.S. corporations that are publicly traded ― Officers/employees of companies with $10 million in assets and at least 500 shareholders of record ― The proposed regulations expand and clarify these exceptions.

25

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

U d th d l ti ffi / l h h

• Under the proposed regulations, officers/employees who have

signatory authority over, but no financial interest in, a foreign financial account and are officers or employees of the following institutions are not required to file FBARs institutions are not required to file FBARs. ― A bank that is examined by the OCC, Board of Governors of the Federal Reserve System, the FDIC, the OTS or the NCUA ― A financial institution registered with/examined by the SEC or the CFTC ― An entity with a class of equity securities listed on any U.S. y q y y national securities exchange, or a U.S. subsidiary of such an entity that is named in a consolidated FBAR report of the parent ― A U.S. corporation that has a class of equity securities registered A U.S. corporation that has a class of equity securities registered under Sect. 12(g) of the SEC (i.e., $10 million of assets and 500

• r more shareholders of record)

26

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• The proposed regulations do not provide any exception for:

E l f i t l h ld i t t f d ― Employees of privately held investment fund managers that are not registered with the SEC ― U.S. employees of foreign banks and funds p y g ― Employees of tax-exempt entities that do not otherwise fall under one of the exceptions

27

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• Notice 2010-23 delays the FBAR filing deadline by one year for

U.S. persons with signature authority over, but no financial interest in, a foreign financial account for the 2010 and prior calendar years. ― Changes due date from June 30, 2010 to June 30, 2011 ― Provided the taxpayer has no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for this relief should check the “No” box in response to FBAR-related questions found on federal tax forms for 2009 and earlier that ask about the existence of a financial interest in, or signature authority over, a , g y , foreign financial account.

28

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

Other Changes

• Other Changes

― Under the existing rules, a U.S. person that has a financial interest in 25 or more foreign financial accounts may file an FBAR form that indicates only the number of financial accounts and certain other basic information on the FBAR report, if it agrees to provide detailed information regarding each account to the IRS upon request. ― The proposed regulations retain this rule. ― The proposed regulations permit an entity that is a U.S. person and owns directly/indirectly more than a 50% interest in an entity that is required to file an FBAR to file a consolidated report of itself and the other entity. Th d l ti l id th t th f ll i ill t b i d ― The proposed regulations also provide that the following will not be required to file an FBAR, with respect to a foreign financial account held by or on behalf of the retirement plan or IRA: ― Participants and beneficiaries in retirement plans under IRC sections Participants and beneficiaries in retirement plans under IRC sections 401(a), 403(a) or 403(b); as well as owners and beneficiaries of individual retirement accounts under IRC Sect. 408

29

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

The proposed regulations also provide that the following will not be required

• The proposed regulations also provide that the following will not be required

to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA: ― Participants and beneficiaries in retirement plans under IRC Participants and beneficiaries in retirement plans under IRC sections 401(a), 403(a) or 403(b); as well as ― Owners and beneficiaries of individual retirement accounts under IRC Sect. 408 ― Roth IRAs under IRC Sect. 408A ― Note that the retirement plan/IRA itself must file an FBAR U d th d l ti b fi i f t t th t ld b i d

• Under the proposed regulations, a beneficiary of a trust that would be rquired

to file an FBAR by reason of having either a beneficial interest in more than 50% of trust assets or receiving more than 50% of the trust’s income is not required to report the trust’s foreign financial accounts if the trust, a trustee q p g ,

• r agent of the trust is a U.S. person that files an FBAR regarding that

account and provides any additional information requested by the IRS.

30

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• The proposed regulations provide anti-avoidance rules so that

any person who causes an entity to be created for the purpose any person who causes an entity to be created for the purpose

• f evading FBAR reporting requirements will be treated as

having a financial interest in any reportable account held by the entity the entity.

31

P d FBAR R (C ) Proposed FBAR Regs. (Cont.)

• What is missing?

― The proposed regulations do not: M k h i ff t t id d li t fili ― Make a comprehensive effort to avoid duplicate filings ― Raise the $10,000 filing threshold Provide for electronic filing of FBARs ― Provide for electronic filing of FBARs ― Treat an FBAR as filed when mailed ― Provide for extending the due date for an FBAR Provide for extending the due date for an FBAR ― State whether they would be effective prospectively

• r retroactively

32

Scott Fink Greenberg Traurig

COMPLIANCE EXPERIENCES

Scott Fink, Greenberg Traurig Igor Drabkin, Holtz Slavett & Drabkin

COMPLIANCE EXPERIENCES FROM 2010 FBAR FILINGS

Increase In FBAR Compliance

• IRS has increased enforcement of FBAR

compliance compliance.

