Who Has Foreign Accounts and Assets?
- Historical reasons
- War and persecution
- Families with international presence
- Americans living overseas for a time
- American business interests
- Inheritance, gifts
- Diversification
- Tax Cheats...
Exposure in Undeclared Account Cases
- Tax Returns – Form 1040
- "Check the box," list the countries
- Report all investment income – interest, dividends, capital gains/losses
- "FBAR" – TDF 90-22.1 – all "financial accounts" broadly defined; due June 30
- Recent guidance – suspension of requirement for "signature authority only" accounts; foreign persons in U.S.; private equity/hedge funds
Exposure in Undeclared Account Cases
- Fiduciaries
- Estate Tax Returns – omitted assets
- 1041s – check the box, investment income
- Fiduciary FBAR obligations
- Possible personal liability
- Additional reporting obligations:
- Receipts of foreign gifts or bequests
- Foreign trust relationships
- Reporting of interests in foreign corporations
Hire Act: FBAR Information on Tax Return
- US tax returns – will now have info similar to FBAR
- $50,000 asset threshold – report all foreign accounts and many foreign investments
- In addition to TDF 90-22.1 (FBAR)
- although that form may change...
- Effective with 2011 tax year
Sanctions – Criminal Penalties
- Tax evasion
- Filing false returns
- Conspiracy
- Failure to file FBAR
- Proof of Intent, Willfulness
- Felonies, usually leading to incarceration
- Generally six year statute of limitations
Sanctions – Civil Penalties
- FBAR -- penalties up to 50% of account balances per year for willful failure to file
- Six year SOL
- Tax penalties – accuracy, fraud – % of the tax
- Substantial penalties for non-compliance regarding unfiled forms regarding trusts, corporations, foreign gifts
- Unfiled returns – no statute of limitations
War on Foreign Accounts – 2007-2010
- LGT, UBS
- Civil John Doe Summons; Criminal Investigation
- Deferred Prosecution Agreement; data turnover
- Indictments of bankers, advisors, taxpayers
- Congressional Hearings
- Summons Settlement...the UBS 4450
- Special IRS Voluntary Disclosure Initiative
- Feds are going after more banks
Voluntary Disclosure Program
- Per longstanding IRS policy:
- Legal source income
- Timely – disclosure before IRS has info regarding taxpayer
- Truthful and complete
- Full cooperation
- Good faith arrangements to pay
Voluntary Disclosure Program
- 1040s, FBARs
- Also applies to estate tax returns
- Eliminates criminal exposure for fiduciaries or beneficiaries
- Other forms as well – 3520s, 5471s, etc.
- Generally six year look back driven by criminal SOL
- There are exceptions...
Voluntary Disclosure Program
- "Special" on offshore accounts expired 10/15/09
- Voluntary Disclosure still available
- Penalty caps now gone
- Shaky start to civil audits in VDP Special Initiative
- Standard IDR...third generation
- The good: closing Agreements re sham entities
- The not so good:
- Taking the 20% penalty v. opting out
- PFIC Issues
Voluntary Disclosure – Post 10/15/09 Tactics
- What to do now? Noisy v. Quiet?
- Noisy:
- Contact CID, preclearance, intake letter
- Eventual 6 year look back w/tax, interest, penalties
- IRS non-committal on FBAR penalty
- Leverage – 50%/year
- Benefit: clearly get out of criminal jeopardy; closure
- Cost: near certain substantial penalty payment
Voluntary Disclosure – Post 10/15/09 Tactics
- Quiet
- Amend returns – 3 to 6 years; pay tax, interest
- Can amend for a decedent...common in these cases
- File FBARs?
- Explanatory statement required
- 3520s? 5471s?
- Benefit: possible avoidance of penalty, audit
- Risk: no clear criminal closure, no clear closure at all
- IRS hostility to "quiet disclosures"
Voluntary Disclosure – Post 10/15/09 Tactics
- Factors in Considering
- Likelihood of bank disclosure
- UBS 4450 – must go noisy
- Recent IRS slowdown....why?
- HSBC, J. Bar...
- One never knows: will a whistleblower emerge?
- Criminal Exposure? Evidence of Willfulness?
- Real tax cheat v. accidental American
- Deceased primary actor; passive beneficiaries
- Number of years – SOL, criminal, civil (3 or 6)
Voluntary Disclosure – Post 10/15/09 Tactics
- Retrospective Cleanup v. Prospective Compliance
- No obligation to go back
- BUT...must advise to comply going forward
- Another vehicle for IRS to learn that account was held in prior years
- Postscript: Watch the criminal cases...will the IRS prosecute good faith disclosures? If so, what happens to the VDP?
- The UBS 285....
Continuing Enforcement in Foreign Asset Area
- U.S. Government – needs money! IRS claims $100 billion lost tax revenues/year
- US reaction – DOJ, IRS, Congress
- Political dynamics in US – then and now
Aggressive Enforcement will Continue
- Whistleblowers and informants
- Criminal Investigation of banks and bankers
- Civil summons process
- Treaty based information exchange
- FATCA and beyond
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
