The Report of Foreign Bank and Financial Accounts: Tough New - - PowerPoint PPT Presentation

The Report of Foreign Bank and Financial Accounts: Tough New Requirements

M t i L t t IRS G id d P i f

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Mastering Latest IRS Guidance and Preparing for FBAR's Increased Data Demands

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A Live 110-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features: Brent Lipschultz, Principal, Personal Wealth Advisors Practice Group, Eisner, New York Neil AJ Sullivan, Owner, International Tax Compliance Strategy, Scarsdale, N.Y.

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Tuesday, February 16, 2010 The conference begins at: 1 pm Eastern p 12 pm Central 11 am Mountain 10 am Pacific

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The Report Of Foreign Bank and The Report Of Foreign Bank and Financial Accounts: Tough New R i t W bi Requirements Webinar

• Feb. 16, 2010

Brent Lipschultz Neil AJ Sullivan Eisner LLP

International Tax Compliance Strategy

blipschultz@eisnerllp.com neilsullivan@att.net

Today’s Program

• Review Of Changes To Form TD F 90.22-1, slides 3 through 24

IRS FBAR E f t S F lid 25 th h 26

• IRS FBAR Enforcement So Far, slides 25 through 26
• Emerging FBAR Issues To Date, slides 27 through 35
• Future Legislation, slides 36 through 41

2

Review Of Changes To Form TD F 90 22 1 90.22-1

3

FBAR Overview

• FBAR (Form TD F 90-22.1) is a Treasury annual report under USC

Title 31, the Bank Secrecy Act of 1970 (the “BSA”). BSA addressed concerns that U S persons were using foreign bank secrecy laws to concerns that U.S. persons were using foreign bank secrecy laws to conceal illegal activities Si FBAR i t t t T C t h j i di ti

• Since FBAR is not a tax return, Tax Court has no jurisdiction over

FBAR penalties (Williams, 131 TC No. 6 (10/2/08))

• FBAR report is in addition to a taxpayer’s obligation to indicate the

existence of a foreign account on: Form 1040, Schedule B, Part III Form 1040, Schedule B, Part III Form 1041, Schedule G Form 1065, Schedule B Form 1120 Schedule N Question 6

4

Form 1120, Schedule N, Question 6

Authority To Administer FBAR

• FinCen delegated its authority to enforce the FBAR to the IRS in 2003,

reflecting the fact that a major purpose of the FBAR was to identify reflecting the fact that a major purpose of the FBAR was to identify potential tax evasion

• The IRS can investigate FBAR non-compliance, and assess and collect

civil penalties for failure to comply civil penalties for failure to comply

• The authority delegated to the IRS included the authority to revise

Form 90-22.1 and instructions

• Currently the IRS is set to release a publication in early December
• Currently, the IRS is set to release a publication in early December

clarifying the rules, and has a regulation projection

5

Who Must File FBAR?

 Any U.S. person who has a financial interest or signature authority

• ver foreign financial accounts with an aggregate value exceeding

$10,000 at any time during the year must file an FBAR for such year  A person or required to file an FBAR also must check the appropriate box of his tax return

6

Key Changes To Form TD F 90.22-1

– Requirement for persons in or doing business in U.S. to file FBAR – “Doing business” standard delayed

• IRS guidance forthcoming

– Expanded definition of reportable financial accounts – Expanded definition of “financial interest” through ownership in corporations, partnerships or trusts – Expanded definition of “covered trusts” – Broadened standards for who holds signatory authority over foreign accounts E d d li f d i i ffi d l h – Expanded list of domestic corporation officers and employees who are exempt from filing requirement

7

“U.S. Person,” For FBAR Purposes

• Prior to 2008, a “U.S. person” was:

, p – A U.S. citizen or resident; or – Any domestic legal entity such as a partnership, corporation, estate

• r trust
• Pursuant to the revised FBAR (October 2008), a “U.S. person” is:

– A U.S. citizen or resident (including entities); or ( g ); – A person in and doing business in the U.S. – Review of U.S. person definition in Internal Revenue Manual (July 2008)

• Revised definition is significantly expanded, with guidance lacking

regarding the “in and doing business” standard

8

“U S Person ” For FBAR Purposes U.S. Person, For FBAR Purposes (Cont.)

 Must a single member LLC file an FBAR? FAQ 8 (6/29/09) reads:

• Q. Is a single member LLC, which is a disregarded entity for

US tax purposes, a United States person for FBAR purposes?

