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

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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

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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

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OVDP: WHAT HAPPENS IF THE TAXPAYER CANNOT RAISE THE FULL REQUIRED PAYMENT UNDER FAQ 25?

FAQ 25 lists the OVDP submission requirements and insofar as payment goes, provides:

Payment to the Department of Treasury in the total amount of tax, interest, offshore penalty, accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties, for the voluntary disclosure period must be sent with information identifying the taxpayer name, taxpayer identification number, and years to which the payments relate….   If you cannot pay the total amount of tax, interest, offshore penalty, and other penalties as described above, submit your proposed payment arrangement and a completed Collection Information Statement (Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate) (see FAQ 20)

Taxpayer’s may be unable to pay the full amounts due under the OVDP regime for any number of reasons, including:

  • The value of the offshore accounts has decreased below the highest balance during the OVDP period on which the penalty is computed. This may be due to a general market decline like the Great Recession or may simply be the result of poor or risky investment decisions.
  • The account has been spent down on living expenses or to repay loans.
  • The offshore funds have been invested in non-liquid assets such as a personal residence against which there is already substantial mortgage debt or no debt but the taxpayer is unable to secure a mortgage on the property.

What if the taxpayer cannot pay? Can the taxpayer still participate in the OVDP?

 FAQ 20 answers: Yes, stating:

The terms of this program require the taxpayer to pay with his submission the tax, interest, offshore penalty, and accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements.  If you cannot pay the total amount of tax, interest, offshore penalty, and other penalties required, submit your proposed payment arrangement and a completed Collection Information Statement (Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, Collection Information Statement for Businesses, as appropriate). The burden will be on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and foreign, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer must work out other financial arrangements, acceptable to the IRS, to resolve all outstanding liabilities to be entitled to the penalty structure of this program. (Emphasis added).

I have spoken with an agent at the OVDP Hotline regarding the meaning of FAQ 20 and was told:

  • If a taxpayer can pay off the OVDP debt in installments, an installment payment plan will be incorporated into the closing agreement.
  • The agent said he knew of one Offer in Compromise (OIC) that had been submitted to the OVDP but was denied.  The agent thought there would have to be extraordinary circumstances like health issues making payment unlikely for a OIC to be approved as part of the closing agreement.
  • If the OVDP debt is so large and beyond the taxpayer’s ability to pay-off in installments, the closing agreement will state total amount of tax, interest, accuracy related penalty and miscellaneous offshore penalty and the amounts that have been paid.       The taxpayer will then have to deal with the IRS Collections Division. Thus a, very large unpayable debt of a taxpayer could then theoretically be resolved through an Offer in Compromise if the taxpayer can borrow from relatives and has no significant income potential or the debt could be put into “currently not collectible” status.
  • The taxpayer will not be ejected from the OVDP simply because he or she legitimately cannot pay although there is no guarantee under FAQ 20 that the OVDP penalty structure will apply. The criminal protection will not be lost, however. Still, if a taxpayer cannot pay the 27.5% or 50% penalty, how will raising the penalty bring in more cash to the government? So, where the taxpayer genuinely cannot pay the entire OVDP debt, I don’t see the logic of the government increasing the penalty because the literal terms of the OVDP have not been met.

Remember, however, that:

  • The taxpayer has the burden of establishing to the satisfaction of the OVDP that he or she genuinely cannot pay.
  • The decision of the OVDP on payment issues, like other OVDP matters, is not appealable outside of the OVDP.  You can request that the issue presented be reviewed at a higher level within the IRS to obtain an official agency response to your request for reconsideration.  But, the decision of the IRS in OVDP matters cannot be brought to IRS Appeals or the Tax Court.

With the advent of the 50% penalty on listed banks, we probably will see more cases in which the taxpayer cannot pay the full amounts due under the OVDP regime.  As these cases flow through the system we will learn more about how the OVDP is treating taxpayers who cannot pay the full required amount.