□

John Doe summons (i.e. UBS)

□

Hiring of additional auditors with a focus on

□

Hiring of additional auditors with a focus on international compliance

□

Education and outreach to the public regarding FBAR compliance compliance

□

Offshore voluntary disclosure initiative

□

Focus on banks in Europe Asia and Latin America

□

Focus on banks in Europe, Asia and Latin America

• 34 -

34

Impact Of Increased Enforcement

• From 2004 to 2009

□

The number of FBARs filed with the IRS increased 145%, from 217,699 to 534,043.

□

FBAR-related examinations increased 96% from 334 to

□

FBAR related examinations increased 96%, from 334 to 656.

□

FBAR penalty assessments increased nearly four-fold, from $4 2 million to $20 5 million from $4.2 million to $20.5 million.

Treasury Inspector General For Tax Administration, reference number 2010-30- 125, New Legislation Could Affect Filers of the Report of Foreign Bank and Financial Accounts, But Potential Issues Are Being Addressed (Sept. 29, 2010) Financial Accounts, But Potential Issues Are Being Addressed (Sept. 29, 2010)

• 35 -

35

Civil FBAR penalties

• Non-willful violation: Up to $10,000 for each

violation violation

• Willful violation: Penalty up to the greater of

$100,000 or 50%

• f the balance in the account

$ , at the time of the violation

• For business:

□

Negligent violation: Penalty up to $500 for each violation

□

Pattern of negligent activity: An additional penalty up to $50 000 ith t t h i l ti $50,000 with respect to any such violation

• 36 -

36

FBAR Audits

• Usually connected with income tax issues and

the failure to file foreign information returns the failure to file foreign information returns (e.g., Form 5471 [Information Return of U.S. Persons with Respect to Certain Foreign C ti ] d F 3520 [T ti Corporations] and Form 3520 [Transactions with a Foreign Trust])

• The statue of limitations on assessment of civil

FBAR penalties is six years from the date of the FBAR penalties is six years from the date of the

• violation. 31 USC Section 5321(b)(1)
• 37 -

37

Examiner Determinations Of FBAR Penalties

• Depends on the facts and circumstances of each
• Depends on the facts and circumstances of each

case (different than in the offshore voluntary disclosure initiative). A i d t i t t t lt

• An examiner can determine not to assert a penalty,

even if there is an FBAR violation. In such a case, the examiner will issue a warning letter to the taxpayer and secure the necessary FBARs taxpayer and secure the necessary FBARs.

□

In exercising his or her discretion, the examiner should consider:

• Whether compliance objectives would be achieved by

issuance of a warning letter,

• Has the taxpayer previously been issued a warning letter or

has been assessed the FBAR penalty,

• The nature of the violation and the amounts involved, and
• The cooperation of the taxpayer during the examination.
• 38 -

p p y g IRM 4.26.16.4.7.

38

Willful Vs. Non-Willful Violations

• Willfulness test: Whether there was a voluntary,

intentional violation of a known legal duty

• For FBAR purposes, willfulness is shown by the person’s

For FBAR purposes, willfulness is shown by the person s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.

• Burden is on the IRS
• IRS can infer willfulness from conduct meant to conceal

sources of income (checking “No” on the Schedule B of sources of income (checking No on the Schedule B of an income tax return in response to the question about having an interest in a foreign bank account).

• Arguments against willfulness

Arguments against willfulness

□

Reasonable cause

□

Unaware of FBAR requirement

• 39 -

□

U.S . v. Williams

39

Penalty Mitigation

• An examiner is given discretion under the

Internal Revenue Manual to determine whether a penalty in an amount less than the maximum a penalty in an amount less than the maximum FBAR penalty should apply.

• This discretion is contingent on several factors
• 1. The person has no history of criminal tax or Bank Secrecy

Act convictions for the preceding 10 years

• 2. No history of past FBAR assessments
• 3. No money in the foreign account was from an illegal source
• r used to further a criminal purpose.
• 4. The person cooperated during the exam.
• 4. The person cooperated during the exam.
• 5. The IRS did not sustain a civil fraud penalty against the

person for an underpayment for the year in question due to the failure to report income related to any amount in a f i R 4 26 16 4 6 1

• 40 -

foreign account. IRM 4.26.16.4.6.1

40

Mitigation Of Non-Willful Penalty

d h h h

• Depends on the highest aggregate account

balance

□

If the balance does not exceed $50 000 the penalty is

□

If the balance does not exceed $50,000, the penalty is $500 for each violation, not to exceed a total of $5,000 in penalties. If h b l d $50 000 b i l h

□

If the aggregate balance exceeds $50,000 but is less than $250,000, then the penalty is, per violation, the lesser of $5,000 or 10% of the highest balance in the account.

□

The penalty is $10,000 per violation for accounts exceeding $250,000. IRM 4.26.16.4.6.2

• 41 -

41

Mitigation Of Willful Penalty

• If the aggregate balance is less than $50,000, then the

penalty is the greater of $1,000 per violation or 5%

• f

the maximum account balance. the maximum account balance.

