I AM AN AMERICAN – JULY 4, 2015

I AM AN AMERICAN
(To original melody)

Verses:
I am an American
So proudly I say
I live in America
In the U.S. of A.

My heart beats American
Courageous and free
I’m a living testament
To the best
That America can be.

Bridge:
Some thought our dream wouldn’t last
But the torch once lit has been passed.
(Has been passed)

Verse:
I am an American
One limb of the tree
Ever mindful I’m blessed
Up to any test,
An American
That’s me.

Refrain:
Big-hearted America
One dream, one destiny.
Ever mindful we’re blessed
Up to any test
All Americans, All Americans
All Americans
Are we.

© 2012, 2015  by Robert S. Steinberg, Esquire
All rights reserved

Posted in Uncategorized | Tagged , , , , | Leave a comment

LIST OF BAD BANKS GIVING RISE TO 50% OVDP OFFSHORE PENALTY STILL GROWING

The IRS had added five more banks to its list of banks at which accounts will cause the OVDP offshore penalty to rise to 50% applied to all noncompliant offshore assets (See OVDP FAQ 7.2).

FAQ 7.2 provides:

Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation:  an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.  Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.   A list of foreign financial institutions or facilitators meeting this criteria is available.

Once the 50-percent miscellaneous offshore penalty applies to any of the taxpayer’s accounts or assets in accordance with the terms set forth in the paragraph above, the 50-percent miscellaneous offshore penalty will apply to all of the taxpayer’s assets subject to the penalty (see FAQ 35), including accounts held at another institution or established through another facilitator for which there have been no events constituting public disclosures of (a) or (b) above.

The list as of today has 26 listed banks.

Foreign Financial Institutions or Facilitators

  1. UBS AG
  2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
  3. Wegelin & Co.
  4. Liechtensteinische Landesbank AG
  5. Zurcher Kantonalbank
  6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
  7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
  8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
  9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
  10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
  11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
  12. Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
  13. BSI SA (effective 3/30/15)
  14. Vadian Bank AG (effective 5/8/15)
  15. Finter Bank Zurich AG (effective 5/15/15)
  16. Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
  17. MediBank AG (effective 5/28/15)
  18. LBBW (Schweiz) AG (effective 5/28/15)
  19. Scobag Privatbank AG (effective 5/28/15)
  20. Rothschild Bank AG (effective 6/3/15)
  21. Banca Credinvest SA (effective 6/3/15)
  22. Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
  23. Berner Kantonalbank AG (effective 6/9/15)
  24. Bank Linth LLB AG (effective 6/19/15)
  25. Bank Sparhafen Zurich AG (effective 6/19/15)
  26. Ersparniskasse Schaffhausen AG (effective 6/26/15)

The list will continue to grow as Swiss banks and other foreign financial institutions under Department of Justice scrutiny enter into non-prosecution agreements or otherwise are subject to a public disclosure described in FAQ 7.2 such as when a John Doe Summons is served on the bank for U.S. depositor information as was the case with CIBC in the Bahamas.

Since the 50% penalty can be avoided by submitting a names preclearance letter to IRS Criminal Investigation before a public disclosure has occurred with respect to the bank.  The extra cost of waiting until after a public disclosure has occurred is significant:  For example, assume a foreign bank account with a $2 million high value and offshore real estate bought with funds from the offshore account now worth $2.5 million.   50% of $4.5 million amounts to a OVDP offshore penalty of $2.250,000 while the regular 27.5% OVDP penalty would amount to $1,237,500.  The delay in submitting a preclearance letter would cost the taxpayer an additional $1,012,500.   That is not to mention the risk that during the delay the Department of Justice might obtain the taxpayer’s name thereby disqualifying him or her from the OVDP criminal amnesty.