• A. Yes, the tax rules concerning disregarded entities do not

apply with respect to the FBAR reporting requirement. FBARs are required under Title 31 not under any provision FBARs are required under Title 31, not under any provision

• f the Internal Revenue Code.

9

a US Person (cont )

• a. US Person (cont.)

Example (U.S. Person)

Non-U.S. person 100%

• wnership

U.S. domestic LLC Foreign financial In the U S Outside the g account

10

U.S. U.S.

Key Changes To Form TD F 90.22-1 y g “In and Doing Business in U.S.”

• Based on an analysis of the facts and circumstances of each case
• A person is not considered to be in and doing business in the U.S. unless that

person is conducting business within the U.S. on a regular and continuous basis P h “ di ll d b i i h U i d S ” i

• Persons who “sporadically conduct business in the United States” are not in

and doing business in the U.S.

• The following examples of persons who are not considered to be in and doing

business in the U.S. are included in IRS guidance issued in February – Non-resident aliens (NRAs) who are engaged in a business but only

• ccasionally visit the U.S. to meet customers or business associates

– NRA artists, athletes and entertainers who only occasionally come to the U.S. to participate in exhibits, sporting events or performances; and – NRAs who visit the U.S. to manage their personal investments, such as rental property, and conduct no other business in the U.S. – Announcement 2009-51 provides that all persons may rely on the definition of U.S. person found in the 2000 instructions and for filings in

11

2010 added “a person in and doing business in the United States”

11

“Foreign”

F i ” fi i l t  Foreign” financial accounts

• A “foreign” financial account is one maintained outside the U.S.
• The geographical location of the account

not the nationality of the

• The geographical location of the account, not the nationality of the

financial institution, determines whether an account is “foreign”

• A financial account with a non-U.S. branch of a U.S. bank or other

U.S. financial institution is “foreign”

• A financial account with a U.S. office of a foreign bank or other

foreign institution is a U.S. account g

• An insurance policy is foreign if issued by a non-U.S. office of

insurer E l – Examples:

• Royal Bank of Canada in New York – no
• Citibank in Toronto – FBAR requirement
• U.S. mutual fund with foreign investments – no FBAR requirement

12

• Foreign mutual fund with all U.S. investments – FBAR requirement

12

What Is A Financial Account?

• A “financial account” includes a bank, securities, derivatives or other financial

instrument account, including any savings, demand, checking, deposit, time deposit, debt card and prepaid credit card account. Safe deposit boxes are not financial accounts unless the institution provides services

• Individual bonds, notes or stock certificates held by the filer, however, are not

financial accounts; nor is an unsecured loan to a foreign trade or business that is not a financial institution

• “Financial account” is any “account in which the assets are held in a

commingled fund, and the account owner holds an equity interest in the fund (including mutual funds)” ( g )

• IRS view is that a cash surrender value insurance policy is a financial account,

and thus if the policy is “foreign” and the value exceeds $10,000, must be reported

13

reported

13

“C i l d F d” Th C t “Commingled Fund”- The Controversy

• IRS official's position (IRS FBAR Forum 06/12/09) is that a foreign hedge

f d ( d f i f d i t it f d) i f i “fi i l fund (and a foreign feeder or private equity fund) is a foreign “financial account” 2009 TNT 122-3 (06/29/09)

• IRS official said IRS position was always that FBARs were required to

be filed for foreign hedge funds (WSJ, 06/25/09), which raises prior-year non-compliance issues

• Under IRS official's stated position, FBARs apparently must be filed by:

p , pp y y − U.S. owners of foreign hedge funds − U.S. managers of foreign hedge funds and their U.S. employees g g g p y with authority; and − U.S. institutions (and their U.S. employees) that have authority

• ver foreign hedge funds of their clients

14

• ver foreign hedge funds of their clients

14

What Is A Financial Interest?

 A person has a financial interest in a foreign financial account if:

• Such person is the owner of record of, or has legal title to, the

account

• The owner of record or holder of legal title is acting as an agent,

nominee or attorney or in some other capacity on behalf of such nominee or attorney, or in some other capacity, on behalf of such person; or

• Such person is deemed to have a financial interest by attribution

from a corporation, partnership or trust

15 15

Financial Interest Through Company

• A person has a financial interest in a foreign financial account by
• A person has a financial interest in a foreign financial account by

attribution from a corporation, if such person owns directly or indirectly more than 50% of the value or vote of a corporation that