• If the aggregate balance is greater than $50,000 but less

than $250,000, then the penalty assessed for each account is the greater of $5,000 per violation or 10%

• f

account is the greater of $5,000 per violation or 10%

• f

the maximum account balance.

• If the aggregate balance exceeds $250,000 but is less

than $1 million, then the penalty assessed for each than $1 million, then the penalty assessed for each account is the greater of 10%

• f the maximum account

balance or 50%

• f the closing balance in the account as of

the last day for filing the FBAR.

• If the aggregate balance exceeds $1 million, then the

maximum penalty applies (the greater of $100,000 or 50%

• f the account). IRM 4.26.16.4.6.3
• 42 -

42

Voluntary Disclosure Program

IRS offshore voluntary disclosure initiative

• Specifically aimed at FBAR compliance

Specifically aimed at FBAR compliance

• Followed UBS enforcement action (“John Doe” summons)
• Launched in March 2009
• Expired on Oct. 15, 2009

43

Effects Of Offshore Voluntary Disclosure Program y g

• More than 15,000 U.S. taxpayers with foreign bank accounts participated

in the program.

• Eliminated risk of criminal prosecution
• Became compliant

p

• Certainty of penalties

– Pay tax and accuracy related penalty

• Six years (2003 2008)
• Six years (2003–2008)
• 20% of tax; IRC §6662

– Global offshore penalty

• 20% of the highest balance in offshore accounts
• In lieu of all other potential penalties

44

Effects Of Offshore Voluntary ( ) Disclosure Program (Cont.)

• Increased compliance
• Raised awareness of foreign asset reporting for taxpayers and

professionals professionals

• Raised awareness of professionals about existing requirements for

foreign financial accounts and assets (Form TD F 90.22‐1; Form 5471; Form 3520)

• Raised awareness of professionals and taxpayers about applicable

draconian penalties

45

FBAR Penalties FBAR Penalties

Violation Civil Penalties Criminal Penalties Comments Negligent Up to $500 N/A 31 U.S.C. § 5321(a)(6)(A) Negligent violation Up to $500 N/A 31 U.S.C. § 5321(a)(6)(A) 31 C.F.R. 103.57(h). Non‐willful violation Up to $10,000 for each negligent violation N/A 31 U.S.C. § 5321(a)(5)(B) Willf l f il t U t th t f $100 000 U t $250 000 5 31 U S C § 5321( )(5)(C) Willful failure to file FBAR Up to the greater of $100,000, or 50% of the account value at the time of the violation. Up to $250,000 or 5 years or both 31 U.S.C. § 5321(a)(5)(C) 31 U.S.C. § 5322(a) and 31 C.F.R. § 103.59(b) for criminal. Willful: Failure to Willful: Failure to file FBAR or retain records of account while violating certain other laws Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $500,000 or 10 years or both 31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal Knowingly and willfully filing false FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. $10,000 or 5 years or both 18 U.S.C. § 1001, 31 C.F.R. § 103.59(d) for criminal.

46

Post‐Amnesty Voluntary Disclosure Post Amnesty Voluntary Disclosure

• Voluntary disclosure is still available.
• Longstanding practice of the IRS
• Main goal of voluntary disclosure: Avoid criminal prosecution

– “A voluntary disclosure will not automatically guarantee A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.”

• Voluntary disclosure policy is contained in Internal Revenue Manual

9.5.11.9.

47

Requirements For Voluntary Disclosure (IRM 9 5 11 9) (IRM 9.5.11.9)

• Legal source income. This practice does not apply to taxpayers with illegal source income.
• Timely disclosure. A disclosure is timely if it is received before:

– The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; – The IRS has received information from a third party (e.g., informant, other governmental The IRS has received information from a third party (e.g., informant, other governmental agency or the media) alerting the IRS to the specific taxpayer’s non‐compliance; – The IRS has initiated a civil examination or criminal investigation that is directly related to the specific liability of the taxpayer; or Th IRS h i d i f ti di tl l t d t th ifi li bilit f th t – The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

• Disclosure is truthful and complete.

– The taxpayer fully cooperates with the IRS in determining his or her correct tax liability, p y y p g y and – The taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest and any penalties.

48

Voluntary Disclosure Procedure Voluntary Disclosure Procedure

• Is “quiet” or “informal” voluntary disclosure dead?

– “Quiet” disclosure historically involved preparation and filing of Quiet disclosure historically involved preparation and filing of accurate returns. – IRS’ position is that filing of amended and information returns will not be considered a voluntary disclosure be considered a voluntary disclosure.