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

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

MEANING OF CURRENTLY UNDER EXAMINATION FOR PURPOSES OF 2014 OVDP FAQ 14

MEANING OF CURRENTLY UNDER EXAMINATION FOR PURPOSES OF OVDP FAQ 14

Frequently Asked Question (FAQ) 14 of the 2014 edition of the Offshore Voluntary Disclosure Program asks:

Question:  “I’m currently under examination.  May I participate in the OVDP?”

Answer: “No. If the IRS has initiated a civil examination for any year, regardless of whether it relates to undisclosed OVDP assets (See FAQ 35), the taxpayer will not be eligible to participate in the OVDP.  A taxpayer under criminal investigation by CI is also ineligible.  In these circumstances, the taxpayer or the taxpayer’s representative should .discuss undisclosed financial account and assets with the agent.”

The disqualifying factor is not that an audit was initiated at some time but whether the taxpayer is currently under examination.  Thus, if an audit has been initiated, the question becomes when is the audit deemed closed for purpose of qualifying for the OVDP.

According to one IRS agent on the OVDP Hotline, normally signing Form 4549 as an agreed case ends the audit.  But, internally, the IRS does not view the audit as closed until the 4549 is reviewed by the manager and a letter confirming its acceptance has been sent.  Thus, the taxpayer seeking OVDP protection should normally wait for the letter.

For an agreed case, Letter 987 is sent.  For a no change case, Letter 590 is sent.  This normally takes a couple of months. At about the same time, a Code 300 series entry should appear on the taxpayer’s account transcript.

If the taxpayer’s name is about to be turned over, however, he or she might submit names to CI with a copy of the signed Form 4549.  The signed Form 4549 might be accepted as closing the audit if there were no items reversed by the reviewing manager.

I did not discuss the situation of an un-agreed case with the Hotline agent because I believe the audit would not be considered closed and I can only envision extraordinary circumstances leading one desiring OVDP protection to appeal a revenue agents report on domestic issues.

Filing a petition in Tax Court after submission to the OVDP would also be against interest because the commissioner would presumably have to counter-claim on the offshore issues raised in the OVDP submission.  Thus, such action would be self-defeating.

REQUIREMENT OF FAQ 14 TO DISCUSS OFFSHORE ISSUES WITH THE AGENT

Regarding the last sentence of FAQ 14, if there are no questions asked during the examination about offshore accounts or income and the taxpayer does not volunteer that he or she has an offshore account or unreported income, the OVDP agent believed the taxpayer should still be eligible for the OVDP.

  • Thus, if the agent never asked and client never volunteered – OK.
  • Also, OK if examination questionnaire asked and client answered truthfully, but the agent never pursued the issue.

Caveat: Agents are generally now asking: Is there any income not reported in the return?

The OVDP agent suggested that a taxpayer may answer no to the unreported income question, and still be eligible for the OVDP if he can establish that he genuinely did not believe there was unreported income because he does not have the account statements.  But, this is a slippery slope and could lead to additional charges if the taxpayer is not being  truthful with his or her counsel about the examination questions and answers or even if his memory is distorted and there is income and very large income.

There are many moving parts to this question and whether the client is allowed to enter the OVDP will depend on specifics.

Bottom line:  the taxpayer must exit the audit with clean hands.

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

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HOW NOT TO VOLUNTARILY DISCLOSE AN UNREPORTED OFFSHORE FINANCIAL ACCOUNT

A Wall Street Journal of March 14, 2015 by Laura Saunders reveals how Gregg Kaminsky and his tax advisors violated the cardinal rule of voluntary disclosure practice, “Don’t make things worse than they already are.”

Kaminsky, now a 46 year-old entrepreneur with two young children, had opened a Swiss account at UBS in 2000. Kaminsky’s stated reason for opening the account: His grandfather having helped Jews escape during Holocaust, had told him to always have a secret stash.  Kaminsky made deposits to the account after it was opened.  By mid-2005 the account value had risen to $1.15 million.