© 2015 by Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

Posted in 2014 OVDP | Tagged , , , , | Leave a comment

IRS ADDS TWO MORE BAD BANKS TO ITS 50% LIST AND ISSUES FBAR PENALTY GUIDELINES

Bad Banks subject account holders to 50% penalty

On June 3, 2015 the IRS added two more banks to its list of banks at which accounts subject the holder to a 50% OVDP miscellaneous offshore penalty on all offshore assets connected with the non-compliance.  The two newcomers bring the list of bad banks to 21.  The new members of the bad bank club are:

  • Rothschild Bank AG, and,
  • Banca Credinvest SA

The above two banks were added to the list after public disclosure of their having entered into non-prosecution agreements with the U.S. Department of Justice. Account holders at these banks who’ve submitted OVDP Letters before June 3, 2015 are not affected by the 50% bad bank penalty and continue to pay an OVDP miscellaneous offshore penalty of 27.5% on all offshore assets connected with the non-compliance.  The complete list of banks is linked in the OVDP FAQ 7.2 (FAQS effective July 1, 2014).

IRS FBAR penalty guidance

On May 13, 2015 the IRS issued a memorandum of Interim Guidance for FBAR penalties that its employees must follow.    The cover letter states:

“When asserting an FBAR penalty, the burden is on the IRS to show that an FBAR violation occurred and, for willful violations, that the violation was in fact willful.  The FBAR penalty provision of Title 31 (United States Code) establishes only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case.”

The guidance establishes procedures for consideration and pre-assessment review of FBAR penalty cases.

For multiple year willful violations the guidance states:

In most cases (emphasis added) , the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.”

Examiners can recommend a higher or lower penalty than the 50% suggested maximum, but in no event will the suggested penalty exceed 100% of the aggregate highest balance.  Most likely, the higher penalty will only be asserted in the most egregious cases.

The Internal Revenue Manual FBAR Penalty Mitigation Guidelines (IRM 4.26.16.4.6.1) continue to apply and the examiner must first determine if the guideline threshold conditions are met.  For willful violations when the aggregate highest balance exceeds $1 million, however, the mitigations rules do not help and the maximum FBAR penalty may be asserted (For violations occurring after October 22, 2004).

Application of interim penalty guidelines in OVDP submissions

These guidelines do not apply to OVDP cases but will apply to cases in which the taxpayer opts-out of the OVDP and submits to an audit.  The guidelines will be helpful in making opt-out decisions.

Application of interim FBAR penalty guidelines to Streamlined Filings

The guidelines should alleviate the concerns of some about the Streamlined Filing Compliance Procedures: The risk of having one’s non-willful certification rejected; and. then becoming subject to draconian confiscatory FBAR penalties.

The linchpin of Streamlined Filings remains determining up front that the taxpayer’s conduct has been non-willful and that the affidavit will not simply offer admissions of a tax crime.  Once tax crimes are ruled out, a transparent, truthful affidavit is the key to minimizing Streamlined Filing risks.

The DOJ has repeatedly stated (most recently at an NYU Tax Controversy Forum) it will compare information received from banks in the Swiss Bank Settlement Program with Streamlined certifications of non-willfulness and intends to prosecute those taxpayers whose conduct, contrary to their certification, was, in fact, willful.

At the NYU Forum a DOJ attorney also stated that the Department has a program to identify quiet disclosures.  The DOJ has cautioned taxpayers considering quiet disclosures about the threat of possible enforcement action.

In a similar vein, some advisers suggest those with accounts of less than $1 million simply begin to file FBARS and report the offshore income going forward (WSJ 6/6/15 article by Laura Saunders, “The New Rules of Offshore Accounts”).  They argue that filing forward may be appropriate for those who can tolerate some risk for a few years.  That advice begs the real question, not whether the taxpayer can sleep at night, but whether he or she can afford the hit should the presumed unlikely audit occur.  Risk capacity not risk tolerance is the real issue in going without wind insurance because another Hurricane Andrew is unlikely.  Remote events happen with regularity and if your return is selected for audit the risk becomes 100%.