• “Formal” disclosure

G h h h IRS C i i l I i i Di i i – Go through the IRS Criminal Investigation Division

49

Current Procedures Current Procedures

• Same process applies as for the offshore VDP
• Contact IRS Criminal Investigations

Contact IRS Criminal Investigations

• Get a pre‐clearance from CI
• Submit optional format letter

G i i h li ’ l di l i di i ll

• Get a written notice that your client’s voluntary disclosure is conditionally

accepted

• Work with Civil Examination Division on determining correct amount of tax

d l i b i d d d i f i Ci il and penalties; submit amended and information returns to Civil Examination

• No certainty about penalties

50

What To Expect What To Expect

• Offshore compliance is top priority for IRS
• Offshore compliance is top priority for IRS
• New John Doe summons cases
• Tax information exchange
• Global high‐wealth unit created by IRS
• Criminal prosecutions will continue

Criminal prosecutions will continue

• Taxpayers with previously undisclosed interest in foreign accounts MUST

get into compliance get into compliance.

51

What To Expect (Cont.) What To Expect (Cont.)

• New offshore amnesty program?

– On Jan 24 the IRS said it would soon announce a new amnesty On Jan. 24, the IRS said it would soon announce a new amnesty program aimed at encouraging wealthy Americans with hidden

• ffshore bank accounts to come forward, declare their money and pay

taxes owed. – Per an IRS spokesman, the program would be formally announced “very shortly” and would not offer terms as generous as those put forth in the last program. p g

52

CIVIL LITIGATION OVER FBAR

Igor Drabkin, Holtz Slavett & Drabkin

United States v. Williams Civil Action No. 1:09‐cv‐437

• U. S. District Court, E.D. Virginia
• Sept. 1, 2010

f llf l

• Issue of willfulness
• U.S. District Court for the Eastern District of Virginia found that the

government had failed to meet its burden to establish by a preponderance

• f the evidence that a taxpayer willfully failed to report his interest in a

foreign bank accounts that were omitted from the individual’s 2000 tax return.

54

United States v. Williams (Cont.) i Pertinent Facts

• In 1993, J. Bryan Williams, opened two Swiss bank accounts in the name of ALQI Holdings,

L d Ltd.

• Over the course of seven years, the taxpayer deposited in excess of $7 million in assets to the

Swiss account.

• Williams did not disclose the foreign accounts on his 2000 tax return, nor did he file a Form

TD F 90‐22.1 (FBAR). TD F 90 22.1 (FBAR).

• In January 2002, based on advice received from his tax attorneys and accountants, the

taxpayer disclosed his financial interests in the offshore accounts to an IRS agent.

• Williams subsequently disclosed the existence of the foreign accounts by the following:

– Upon the filing of his 2001 tax return (October 2002), p g ( ) – In an application to participate in the offshore voluntary compliance initiative (February 2003), – In amended returns for 1999 and 2000 (filed February 2003), – While pleading guilty to tax fraud (May 2003) as well as to conspiracy charges and tax i f th ff h f d f 1993 t 2000 (J 2003) d evasion for the offshore funds from 1993 to 2000 (June 2003), and – Upon filing his filing of Form TD F 90‐22.1 for tax years 1993 through 2000 (January 2007).

• Williams met with Swiss authorities in 2000 and learned that his Swiss accounts were frozen
• n Nov. 14, 2000, “at the behest of the U.S. government.”
• n Nov. 14, 2000, at the behest of the U.S. government.

55

United States v. Williams (Cont.) ’ i i Government’s Position

• The government sought to enforce its assessment of two FBAR penalties

against the defendant for willfully failing to report his interest in his g y g p

• ffshore accounts for the tax year 2000.

– Penalty for willful failure to file an FBAR is the greater of $100,000, or 50% of the amount in the account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C) and 31 U.S.C. § 5322(a).

• The government argued that the defendant’s signature on his Form 1040

The government argued that the defendant s signature on his Form 1040 was prima facie evidence that Williams knew the contents of his tax return and willfully failed to disclose his Swiss bank accounts.

56

United States v. Williams (Cont.) ’ illf l l i Court’s Willfulness Analysis

• The court concluded that the government fell short of meeting its clear

and convincing burden of proof in establishing that Williams willfully and convincing burden of proof in establishing that Williams willfully failed to disclose offshore assets.

• While Williams had in fact not disclosed his offshore account on his
• riginal 2000 tax return, it occurred after he found out that the U.S. and

h k b h Swiss authorities knew about the accounts.

• In the court’s view, Williams was aware that the authorities knew about

his offshore accounts by the fall of 2000, long before the FBAR deadline of June 30, 2001. ,

• The court said that such evidence demonstrated that Williams lacked any

motivation to willfully conceal his offshore accounts on his 2000 tax return, and thereafter.

• “Williams’ subsequent disclosures throughout 2002 and 2003 corroborate
• Williams subsequent disclosures throughout 2002 and 2003 corroborate

his lack of intent,” the court said. Though made after the June 30, 2001 deadline, Williams’ disclosure of the ALQI accounts to the IRS in January 2002 indicated to the court that Williams continued to believe the assets had already been disclosed had already been disclosed.

57

United States v. Williams ’ illf l l i ( ) Court’s Willfulness Analysis (Cont.)

