Posted tagged ‘FBAR’

Are Quiet Disclosures of Offshore Accounts Becoming Even Riskier?

October 18, 2013

By Phil Karter

Is the IRS getting closer to ferreting out “quiet disclosures” by taxpayers who chose that route to address the problem of previously unreported offshore accounts rather than by participating in the Service’s offshore voluntary disclosure program (OVDP)?  That’s the conclusion of an increasing number of tax professionals and if taxpayers in this predicament weren’t already worried, they should be.

A quiet disclosure involves the filing of new or amended tax returns that report offshore income, and FBARs (Report of Foreign Bank and Financial Accounts) that provide other account information regarding the taxpayer’s interest in foreign accounts.  It is a discreet disclosure intended to make a taxpayer compliant with his or her tax reporting responsibilities while avoiding penalties imposed under the IRS’s official voluntary disclosure program.

The IRS has made no secret of its distain for those who choose the quite disclosure route over participation in its voluntary disclosure program.  In its frequently asked questions and answers applicable to the most recent iteration of the OVDP, the Service has cautioned taxpayers that those who have already made quiet disclosures should “be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.”  The IRS has encouraged such taxpayers to “take advantage” of the program before discovery.  The FAQs also note that detection of a quit disclosure also eliminates the possibility of reduced penalty exposure offered under the OVDP. (See FAQs 15 & 16.)

To some, the calculus about whether to participate in the OVDP, follow the quiet disclosure path, or do nothing has been viewed as another form of the audit lottery, albeit one with very high stakes in terms of potential monetary penalties and possibly criminal prosecution.  As virtually everyone should know at this point, offshore account holders can no longer rely on bank secrecy to protect them, so the issue of detecting unreported accounts has become more a question of when, not if. Although a quiet disclosure addresses the unreported account problem, either currently or retroactively, that is not necessarily the end of the story . . . or the risk.

Earlier this year, the Government Accounting Office issued a report in which it noted a dramatic increase in the number of taxpayers reporting offshore accounts, concluding that the trend may reflect attempts to minimize or circumvent taxes, penalties and interest that would be owed if not corrected before detection or even upon participation in the OVDP.  Among other things, the GAO recommended that the IRS explore methodologies to detect and pursue quiet disclosures.  Apparently, the IRS has taken the GAO’s recommendation to heart by working on new ways to identify them.  The effort, according to former Acting IRS Commissioner Steven Miller, was to include “analysis of Forms 8938, Statement of Specified Foreign Financial Assets, to identify specific characteristics of the filing population and to assess filing behaviors indicating potential compliance issues.”

In predicting the effectiveness of this undertaking, it is worth noting that the IRS has a wealth of experience in implementing computer algorithms on a much larger scale to ferret out trends warranting closer scrutiny.  One need look no further than the Services’ Discriminant Function System (DIF), which is used to flag tax returns for possible audit, among the hundreds of millions filed, to appreciate that improved detection of quiet disclosures is well within the IRS’s capabilities.  Therefore, taxpayers who rely on a limited IRS resources justification to ignore the directional trend regarding quiet disclosures are likely to wish they had examined the issue relative to their own personal circumstances a lot more closely. At the very least, given the prevailing wind on this issue, it would be prudent for those who have made quiet disclosures or are contemplating one to revisit the issue with their tax adviser.

Government Wins Second Willful FBAR Penalty Case: What McBride Really Means to Taxpayers with Unreported Foreign Accounts

April 25, 2013

By Hale Sheppard

Taxpayers with undisclosed foreign accounts wish it were not true, but the reality is that the U.S. government, after a long period of inactivity and ineffectiveness, has taken significant steps over the past few years to identify and punish failures to file Forms TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), or foreign bank account reports (“FBARs”) as they are commonly known.  These steps include enacting legislation obligating foreign institutions to automatically provide the IRS with information about U.S. account holders, paying handsome rewards to whistleblowers, introducing a new information return forcing taxpayers to report their foreign financial assets (including foreign accounts) to the IRS each year, imposing multi-million dollar fines and disclosure duties on foreign banks that collaborate with taxpayers to evade U.S. taxes, extracting valuable data about international tax transgressions from taxpayers participating in the Offshore Voluntary Disclosure Program (“OVDP”), and criminally prosecuting FBAR offenders.  Another step has become apparent in the past few months, i.e., litigation to collect civil penalties for “willful” FBAR violations.  To date, two cases have been decided, both in favor of the U.S. government.  The attached article, “McBride Willfull FBAR Penalty Case Article,” examines the most recent case.  The article was published in the most recent version of the Journal of Taxation (April 2013).