Statute of Limitations (SOL) considerations

How much risk one is assuming depends, among other things, on how close is the SOL expiration date. The FBAR penalty SOL (6 years from the date of the violation) for 2008 will expire on June 30, 2015. The criminal SOL for FBAR violations is five years. There is a question whether the SOL would be extended for the period during which one is outside the U.S. Jack Townsend has discussed the issue in his Federal Tax Crimes Blog. (Statutes of Limitations for FBAR Noncompliance Related to Tax Noncompliance (3/12/13)). It seems the likelihood of tolling is lower for FBAR crimes which require the accused to be fleeing justice (18 USC § 3290) but certain for tax and tax-related crimes where the SOL is tolled if the taxpayer is absent from the U.S. (26 USC § 6531).  The SOL (normally 3 years but extended to 6 years for many tax and tax related crimes) for tax crimes may also be extended if acts to cover up the crime (possible tax crimes themselves) are committed after the initial violation. There is no tolling of the SOL for civil FBAR penalties which is an absolute 6 year period.

© 2015 by Robert S. Steinberg, Esquire
All rights reserved
http://www.steinbergtaxlaw.com

Posted in OFFSHORE VOLUNTARY DISCLOSURE PROGRAM, STREAMLINED FILING COMPLIANCE PROCEDURES, TAX CRIME STATUTE OF LIMITATIONS | Tagged , , , , , , , | Leave a comment

THE CLOCK IS TICKING ON THE 27.5% OVDP OFFSHORE PENALTY (AS OPPOSED TO 50%) FOR THOSE WITH ACCOUNTS AT BANKS SOON TO BE ADDED TO THE IRS BAD BANKS LIST

The Department of Justice (DOJ) on May 29, 2015 announced that four more Swiss banks had entered into non-prosecution agreements (NPA), namely:

  • Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
  • MediBank AG (effective 5/28/15)
  • LBBW (Schweiz) AG (effective 5/28/15)
  • Scobag Privatbank AG (effective 5/28/15)

As a consequence of this public disclosure by the DOJ, the IRS under FAQ 7.2 has added the above banks to its list of banks at which an account will subject all offshore assets connected with non-compliance to a 50% offshore penalty instead of the usual 27.5% penalty.

Below is a complete list of the banks currently on the list.

Foreign Financial Institutions or Facilitators

  1. UBS AG
  2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
  3. Wegelin & Co.
  4. Liechtensteinische Landesbank AG
  5. Zurcher Kantonalbank
  6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
  7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
  8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
  9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
  10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
  11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
  12. Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
  13. BSI SA (effective 3/30/15)
  14. Vadian Bank AG (effective 5/8/15)
  15. Finter Bank Zurich AG (effective 5/15/15)
  16. Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
  17. MediBank AG (effective 5/28/15)
  18. LBBW (Schweiz) AG (effective 5/28/15)
  19. Scobag Privatbank AG (effective 5/28/15)

With new banks coming into the NPA fold almost daily, the message is clear.  Continuing to wait to address an offshore bank account problem at best may subject a procrastinator to the higher penalty; and, at worst will expose him or her to criminal sanctions, should his or her name become known to the DOJ.

Don’t be left out in the cold.  Seek advice from an attorney experienced in these matters and explore the safest path for coming into compliance with the tax laws of the U.S.

Robert S. Steinberg, Esquire

www.steinbergtaxlaw.com

Posted in 2014 OVDP, OFFSHORE BANK ACCOUNTS, OFFSHORE VOLUNTARY DISCLOSURE PROGRAM | Tagged , , , , | Leave a comment

OVDP – LIST OF BANKS AT WHICH AN ACCOUNT UPS OFFSHORE PENALTY TO 50% IS GROWING

The IRS continues to add to its published list of banks at which an account, even one account, increases the Miscellaneous Offshore Penalty imposed as part of the OVDP from 27.5% to 50% on all offshore assets connected with the non-compliance. The list has now grown to 15 foreign financial institutions with the last three indicated in bold-underlined text below.

Foreign Financial Institutions or Facilitators

  1. UBS AG
  2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
  3. Wegelin & Co.
  4. Liechtensteinische Landesbank AG
  5. Zurcher Kantonalbank
  6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
  7. CIBC First Caribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
  8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
  9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
  10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
  11. Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
  12. Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
  13. BSI SA (effective 3/30/15)
  14. Vadian Bank AG (effective 5/8/15)
  15. Finter Bank Zurich AG (effective

The list will grow exponentially as Swiss banks in the Swiss Bank Settlement Program continue to enter into Non-prosecution Agreements (NPA) with the Department of Justice. The latest of such agreements with BSI, Vadian and Finter Bank are but the tip of the proverbial iceberg.