• The government mainly relied on the taxpayer’s signature on a return with

a “No” box checked, in response to a question about foreign bank accounts. C t it d th f U S M h 949 F 2d 1397 1407 (6th Ci 1991)

• Court cited the case of U.S. v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991),

which said that a “taxpayer’s signature on a return does not in itself prove his knowledge of the contents, but knowledge may be inferred from the signature along with the surrounding circumstances ... “ g g g

• Court concluded that Williams’ testimony that he only focused on the

numerical calculations on the Form 1040, and otherwise relied on his accountants to fill out the remainder of the form, was credible.

• The court thus concluded that in light of subsequent disclosures and

Williams’ belief that the government is aware of his account, his failure to disclose already frozen assets in a foreign account was not an act undertaken intentionally or in deliberate disregard for the law undertaken intentionally or in deliberate disregard for the law.

58

United States v. Williams (Cont.) l i Conclusions

• The Williams case shows that it may not be easy for the government to

meet its burden of proof in order to establish the “willfulness” element. p

• Relying on the taxpayer’s signature and “No” box on Schedule B may not

be sufficient by itself to show willfulness.

• The courts will review all the facts and circumstances including the

The courts will review all the facts and circumstances, including the taxpayer’s motives and actions as well as the surrounding circumstances, in order to determine if there was requisite willful intent.

• The case also shows the government’s “state of mind” and indicates that

The case also shows the government s state of mind and indicates that the government may continue to aggressively enforce the FBAR penalties and will continue to pursue cases of undisclosed foreign accounts.

59

CRIMINAL PROSECUTIONS

Steven Toscher, Hochman Salkin Rettig Toscher & Perez

CRIMINAL PROSECUTIONS OVER FBAR

The War On Secret Foreign Accounts

“If you are a U.S. individual holding overseas assets, you must report and pay your taxes or we will be increasingly focused on finding you.” p y y g y g y Douglas H. Shulman, Commissioner of Internal Revenue AICPA National Conference on Federal Taxation W hi D C O 26 2009 Washington, D.C. , Oct. 26, 2009

61

Douglas H. Shulman, Commissioner Of Internal Revenue Commissioner Of Internal Revenue

• Nov. 16, 2010

“The VDP and UBS matters are significant, but there is obviously more to come. We have been scouring the vast quantity of data we received from the VDP applicants and have been scouring the vast quantity of data we received from the VDP applicants and from various other sources. Although more data mining is still to be done, this information has already proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and p p g g promoters from around the world. And this remains just the start. As I have said from the beginning, this has never been about one bank or one country. We’ve produced results and will continue to produce results.”

62

Douglas H. Shulman, Commissioner Of Internal Revenue Commissioner Of Internal Revenue

• Nov. 16, 2010 (Cont.)

“To conclude, we are sending a clear message to taxpayers that we are serious about tax compliance We will tirelessly pursue anyone who serious about tax compliance. We will tirelessly pursue anyone who tries to use international borders to their advantage and cheat honest

• taxpayers. As I’ve said throughout my tenure as Commissioner,

combating international tax evasion will continue to be a top priority. We have additional cases and banks in our sights right now. This issue is not going away, and those who try to skirt U.S. tax laws by hiding assets and income offshore, and the banks and advisors who help them do it will find themselves increasingly at risk due to our help them do it, will find themselves increasingly at risk due to our efforts in this area.”

63

Criminal Penalty For FBAR Criminal Penalty For FBAR Violations: Not Just A Civil Matter

• A willful failure to comply with the FBAR reporting

requirements is a felony that can subject a taxpayer to a fine of not more than $ 250,000 or five years in prison or both.

• While most criminal tax violations involving a willful failure

to file a require tax forms are misdemeanors, a willful failure to file the FBAR form is a felony.

• Where the failure to file an FBAR is part of a pattern of illegal

activity, the statute provides for a fine of up to $500,000 and imprisonment of up to 10 years, or both.

• A civil penalty can be imposed despite the fact that a criminal

penalty is imposed with respect to the same violation.

64

Related Tax Charges Under Internal C Revenue Code

• Most of the criminal prosecutions with respect to foreign bank
• Most of the criminal prosecutions with respect to foreign bank

accounts in the past arose with respect to non-FBAR criminal

• statutes. For example, a taxpayer who provides a false answer

to the foreign bank question on Schedule B of the for Form b d ( ) h i 1040 can be prosecuted pursuant to IRC §7206(1). That section criminally punishes a taxpayer who willfully makes and subscribes any return under penalties of perjury which he does not believe to be true and correct as to every material matter. not believe to be true and correct as to every material matter.

• A person may not avoid criminal prosecution by failing to

provide an answer to the foreign bank account question. Failing to answer “yes” or “no” could be considered knowingly signing a return that is not true and correct as to every material matter under IRC §7206(1).