IRS Introduces Two Unique Remedies for U.S. Persons with Unreported Canadian Retirement Plans and Accounts

February 6, 2013

By Hale Sheppard

Life isn’t fair.  Neither is the IRS’s most recent settlement initiative designed to entice taxpayers to proactively resolve their international tax non-compliance, such as failing to report foreign income, foreign accounts, foreign entities, etc.  In both instances, some people win and some people lose, often with little or no regard to what is equitable.  Among those basking in the benefits of favored status lately are certain Canadians, residing either in the United States or the homeland, who have neglected their tax-related obligations with Uncle Sam.  Indeed, thanks to recent modifications to the offshore voluntary disclosure program (“OVDP”) and the introduction of a special “streamline procedure” for select expatriates, many Canadians are able to resolve their tax transgressions on terms vastly superior to those applicable to the masses.  This is particularly true for persons with specific types of Canadian retirement plans.  The article, “IRS Introduces Two Unique Remedies for U.S. Persons with Unreported Canadian Retirement Plans and Accounts,” which was published in the most recent edition of the International Tax Journal, analyzes the unique options available to Canadians.

IRS Finally Collects Civil “Willful” FBAR Penalty in Williams Case – Court Introduces New Lower Standard for Penalizing Taxpayers with Unreported Foreign Accounts

December 7, 2012

By Hale Sheppard

The world of international tax enforcement is changing at a frenetic pace, especially when it comes to the rules about penalizing taxpayers who fail to file Forms TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), or foreign bank account reports (“FBARs”) as they are commonly known.  The latest installment in this area is United States v. Williams, a recent decision by the Fourth Circuit Court of Appeals holding that the taxpayer “willfully” violated his FBAR duties and thus deserved maximum sanctions.  This judicial opinion, already the subject of much criticism by the tax community, raises more questions than answers.  The attached article, called “Third Time’s the Charm:  Government Finally Collects “Willful” FBAR Penalty in Williams Case,” addresses multiple issues triggered by Williams.  The article was published in the December 2012 issue of the Journal of Taxation.

Alarmists might conclude that Williams stands for the proposition that (i) the standard for asserting civil FBAR penalties is willfulness, (ii) in this context, the government can establish willfulness by showing that the taxpayer was merely reckless, (iii) recklessness exists where a taxpayer does not read and understand every aspect of a complex tax return, including all schedules and statements attached to the return (including Schedule B), as well as any separate forms (including the FBAR) alluded to in the schedules, and (iv) the taxpayer’s motive for not filing an FBAR is not relevant.  Pragmatists, on the other hand, might see Williams as an aberration, based on narrow facts, with little precedential value, and with questionable real-world applicability.  Most people likely will fall somewhere in between.  Regardless of the viewpoint, it is undeniable that Williams introduced issues critical to the FBAR debate, many of which remain unresolved.  Taxpayers and their advisors would be wise to follow the evolving issues, as the incidence of FBAR and other international tax enforcement issues will continue to rise in the future.

The New Duty to Report Foreign Financial Assets on Form 8938: Demystifying the Complex Rules and Severe Consequences of Noncompliance

July 15, 2012

By Hale Sheppard

Concerned about the extent of international tax non-compliance, Congress enacted the Foreign Account Tax Compliance Act (“FATCA”).  Among other provisions found in FATCA was Section 6038D, which requires certain individuals to annually report to the IRS data about their interests in foreign financial assets.  Sounds simple enough, right?  Well, this seemingly straightforward obligation has been causing significant havoc for taxpayers and their advisors in 2012, as they wrestle for the first time with tricky new issues when deciding whether and/or how to complete Form 8938 (Statement of Specified Foreign Financial Assets).

Given the challenges associated with the current rules and the finalization in the near future of additional regulations expanding the coverage of Section 6038D, uncertainty will persist for some time.  Confusion about Section 6038D and Form 8938 can trigger a series of negative results for taxpayers, including new information-reporting penalties, increased accuracy-related penalties, criminal charges, extended assessment periods, and a fight with the U.S. government on three fronts simultaneously.  Confusion about this new international tax requirement could cause severe problems for tax advisors, too, because misinformed clients facing IRS problems tend to point their fingers (and their malpractice firms) squarely toward the trusted tax professionals on whom they relied.

In an effort to avoid these types of problems, the attached article, which was recently published in the May-June 2012 issue of the International Tax Journal, (i) contains a thorough analysis of the Form 8938 filing requirements, incorporating and digesting guidance from multiple sources, (ii) clarifies the confusing overlap between Form 8938 and the FBAR, and (iii) explains the unappreciated, severe consequences for taxpayers who fall into noncompliance.