And, it gets worse.  It is not only announcement of a signed NPA with Swiss banks that will put a bank on the list.  Banks in other countries have also been added after public disclosures of other DOJ action against the bank.  For example, CIBC (Bahamas) was added to the list when the Department of Justice procured a John Doe Summons which was served on the bank, seeking the names of U.S. account holders.  So, any publication of DOJ action against a bank will add it to the list and up the cost dramatically for its U.S. depositors who have yet to submit their names to IRS Criminal Investigation (CI) for pre-clearance.

To grasp the full breath of the public disclosure below is the full text of OVDP FAQ 7.2 which provides:

Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation:  an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.  Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.   A list of foreign financial institutions or facilitators meeting this criteria is available.

Once the 50-percent miscellaneous offshore penalty applies to any of the taxpayer’s accounts or assets in accordance with the terms set forth in the paragraph above, the 50-percent miscellaneous offshore penalty will apply to all of the taxpayer’s assets subject to the penalty (see FAQ 35), including accounts held at another institution or established through another facilitator for which there have been no events constituting public disclosures of (a) or (b) above.

Lawyers are not prognosticators.  But, the clear inference from the above may be translated into a prediction:  If you hold a foreign financial account and have not yet come into compliance under one of the IRS approved processes (OVDP, Streamlined Filing Compliance Procedures, Noisy Voluntary Disclosure), you will likely be discovered sooner than later.  Moreover, waiting one more day to submit your names for pre-clearance may result in the cost for coming into compliance substantially escalating.

Coming into a compliance is a process, the start of which is consulting with an experienced offshore tax lawyer, who can help you decide, during privileged communications, which process is safest and least expensive given your particular factual situation.  Since every case I have seen has unique characteristics, generalities are useless and in fact dangerous for making such decisions.  Most importantly, you must overcome inertia and take action.  Do not mimic the ostrich, burying its head, hoping problems will go away.  This problem will not evaporate. Take action now before you regret your delay.

© 2015 by Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

Posted in 2014 OVDP | Tagged , , , , , | Leave a comment

STREAMLINED FILING COMPLIANCE PROCEDURES: IRS ROADBLOCKS

The IRS announced with great fanfare its 2014 updated version of the Streamlined Filing Compliance Procedures.  These simplified filing procedures were touted as a filing process under which U.S. noncompliant taxpayers living in the U.S. or outside the U.S. could come back into compliance without paying the steep OVDP penalty, going back 8 years or jumping through all of the other OVDP hoops.  U.S. residents would pay a reduced 5% penalty and those living outside the U.S. would pay no penalty.

All would have to file three years income tax returns, amended for U.S. residents and delinquent or amended for expats.  They would also have to file six years of delinquent or amended FBARS.  And, most significantly, would have to submit an affidavit (non-willful certification) stating under penalties of perjury why they believe their non-compliance was non-willful.

The certifications (Form 14654 in the case of a U.S. resident and 14653 for a person residing outside of the U.S.) both state:

I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. 

Great, so many thought: Hey, it’s not too difficult to distinguish “negligence, inadvertence, mistake or … good faith misunderstanding of the law” from willful conduct. After all, it is widely known that willfulness means, “Intentional violation of a known legal duty.”  Shouldn’t the same definition apply here, especially since IRS had not long ago stated it would apply the same definition to both criminal and civil penalty cases?”

So, what’s the problem?  Weill, the problem lies in the word that IRS left out from its definition of non-willful conduct, namely recklessness.  And while it may be easy to distinguish negligence from the criminal standard of willfulness, it is much more difficult to distinguish negligence from recklessness.