65

Criminal FBAR Violations Require Criminal FBAR Violations Require Willfulness

A criminal violation of the FBAR reporting requirement requires that the taxpayer act “willfully ” the taxpayer act willfully. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty violation of a known legal duty. In a criminal prosecution, the government must establish willfulness beyond a reasonable doubt. beyond a reasonable doubt.

66

“Willfulness” Defined

Willfulness is shown by the person’s knowledge of the Willfulness is shown by the person s knowledge of the reporting requirements and conscious choice not to comply with the requirements. The person needs to know he has an FBAR reporting

• requirement. If a person has that knowledge, the only intent

needed to constitute a willful violation of the requirement is a needed to constitute a willful violation of the requirement is a conscious choice to not file the FBAR or to file a false FBAR.

67

Williams: A Civil FBAR Case Williams: A Civil FBAR Case

• The are very few court cases addressing willfulness in the

context of the FBAR reporting requirements. One recent case context of the FBAR reporting requirements. One recent case in District Court Judge , United States v, Williams, Civil Action No.: 1:09-cv-437 (E.D.Va. Sept 1, 2010), found that willfulness was lacking.

• In the case, the government sought to enforce its assessments
• f two FBAR penalties against defendant Williams for

illf ll failing to report his interest in t o S iss bank willfully failing to report his interest in two Swiss bank accounts for tax year 2000, as required by 31 USC §5314. The court concluded that the government fell short of meeting its burden (clear and convincing evidence in a civil case) in ( g ) establishing that Williams willfully failed to disclose offshore assets in violation of that statute.

68

Williams’ Testimony Was Credible y

• The court, in citing to U.S. v. Mohney, 949 F.2d 1397, 1407

(6th Cir. 1991) (a “taxpayer’s signature on a return does not in ( ) ( p y g itself prove his knowledge of the contents, but knowledge may be inferred from the signature along with the surrounding circumstances ... ”) concluded that “Williams’ testimony that he only focused on the numerical calculations on the Form he only focused on the numerical calculations on the Form 1040 and otherwise relied on his accountants to fill out the remainder of the Form was credible, and should be given more weight than the mere fact that Williams checked 'no’ box.” The court thus concluded that Williams’ failure to disclose already-frozen assets in a foreign account was not an act undertaken internationally or in deliberate disregard for the law but instead constituted an understandable omission the law, but instead constituted an understandable omission given the context in which it occurred.

69

Internal Revenue Manual Examples Of Willfulness

The following examples of willfulness are set forth in Internal The following examples of willfulness are set forth in Internal Revenue Manual 4.26.16.4.5.3.8 (07-01-08) and are instructive

• f the government’s approach in determining willfulness (at

least in the civil penalty context) for criminal cases and normally requiring much stronger proof : “A person admits knowledge of, and fails to answer, a p g question concerning signature authority over foreign bank accounts on Schedule B of his income tax return. When asked, the person does not provide a reasonable explanation for failing to answer the Schedule B question and for failing to file failing to answer the Schedule B question and for failing to file the FBAR. According to the IRS, a determination that the violation was willful likely would be appropriate in this case.”

70

IRM Example

“A person files the FBAR, but omits one of three foreign bank

• accounts. The person had closed the omitted account at the

time of filing the FBAR. The person explains that the omission was due to unintentional oversight. During the examination, the person provides all information requested with respect to the omitted account The information provided does not the omitted account. The information provided does not disclose anything suspicious about the account, and the person reported all income associated with the account on his tax

• return. The willful penalty should not apply absent other

id h i di illf l ” evidence that may indicate willfulness.”

71

IRM Example (Cont.)

“A person filed the FBAR in earlier years but failed to file the FBAR in subsequent years when required to do so When FBAR in subsequent years when required to do so. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with foreign bank accounts failed to report income associated with foreign bank accounts for the years that FBARs were not filed. [A] determination that the violation was willful likely would be appropriate in this case.”

72

IRM Example (Cont.)

“A person received a warning letter informing him of the FBAR filing requirement, but the person continues to fail to g q , p file the FBAR in subsequent years. When asked, the person does not provide a reasonable explanation for failing to file the

• FBAR. In addition, the person may have failed to report

income associated with the foreign bank accounts. According to the IRS, a determination that the violation was willful likely would be appropriate in this case.”

73

FBAR Criminal Referrals From FBAR Criminal Referrals From Civil Examination Division

The IRS Criminal Investigation Division (CI) has authority to examine criminal FBAR violations. Acceptance by the CI of p y an FBAR referral for criminal investigation depends on the evidence establishing willfulness. A fraud technical advisor (FTA) will assist the civil examiner in determining whether there is a willful violation and provide the examiner with there is a willful violation and provide the examiner with information concerning referrals to CI. If the examiner considers that the case warrants referral for possible criminal investigation, the examiner will involve a FTA as soon as possible.