• wns the foreign financial account
• wns the foreign financial account
• Thus, if A, a U.S. person, owns 51% of B, a U.S. corporation

with a foreign financial account, both A and B must report the (same) account

• Similarly, if A, a U.S. person, wholly owns B, a foreign

ti (i it i “CFC”) d B h f i fi i l corporation (i.e., it is a “CFC”), and B has a foreign financial account, A must report the account on his FBAR

16 16

Financial Interest Through Financial Interest Through Partnership

• A person has a financial interest in a foreign financial account by

attribution from a partnership, if such person owns an interest in more than 50% of the profits or capital of a partnership that owns p p p p the foreign financial account

• Profits are defined as the distributive share of partnership income,

ki i i l ll i taking into account any special allocations

• Like the corporate attribution rules, the partnership attribution rules

require a U S partnership and a 50%-plus partner to trigger require a U.S. partnership and a 50% plus partner to trigger reporting by the partner of the partnership’s foreign financial account

17 17

Financial Interest Through Trust

• A person has a financial interest in a foreign financial account by
• A person has a financial interest in a foreign financial account by

attribution from a trust that owns the account if such person (1) has a present beneficial interest, directly or indirectly, in more than 50% of the assets of that trust; or (2) receives more than 50% of ; ( ) the trust’s current income

• Under this rule, certain actual or potential U.S. beneficiaries
• f a U.S. or foreign trust may be required to file an FBAR

reporting the trust’s foreign financial accounts

• IRS official’s position is that a beneficiary who can receive

IRS official s position is that a beneficiary who can receive 50+% of the income or assets should file an FBAR (6/12/09 IRS FBAR Forum)

18 18

Financial Interest Through Trust Financial Interest Through Trust (Cont.)

• A person can also have a financial interest in a foreign financial

account by attribution from a trust if:

• Such person established a trust that actually or beneficially
• wns the foreign financial account; and
• A “trust protector” has been appointed
• A trust protector has been appointed
• A trust protector is a person who is responsible for monitoring the

activities of a trustee, with the authority to influence the decisions

• f the trustee or to replace, or recommend the replacement of, the

trustee

19 19

What Is “Signature Or Other What Is Signature Or Other Authority”

• A person has “signature authority” over an account if such person
• A person has

signature authority

• ver an account if such person

can control the disposition of money or other property in it by delivery

• f a document containing his or her signature (or his or her signature

and that of one or more other persons) to the bank or other person with and that of one or more other persons) to the bank or other person with whom the account is maintained

• Other authority” over an account exists when a person can exercise

comparable power over an account by oral or some other means of communication, either directly or through an agent, nominee, attorney

• r other person in similar capacity, to the bank or other person with

whom the account is maintained

• In the IRS 06/12/09 FBAR Forum, the “other authority” was

described as including a substance over form standard

20

described as including a substance-over-form standard

20

Exceptions To Filing FBAR

• NRAs
• If foreign account is in a U S military facility or operated by U S
• If foreign account is in a U.S. military facility or operated by U.S.

institution for the military Offi / l f bli l U S ti hi h h

• Officers/employees of publicly U.S. corporations, or which has more

than $10M and at least 500 SHs, if no personal financial interest, and receives letter from chief financial officer stating that the corporation has complied has complied.

• Officers/employees
• f

federally-regulated bank, if no personal financial interest

21

financial interest

21

FBAR Filing Deadlines

• Filing deadlines

– Brief history of original deadlines and changes along the way IRS Announcement 2009 62: Current June 30 2010 extension for – IRS Announcement 2009- 62: Current June 30, 2010 extension for U.S. persons with only signature authority over foreign financial accounts, and U.S. persons with beneficial ownership of foreign comingled funds comingled funds

• Does this extend to U.S. persons who have owned hedge funds

for the last six years?

• IRS has not released guidance as of Feb 12 2010 (IRS in
• IRS has not released guidance as of Feb. 12, 2010 (IRS in

January 2010 did release fact sheet, with no further guidance)

• IRS regulation project in progress

22 22

Is Information On FBAR Confidential?