Moreover, recklessness does not require that badges of fraud be found in the taxpayer’s conduct.  No nominee entity or mail holds or other acts that evince an intent to conceal need be present to find recklessness.  Is gross negligence reckless conduct?  It’s all a matter of degree and largely depends on the perception of the reviewer.  Thus, willfulness has been found in two recent cases in the taxpayer having merely signed his tax return without investigating the reference to instructions for foreign bank account reporting on Schedule B of Form 1040.  This type of phantom willfulness has been called willful blindness.

Here is what the IRS regulations, in part, provide with regard to the accuracy related penalty:

Regulation Sec. 1.6662-3

 (b) Definitions and rules—

(1) Negligence. The term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. (emphasis added) “Negligence” also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. A return position that has a reasonable basis as defined in paragraph (b)(3) of this section is not attributable to negligence. Negligence is strongly indicated where—

(i) A taxpayer fails to include on an income tax return an amount of income shown on an information return, as defined in section 6724(d)(1);

(ii) A taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion on a return which would seem to a reasonable and prudent person to be “too good to be true” under the circumstances….

2) Disregard of rules or regulations. The term disregard includes any careless, reckless or intentional disregard of rules or regulations.  A disregard of rules or regulations is “careless” if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. A disregard is “reckless” if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe. A disregard is “intentional” if the taxpayer knows of the rule or regulation that is disregarded…. (emphasis added).

In an ABA Webinar “Answering More of Your Offshore Disclosure Questions” (5-15-15) an IRS official stated that Non-willful conduct includes gross negligence. Well, if careless conduct is reckless and gross negligence is not willful, what is reckless conduct?

Webster’s Law Dictionary defines reckless disregard as:

An act of proceeding to do something with a conscious awareness of danger, while ignoring any potential consequences of so doing. Reckless disregard, while not necessarily suggesting an intent to cause harm, is a harsher condition than ordinary negligence.

Thus, recklessness or reckless disregard of the rules and regulations seems to involve acting with the foreknowledge that you may be doing something wrong but going ahead without the least bit of care about the consequences.  But, isn’t gross negligence something like that as well.  This certainly could include failing to even inquire if what you are doing in your return is right or wrong but gross negligence would also seem to cover such inaction.

To wit: Nolo’s Plain English Law Dictionary defines gross negligence as:

A lack of care that demonstrates reckless disregard….

Although for this blog post I’ve not reviewed every case dealing with recklessness or disregard of the rules, we are left with the impression that there are two standards, gross negligence that is non-willful and recklessness which is willful conduct, for purposes of the Streamlined Filing Process.   That is  one reason  Streamlined Filing decisions are difficult for cases falling in the middle of the Bell Curve, that is, neither clearly willful nor clearly non-willful.

Another IRS roadblock.  The Service has not stated how far back it will look for evidence of willfulness.  Will it go back three years, six years or as far back as available information goes?

One saving grace:  It is unlikely that IRS will seek to bring criminal charges against a taxpayer who has submitted a truthful and complete affidavit but one with which the IRS disagrees as to its conclusion of non-willfulness versus recklessness.  It is quite another matter, however, should the affidavit make admissions of criminal conduct.  Such a person belongs in the OVDP and should not employ the Streamlined Filing Procedures to come into compliance for he or she will simply be making admissions of guilt.  The safe harbor for Streamlined Filings is then a complete, accurate and fully transparent non-willful certification.  The certification should state specific facts that explain why the taxpayer believes his or her conduct is non-willful.  This expose is not the same animal as a reasonable cause statement which seeks to show that the taxpayer’s conduct was not negligent.

Another saving grace, Streamlined submissions, even if audited will not be subject to the late filing, late payment, accuracy, information return or non-willful FBAR penalties.  The risk, however is that an inappropriate Streamlined Filing, if audited, could subject the taxpayer to the civil fraud and willful FBAR penalties or criminal charges or both, especially if the non-willful certification is false, misleading such as where helpful facts are cherry picked and negative facts are omitted.