74

Criminal Prosecutions Criminal Prosecutions Of FBAR Violations

While in the past criminal enforcement relating to persons failing While in the past, criminal enforcement relating to persons failing to comply with FBAR reporting requirements has been rare, the IRS (now the agency principally responsible for FBAR compliance) has geared up to investigate and prosecute willful p ) g p g p

• violators. Increased emphasis, together with the IRS’ ever-

increasing ability to obtain once-secret information from foreign jurisdictions, suggests there will be more investigations and prosecutions in this area.

75

U.S. v. Simon: Civil Administrative Relief? “Only Congress Can Forgive The Crime” Only Congress Can Forgive The Crime

– In U.S. v. Simon, 3:10-CR-0056-RLM (N.D. Ind., 2010), a court considered the impact of administrative relief on a criminal ti prosecution. – The notice (and the defendant)

• Notice 2010-23

– If there is signature authority only (but no financial interest), then U.S. persons have until June 30, 2011 to file FBARs in 2010 and prior years. Such taxpayers should check “No ” – Such taxpayers should check No. – The DOJ (and the court)

• Congress, not an agency, creates the crime. Only Congress can

forgive the crime forgive the crime.

• Later regulatory amendments cannot absolve a defendant of a crime

without retroactive modification by Congress.

* An earlier notice, Notice 2009-62, also provided relief.

76

U.S. v. Simon (Cont.)

– Creation of uncertainty

• If conduct is arguably not subject to civil penalties, how can it be

criminal?

• Can one rely on notices, other administrative guidance, FAQs or

the Internal Revenue Manual?

• Do you follow the broader statute, or the more lenient guidance and

y g face possible prosecution? – Possible limits of the orders and opinion in Simon

• Taxpayers received large sums of money in years at issue.
• Procedural notes

– Change of the defense theory mid-trial regarding non-taxability

• f income

– Late jury instructions – Can a taxpayer risk following the administrative guidance?

77

Criminal Prosecutions: The Old Days y

Between 1996 and 1998, Justice Department statistics reveal that only nine indictments were filed charging failure to y g g comply with the FBAR disclosure requirements, and for 1999 and 2000, no one was charged. During the period 1995 to 2002, there were only three convictions. Th t t d b th T f th l t i l The reasons stated by the Treasury for these low prosecutorial statistics are strict banking secrecy laws making it difficult to

• btain admissible evidence with respect to undisclosed foreign

bank accounts, and prosecutorial selection of violations for , p criminal conduct associated with the concealment of foreign accounts such as tax evasion, fraud, money laundering, and false statements on a tax return for failing to check the box on Schedule B (which have greater jury appeal) in lieu of failure Schedule B (which have greater jury appeal), in lieu of failure to comply with the FBAR disclosure requirements.

78

Criminal Enforcement After UBS

I i ld f ll i h UBS f i i i i hi h h

• It is a new world following the UBS enforcement initiative, which has

been ongoing since 2008.

• Criminal prosecutions of FBAR violations have increased dramatically
• ver the last two years
• ver the last two years.
• There have been approximately 20 criminal convictions relating to the

UBS investigation (mostly plea bargains), approximately 10 pending actions, and 60-70 UBS related criminal investigations nationwide. , g

• Recent criminal filings such as the Jackson case in New Jersey reflect

that the government will prosecute UBS-type cases with tax losses that are very small (tax losses between $5,000 and $12,500 under i id li ) sentencing guidelines).

79

80

81

Recent FBAR Conspiracy Indictment (Non-UBS)

• On Jan. 26, 2011, a grand jury indicted a New Jersey businessman for

conspiring to conceal offshore bank accounts from the IRS.

• Background in indictment:
• Background in indictment:

– Accounts in BVI and India were with large international bank (not UBS). – Banker advised him to send five checks (each in the amount of $10,000) in order to “stay below the radar.” y – Banker told him that funds would not be transferred through U.S. banking system. – Following news of UBS DPA, he considered repatriation, and banker replied that he had nothing to worry about because the bank would not be replied that he had nothing to worry about, because the bank would not be issuing Forms 1099. – Banker said IRS was looking at the Caribbean, not the Far East.

• Continued crackdown on non-UBS foreign bank accounts

Co ued c c dow o

• U S o e g b

ccou s

• U.S. attorney in New Jersey: “Bankers should encourage their clients

to comply with the law, not advise them how to break it.”

82

Sentencing Under Advisory Sentencing Under Advisory Federal Sentencing Guidelines

• Although a criminal conviction generally carries a statutory maximum

sentence of five years of imprisonment, the actual sentence is determined under the now-advisory Federal Sentencing Guidelines and th Titl 18 U it d St t C d S t 3553 the Title 18 United States Code Sect. 3553.

• The applicable guideline provision is Sect. 2S1.3. In most tax cases,

the guidelines will look to the “tax loss” involved to determine the the guidelines will look to the tax loss involved to determine the advisory sentencing range.

• For example the advisory guideline range of an individual convicted
• For example, the advisory guideline range of an individual convicted
• f an FBAR violation who avoided tax of more than $80,000 would be

27 to 33 months, assuming a “sophisticated means” adjustment.