 Information provided on an FBAR may be provided to the officers and employees of any constituent unit of the Department of the Treasury who have a need for the records in the performance of their duties Th i f ti l b f d t th d t t  The information also may be referred to any other department or agency of the U.S. upon the request of the head of such department or agency for use in a criminal, tax or regulatory investigation or proceeding proceeding  The information collected may also be provided to appropriate state, local and law enforcement and regulatory personnel in the performance g y p p

• f their official duties. Disclosure of this information is mandatory

 By contrast, dissemination of information on a tax return is strictly li i d S C § 6103

23

• limited. See IRC § 6103

23

FBAR- Penalty Regime

 Non-willful noncompliance:

• Civil penalties of up to $10,000 for each violation, absent reasonable cause.
• Willful non-compliance
• Civil penalties of up to the greater of $100,000 or 50% of the account value for

each violation per person each violation per person

• Criminal penalties are up to a $250,000 fine and a five-year prison term, although

under certain circumstances, it can be 10 years and up to a $500,000 fine  The IRS has the burden of proving willfulness

• However, the Administration proposes (in the Green Book) certain rebuttable

presumptions for civil proceedings, including that generally a failure to report an $ account would be presumed to be willful if that account exceeds $200,000 during the year and is held with a certain intermediary that is not required to report information with respect to U.S. account holders

24 24

IRS FBAR Enforcement So Far

25

IRS FBAR Enforcement To Date

Sl f h dli f fil d f

• Slow pace of handling forms filed so far
• Extra auditors and compliance staff assigned to international
• IRM penalty guidelines of July 2008 and applicability to quiet filings
• Penalty structure: How FBAR penalty is determined, assessed and

collected (statute of limitations, JB Williams and Simonelli cases)

• Too early to tell how IRS investigations will proceed from voluntary

y g p y disclosures though inconsistent penalty application apparent

• Does an income tax examination automatically include an FBAR

examination?

• May an FBAR violation be referred to criminal investigation?
• What is the difference between “willfulness” used in a criminal

context, and in a civil context?

26 26

context, and in a civil context?

Emerging FBAR Issues To Date

27

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance

• Proper protocol if a taxpayer has already filed an FBAR and later discovers

another account – If so, need to consider filing an amended FBAR, using the 2008 tax form – If account relates to another year, use 2008 FBAR and that year’s instructions

• Suppose the taxpayer has unreported income

– If the taxpayer hasn’t filed an FBAR, taxpayer is outside the scope of the IRS voluntary compliance initiative – Taxpayer would want to consider hiring legal counsel to evaluate whether taxpayer would come in through normal voluntary compliance process

28 28

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance (Cont.)

• Representing amnesty non participants that instead came forward with
• Representing amnesty non-participants that instead came forward with

“quiet” or “noisy” filing

– Cover letter – IRM Guidelines (July 1 2008) – IRM Guidelines (July 1, 2008)

29 29

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance (Cont.)

• Conflicts of interest among family members involved with unreported

account, and with differing levels of involvement or culpability. One account, and with differing levels of involvement or culpability. One way to come in now under the normal protocol is the voluntary compliance process – Suppose some family members want to come in but others don’t Suppose some family members want to come in but others don t – A conflict is likely to arise Di l

• Disclosure
• Address in engagement letter

30

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance (Cont.)

• Innocent spouse relief

– Tax – FBAR penalties -- reasonable cause

31

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance (Cont.)

• Need for criminal counsel if IRS investigates taxpayers that made
• Need for criminal counsel if IRS investigates taxpayers that made

filings outside “amnesty” program

32 32

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance (Cont.)

• Practical difficulties with future proceedings on non filers that came
• Practical difficulties with future proceedings on non-filers that came

forward under now-closed amnesty – Retrieval of records from offshore financial institution R d d d t d t i b th ( ) hi h t b l d (b) – Records needed to determine both (a) highest balances and (b) income earned

33 33

Hot Topics: Voluntary Disclosure And Hot Topics: Voluntary Disclosure And Voluntary Compliance (Cont.)

• What is happening after one has submitted voluntary disclosure
• What is happening after one has submitted voluntary disclosure

– Government information document request – Obtaining account records from foreign banks – Inconsistent penalty treatment is prevalent

34

Hot Topics For Taxpayers, Advisors With FBAR – Bank Secrecy And y Offshore Tax Havens

• Future of offshore tax havens, given that piercing has occurred

, g p g

• Exchange of information agreements

– Increased information-sharing among tax authorities

• 84 OECD and non-OECD countries have implemented transparency and effective

exchange of information standards.

• 3,600 bilateral tax conventions currently in force; 1,700 include provisions that

permit information exchange

• 50 tax information exchange agreements are signed or in force
• Treasury announced tax information exchange agreement between U.S. and Monaco in

September 2009

• Similar agreements reached with Gibraltar and Luxembourg (May 20, 2009)
• Luxembourg agreement is the first one entered into by Luxembourg with an OECD

country that meets OECD standards for information exchange U S S i b d d id f i d h f i f i

• U.S.-Swiss tax treaty to be amended to provide for increased exchange of tax information
• New tax information exchange agreement between U.K. and Liechtenstein announced on Aug.