The above is a cautionary discussion illustrating why it is important to have an experienced tax attorney oversee a Streamlined Filing.  When there is a risk of criminal charges being brought, however remote, the process is a criminal process, one that is far afield from the filing of delinquent or amended tax returns not having to do with offshore foreign financial accounts.  That is not to say that amended or delinquent returns dealing with only domestic items never carry criminal exposure, after all they are admissions of some elements of a tax crime, but delinquent or amended returns with offshore items almost always do carry such potential.  For even if the facts do not point towards criminal conduct, the filings themselves can evidence criminal conduct such as where the returns filed are later found to have been false.
© 2015 by Robert S. Steinberg, Esquire
All rights reserved

Posted in STREAMLINED FILING COMPLIANCE PROCEDURES | Tagged , , , , , , | Leave a comment

NON-WILLFUL FBAR PENALTY: TAXPAYER FOUND BY DISTRICT COURT TO LACK REASONABLE CAUSE FOR HAVING FAILED TO FILE FBARS. COURT ALSO RULES AGAINST TAXPAYER ON DUE PROCESS AND EXCESSIVE FINE ARGUMENTS.

After James Moore had filed amended returns and delinquent FBARS, the IRS assessed against him maximum non-willful FBAR penalties of $10,000 for each of the years 2005 through 2008, for a total of $40,000.  Instead of waiting for the Treasury to file suit to collect the penalties assessed, Moore filed suit in The U.S. District Court Western District of Washington at Seattle.  The U.S. filed a Motion for Summary Judgment and in ruling on the motion the Court discussed the law and factual analysis applicable to:

  • Whether, under the Administrative Procedures Act (APA), the IRS determination process before assessing the FBAR penalties was “arbitrary, capricious, an abuse of discretion, or not otherwise in accordance with the law.” 5 USC 706 (2) (A).
  • Whether due process rights afforded Moore passed muster under the U.S. Constitutional requirements.
  • Whether the penalties assessed constituted “an excessive fine” under the Eighth Amendment to the U.S. Constitution, and,
  • Whether Moore had established reasonable cause for not timely filing his FBARS. (James Moore v. U.S. Case 2:13-cv-02063-RAJ filed 4/1/15).

Since the Court was ruling on a Motion for Summary Judgement only, (this was not a trial on the merits but only a hearing to decide if a trial on the merits was necessary), the U.S. only had to prove that the record, viewed most favorably to Moore, showed no genuine issue of material fact remaining to be decided by trial. In that case, the U.S. is entitled to judgement as a matter of law.

APA Argument

The Court not rule on the U.S Summary Judgement Motion regarding this issue.

Moore was challenging the IRS’ method of assessing the penalty and the amount of the penalty assessed.  The Court discussed whether its review of IRS procedures should be de novo – that is, considering all available evidence anew, or merely of facts showing “abuse of discretion.”  The court stated that a de novo review would only apply if the IRS “fact-finding procedures are inadequate.”  The Court found the IRS procedures to be adequate and therefore limited its review to whether IRS had acted arbitrarily, capriciously or abused its discretion.  In its review the court sated it looks for a “rational connection between the facts found and the choice (the agency) made.”

The Court found that the record before the Court (what both sides had submitted, depositions, admissions etc.) contained insufficient facts for the Court to decide whether IRS had acted arbitrarily, capriciously or abused its discretion in assessing the maximum FBAR penalty.  It did not rule on this issue and ordered the parties to submit to the court additional arguments in Supplemental Briefs within 14 days of the issuance of Court’s order.

Due Process Argument

The Court granted Summary Judgment to the U.S. on this issue.

The Court found that Moore’s due process rights had not been violated because the penalty assessment procedures satisfied the Due Process Clause of the U.S. Constitution, by:

  • IRS having conducted an interview with Moore and counsel to determine his reasons for not filing FBARS.
  • Issuing a notice proposing to assess $40,000 in FBAR penalties.
  • Offering Moore an opportunity to internally appeal the decision before assessment in the case of 2006 through 2008 and to appeal after assessment in the case of 2005.
  • Affording him an opportunity to seek judicial review of all of the IRS decisions.

Thus, Moore had both notice and an opportunity to contest the FBAR penalties and that was sufficient.  Due process does not always require a full evidentiary or formal hearing said the Court.

Excessive Fine Argument (Eighth Amendment)

The Court granted the U.S. Motion for Summary Judgement on this issue.