Form 8938 – Foreign Reporting Trap for the Unwary

April 11, 2012

By Sebastien Chain and Tamara Woods

Beginning with the 2011 tax year (i.e., for returns filed April 17, 2012 or later), individual taxpayers will be required to file Form 8938 if he or she has an interest in a “specified foreign financial asset” (“SFFA”) (click for additional information on FATCA requirements) that has a value exceeding a certain threshold.  A Taxpayer has an interest in a SFFA if any income, gains, losses, deductions, credits, gross proceeds or distributions from the asset would be required to be reported on the income tax return.

The reporting thresholds differ depending on whether the taxpayer is married or single and whether the taxpayer is living inside or outside the United States.

Form 8938 Reporting Thresholds

STATUS

LIVING IN U.S.

LIVING ABROAD*

 Unmarried

OR

Married Filing Separately

>$50,000 at year end

OR

>$75,000 any time during year

>$200,000 at year end

OR

>$300,000 any time during year

Married Filing Jointly

>$100,000 at year end

OR

>$150,000 any time during year

>$400,000 at year end

OR

>$600,000 any time during year

There are certain exceptions and limitations to reporting.  Arguably, the most important limitation (other than the thresholds listed above) is whether the taxpayer reports the same assets on a separate foreign information return such as Forms 3520, 5471, 8621, 8865 or 8891 (but not Form T.D. F 90-22.1, Report of Foreign Bank Account (“FBAR”).  If so, the taxpayer is only relieved from fully completing the Form 8938.  The taxpayer is NOT relieved from filing Form 8938.

Form 8938 requires the following information:

  • Basic identification of the account/asset;
  • Name/address of financial institution where account is held (if applicable);
  • Name/address of issuer or counterparty of stock, securities or financial instruments (if applicable);
  • Information regarding whether the account/asset was acquired (opened) or disposed of (closed) during the year, the amount of income, gain, or other tax attributes recognized during the year and schedule, form or return on which reported to IRS, currency exchange rate (and source of rate, if not from Treasury’s Financial Management Service); and
  • If the SFFA is reported on another form (3520, 5471, etc.), the report type and number of such other form.

The minimum penalty for failing to file or report an asset on Form 8938 is $10,000 per year the Form 8938 is not filed.  The penalty can be increased up to a $50,000 maximum for noncompliance 90 days after receipt of an IRS notice.  It is important to note that the IRS has no discretion to reduce this penalty unless the Taxpayer “affirmatively shows the facts that support a reasonable cause claim.” It is unclear at this time what will constitute sufficient reasonable cause.  In addition to the above penalties, accuracy related penalties are increased from 20% to 40% for underpayments involving undisclosed SFFAs.

More Foreign Reporting for US Taxpayers? Absolutely says IRS

April 3, 2012

By Sebastien Chain and Tamara Woods

The Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) enacted the Foreign Account Tax Compliance Act (“FATCA”).  P.L. 111-47.  FATCA greatly increases disclosure requirements and penalties on taxpayers with foreign accounts and assets.  These reporting requirements will affect individuals beginning with the 2011 tax year, and are expected to apply to certain domestic entities beginning with the 2012 tax year.

FATCA reporting is in addition to the Form T.D. F 90-22.1, Report of Foreign Bank Accounts (“FBAR”) requirements and other foreign reporting requirements such as Form 5471 (foreign corporations); Form 3520 (foreign estates and trusts); 8865 (foreign partnerships); 8621 (passive foreign investment companies); 8891 (beneficiaries of certain Canadian registered retirement plans).

These new reporting obligations apply to U.S. individuals with an interest in “specified foreign financial assets” (“SFFA”) with an aggregate value exceeding certain thresholds. SFFAs generally include:

  • Any financial account maintained by a foreign financial institution (i.e., a bank);
  • Any stock or security issued by a foreign person,
  • Any financial instrument or contract held for investment that has a non-U.S. issuer or counter-party, or any interest in a foreign entity.

It is important to note that the SFFA concept is much broader than related FBAR concepts.  Some examples include:

  • Investments by an entity that holds real estate;
  • Investments in foreign hedge funds and private equity funds;
  • Capital or profits interest in foreign partnership;
  • Foreign debt(e.g., notes, bonds, other indebtedness issued by a foreign person);
  • Interests in a foreign trust or estate;
  • Swaps, options, derivatives, etc. with a foreign counterparty; and
  • Foreign pension or deferred compensation plans.

As previously mentioned, beginning with the 2011 tax year, i.e., by April (or October if on extension) of 2012, Taxpayers with SFFAs must report these assets on new Form 8938 (click for additional information on Form 8938 ).  If a Taxpayer is required to file Form 8938, they must attach the Form to their 2011 tax return.  In contrast, the FBAR is not due until June 30th of each year and is mailed to Detroit (not with the Taxpayer’s tax return).


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