11, 2009

• Switzerland’s Federal Administrative Court granted UBS client appeal on Jan. 21, 2010 to

prevent Swiss government from disclosing account information under Aug 29 2009

35 35

prevent Swiss government from disclosing account information under Aug. 29, 2009 agreement with U.S. government

Future Legislation

36

Foreign Account Tax Compliance Act Of 2009

• The Foreign Account Tax Compliance Act of 2009 (H R 3933 S 1934)
• The Foreign Account Tax Compliance Act of 2009 (H.R. 3933, S. 1934),

introduced in the House by Ways and Means Committee Chair Charles B. Rangel, D-N.Y., and in the Senate by Finance Committee Chair Max Baucus, D-Mont., would impose significant tax withholding penalties on foreign financial institutions that do not disclose holdings by U S individuals or firms financial institutions that do not disclose holdings by U.S. individuals or firms and would create several new information-reporting requirements. According to the Joint Committee on Taxation, the legislation would raise $8.5 billion

• ver 10 years
• Could likely be tacked on to an extenders bill or potentially the Health Care

Bill

• Treasury Secretary Timothy Geithner endorsed the measure, saying in a

release that it “fits well into the Administration’s dual-track strategy of improving our domestic tax laws while increasing global cooperation on tax information exchange”

37 37

information exchange

Foreign Account Tax Compliance Act Of 2009 Highlights Of 2009 - Highlights

• Require foreign financial institutions to provide the identity of any U.S.

individual or foreign entity with substantial U.S. owners, and relevant account g y information, to Treasury or face a 30% withholding tax on income from the bank’s U.S. assets

• Mandate that foreign corporations provide withholding agents with the name,

address and tax identification number of any U.S. individual with at least 10%

• wnership in the firm, or face a 30% withholding tax
• Extend bearer-bond tax penalties to such bonds marketed to offshore investors,

and prevent the U.S. government from offering any bearer bonds

• Subject dividend equivalent payments included in notional principal contracts

and paid to overseas corporations to the same 30% withholding tax levied on dividends paid to foreign investors

38 38

Foreign Account Tax Compliance Act

• f 2009 – Highlights (Cont.)
• Impose penalties as high as $50,000 on U.S. taxpayers who own at least

$50 000 in offshore accounts or assets but fail to report the accounts on their $50,000 in offshore accounts or assets but fail to report the accounts on their annual income tax return

• Levy a 40% on the amount of any understatement attributed to undisclosed

foreign assets

• Extend to six years the statute of limitations for “substantial” omissions

(exceeding $5,000 and 25% of reported income) derived from offshore assets

• Require tax or investment advisers to disclose the identities of any clients they

i i b i ff h ll h h d assist in buying offshore assets, as well as the assets purchased

• Require that shareholders in passive foreign investment companies file annual

returns, and also give Treasury authority to mandate that financial firms file returns dealing with withholding taxes even if they file fewer than 250 returns returns dealing with withholding taxes, even if they file fewer than 250 returns annually

• Make it easier for Treasury to presume that foreign trusts have U.S.

beneficiaries, and establish a $10,000 minimum failure-to-file penalty for

39

p y certain foreign-trust-related information returns

39

2010 Legislation: Highlights

• FACTA legislation

– Introduced by Senate Finance Committee Chairman Max Baucus in the Senate Finance Committee jobs bill in the Senate Finance Committee jobs bill – Hiring Incentives to Restore Employment (HIRE) Act provisions estimated to raise more than $9 billion over 10 years

• Obama releases 2011 revenue proposals
• Obama releases 2011 revenue proposals

– Require increased reporting on certain foreign accounts of foreign financial institutions including hedge fund, private equity funds R i i d ti ith t t t i i i t f – Require increased reporting with respect to certain recipients of FDAP or gross proceeds – Require disclosure of foreign financial assets to be filed with tax ret rn

40

return

2010 Legislation: Highlights (Cont.)

• Obama releases 2011 revenue proposals (Cont.)

Impose penalties for underpayments attributable to undisclosed – Impose penalties for underpayments attributable to undisclosed foreign financial assets – Extend statute of limitations for significant omission of income attributable to foreign financial assets attributable to foreign financial assets – Require reporting of certain transfers of assets to or from foreign financial accounts R i thi d t i f ti ti di t f f – Require third-party information reporting regarding transfer of assets to or from foreign financial accounts

41