The Court found the assessments did not violate the excessive fines provision of the Eighth Amendment because the penalty, in the court’s eyes, was not “grossly disproportionate to the gravity of the defendant’s offense” (U.S. v. Bajakazian, 524 U.S. 321, 337 (1998) Bajakazian’s fine was found excessive because it expropriated $350,000 of Barjakazian’s tax-paid cash, simply because he neglected to fill out a custom’s form upon leaving the U.S.  The Supreme Court had noted that no fraud against the U.S. had been committed. Moore, the court found, fell way short of the facts in Bajakazian.  He failed to report an account worth between $300,000 and $550,000. The $40,000 represented only 10% of the account value.  The court found the fine not grossly disproportionate.  The fact that his failure to file caused no harm to the U.S. did not persuade the court.

One point of support for its decision, I find questionable, however.  The Court pointed out that congress had authorized the penalty of up to $10,000 for non-willful violations without regard to the value of the account.  In addressing constitutional concerns about a law Vis a Vis the Eighth Amendment, what congress authorized should not govern, rather what the constitution permits should be the focus.

Bottom line, Moore’s conduct in maintaining the account was viewed by the Court as more willful than non-willful.  So, it had little difficulty upholding the maximum non-willful penalty. The court granted Summary Judgment to the U.S. on this issue.

Reasonable Cause Argument.

The Court granted Summary Judgment to the U.S. on this issue.

The Court, applying the income tax standards for reasonable cause in the absence of applicable FBAR regulations, found no reasonable cause because:

  • Moore maintained the offshore account for nearly two decades.
  • Moore had no objective basis for his belief that he did not have to file FBARS because the account was held, not in his name, but in the name of his 100% owned Bahamian corporation.
  • Moore could not point to professional advice he had received that he did not have to file FBARS.
  • Moore admitted that since at least 2003 he did not even know if the Bahamian company still existed.
  • Moore moved his account to Switzerland in 2003 but did not ask bank officials if he had to report the account to U.S. authorities (RSS not that the Swiss bank officials at that time would have suggested he report).
  • Prior to 2006, Moore had prepared his own tax returns and filled out Schedule B, but did not answer the foreign bank account question “yes” or “no.”
  • Moore signed the declaration on each return he filed.
  • Moore could have read page B-2 of the return instructions as the foreign bank account question directed and would have learned of the requirement to file, even if the account was owned by his 100% owned entity.
  • Beginning in 2006, Moore’s tax preparer sent Moore a “tax organizer. Moore completed the questionnaire in its entirety and answered “no” to a question in the organizer whether he had an offshore bank account.
  • Moore admitted that even a minimal inquiry, such as looking at the return instructions would have informed him of his obligation to file FBARS.
  • Moore’s age, in his eighties, is not an excuse for negligence especially since his deposition testimony in the case showed him to be “a man of ample intelligence.”

Citing U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012) (finding willful blindness), the Court found that “Evidence that a taxpayer ignored relevant questions on Schedule B and in tax organizers is evidence of willful conduct.  In this court’s view, it suffices as a matter of law to demonstrate a lesser FBAR violation – one made without reasonable cause.”

RSS Comments:

The case illustrates the difficulty of establishing reasonable cause.  It points up the risks of filing amended returns outside of the Streamlined Filing Compliance Procedures or OVDP and emphasizes the importance of carefully vetting Streamlined Filings and strictly adhering to the Streamlined Procedures.  For, if the taxpayer is kicked out of Streamlined Filing Process the only way to avoid a penalty will be to establish reasonable cause.  The non-willful penalty can be up to $60,000, the maximum permitted for each year open under the statute of limitations.  The courts, at least so far, are giving IRS wide latitude on determining the amount of the penalty that is appropriate, reviewing IRS determinations under the abuse of discretion standard.

Thus, as I’ve written often, deciding how to come into compliance is a decision making process that should be undertaken with the assistance of tax counsel experienced in these matters.

© 2015 by Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

Posted in 2014 OVDP, AMENDED RETURNS, FBARS | Tagged , , , , , | Leave a comment