83

Steven Toscher, Hochman Salkin Rettig Toscher & Perez

FATCA SECT. 6038D

g Shannan Cuddy, Moody Famiglietti & Andronico

3 INFORMATION RETURN

Foreign Account Tax Compliance Act (FATCA)

On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act (Pub.L No. 111-14) (HIRE Act). The HIRE Act created tax breaks for businesses hi i k th h ll t h lid d th hiring new workers through a payroll tax holiday and other measures. To pay for these tax breaks the HIRE Act set forth provisions To pay for these tax breaks, the HIRE Act set forth provisions that have far reaching implications for foreign institutions that may have U.S. clients and broadens reporting requirements for foreign assets, through incorporation (with some modifications) of the Foreign Account Tax Compliance Act of 2009 (FATCA).

85

FATCA

• The FATCA provisions affect (1) increased reporting for

individuals with foreign assets, and (2) disclosure and individuals with foreign assets, and (2) disclosure and compliance issues for foreign financial institutions.

• We will address only the increased reporting and disclosure for

persons with foreign assets. persons with foreign assets.

• The compliance and reporting issues for foreign financial

institutions has been subject to much controversy and is beyond the scope of the program today. Suffice it to say that it beyond the scope of the program today. Suffice it to say that it expands information exchanges between foreign banks and the U.S. government and will severely limit bank secrecy for US taxpayers.

86

New Foreign Asset Disclosure

Beginning with the 2011 tax year (that is, for tax years beginning after g g y ( , y g g March 18, 2010), in addition to the existing FBAR reporting requirements, U.S. individuals who hold any interest in a specified foreign financial asset during the tax year must attach to their tax returns for the year certain information with respect to each asset if the returns for the year certain information with respect to each asset if the aggregate value of all assets exceed $50,000 (or a higher dollar amount prescribed by the secretary of the Treasury).

87

Foreign Financial Assets

Specified foreign financial assets include (1) depository custodial Specified foreign financial assets include (1) depository, custodial accounts or other financial accounts maintained at a foreign financial institutions; or (2) to the extent not held in an account at a financial institution, generally (A) any foreign issued stock or securities, any institution, generally (A) any foreign issued stock or securities, any interests in a foreign investment fund or derivatives with a foreign counterparty; or (B) any interest in a foreign entity.

88

Information Required

The information required to be disclosed must include the maximum value of the asset during the tax year. Moreover, for financial accounts, the taxpayer must disclose the name and address of the financial institution, and the account number. For stocks or securities, the taxpayer must disclosure name and address of the issuer and such other information as is necessary to identify the class or issue of stock In the information as is necessary to identify the class or issue of stock. In the case of any other instrument, contract or interest, a taxpayer must provide any information necessary to identify the instrument, contract

• r interest; along with the names and addresses of all issuers and

i counterparties.

89

Form 8938, Statement of Foreign Financial Assets

90 90

Form 8938, Statement of Foreign Financial Assets

91

Form 8938, Statement of Foreign Financial Assets

92

Form 8938, Statement of Foreign Financial Assets

93

Failure-To-Disclose Penalty

Individuals who fail to make the required disclosures are subject to a q j penalty of $10,000 for the tax year, and this penalty may increase to $50,000 if the failure continues for more than 90 days after notification by the IRS. The failure-to-disclose penalty may not be imposed on any individual who can show that the failure is due to reasonable cause and individual who can show that the failure is due to reasonable cause and not willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer for disclosing is not reasonable cause.

94

Underpayment Penalty: Underpayment Penalty: Undisclosed Foreign Assets

• A 40% accuracy-related penalty (double the otherwise applicable

penalty) can be imposed for the underpayment of tax that is attributable to an undisclosed foreign financial asset understatement. F thi “ di l d f i fi i l t For this purpose, an “undisclosed foreign financial asset understatement” for any tax year is the portion of the understatement for the year that is attributable to any transaction involving undisclosed foreign financial assets. g

• The new 40% penalty is subject to the same defenses that are
• therwise available for §6662 penalties. The penalty applies starting

with tax year 2011 (tax years beginning after March 18, 2010.)

95

Six-Year Statute Of Limitations Six-Year Statute Of Limitations For Omitted Income

• The statute of limitations for assessment of tax has been extended to

six years if there was an omission of gross income in excess of $5,000 relating to a foreign financial asset.

• The new statute applies not only to returns filed after March 18, 2010,

but also to returns filed before that date if the statue of limitations was still open on that date still open on that date.

• A 2006 tax return filed on April 15, 2007 would be subject to the new

six year statute of limitations six-year statute of limitations.

96

In Conclusion

• In terms for foreign tax compliance and enforcement, this is really not

the end. the end.

• Nor is it the beginning of the end.
• As a famous statesman once said: “This is merely the end of the

beginning.”

97