Kaminsky did not file the required FBARS and did not include income from the accounts in his income tax returns.  Moreover, he left the assets off federal financial tuition aid forms he’d filed in 2007 and 2008 to obtain low-interest loans for an MBA program.

Making things worse

In 2009, after the UBS scandal became public, Kaminsky closed the UBS account and wired his funds from the account to a HSBC bank account in Hong Kong thus becoming one of what IRS calls “The Leavers.” (Those who fled UBS for other banks thought to be not yet on the IRS radar screen).  In leaving he’d instructed UBS that he expected them to keep   “details regarding the account over its history … entirely confidential.”  Unfortunately for Kaminsky UBS, trying to save its own neck, gave him up to the Department of Justice.

Making things yet more worse

In 2010, Kaminsky decided to come clean.  He claims he was advised to forego the Offshore Voluntary Disclosure Initiative, as it was called at the time.  Instead he made an ill-advised “quiet disclosure” by filing amended returns for the years 2009 through 2012 reporting his previously unreported offshore earnings.  Kaminsky’ s quiet disclosure was ill-advised because his failure to file FBARS and report income from his Swiss and Hong Kong accounts was clearly not due to reasonable cause and almost certainly not non-willful, at least from 2009 when his movement of funds to Hong Kong created pretty compelling evidence of knowledge and intent to conceal.

Making things yet even more worse

Not only was the quiet disclosure ill-advised, but worst of all his errors of judgment, the amended returns did not include all of Kaminsky’s gross income earned.  He left out of the amended returns income earned from the second life virtual world. SL members buy and sell goods and services using a currency called Linden Dollars (L$). Linden Labs. The income earned from such activities is gross income that must be reported on a member’s tax return. Whether or not the SL income omission was intentional, it was a fatal nail in the coffin.

Result

A DOJ press release (12/18/14)

“Gregg A. Kaminsky has pleaded guilty to one count of willfully failing to file a Foreign Bank Account Report with the U.S. Department of Treasury in connection with his concealment of income and assets in accounts in Switzerland, Hong Kong, and Thailand over several years, as well as his failure to report certain income earned in the virtual world, “Second Life.”

Kaminsky was sentenced this month and his punishment seems not overly harsh in relation to his offenses (In total he’d failed to report over $400,000 in income and evaded tax of about $125,000):

  • Four months in prison followed by two years of supervised release.
  • Two months of home confinement.
  • 200 hours of community service.
  • Pay restitution in the amount of $91,983 to the IRS.
  • Pay an FBAR civil penalty of $250,635.20, which was about fifty percent of the balance in Kandinsky’s HSBC account in Hong Kong as of June 30, 2009.  The penalty could have been much higher had not the FBAR penalty statute of limitations run on the earlier years when his bank account value had peaked.

Lessons to take from the plight of Mr. Kaminsky

  1. Filing amended returns for offshore transgressions, whether in a “quiet disclosure” or under the “Streamlined Filing Compliance Procedures” is dangerous and must be undertaken with great care and only after a thorough analysis whether the taxpayer’s conduct in failing to comply with the tax law and Bank Secrecy Act was willful.
  2. The willfulness analysis is not the end of the process requiring great care. The amended returns must be prepared scrupulously and must capture all income earned and claim only those deductions clearly allowed under the Internal Revenue Code. Such returns are not ordinary returns in which aggressive filing positions should be taken. With hindsight errors or aggressive, unsustainable deductions may look like more evidence of criminal intent to conceal a prior tax crime, reduce the tax owed on the prior tax crime, or of yet another tax crime.

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

Posted in 2014 OVDP, AMENDED RETURNS, LESSONS FOR OFFSHORE TAX COMPLIANCE, ROBERT S STEINBERG, STREAMONED FILING COMPLIANCE PROCEDURES, WRONG WAY TO VOLUNTARILY DISCLOSE OFFHORE ACCOUNTS | Tagged , , , , | Leave a comment

STREAMLINED NON-WILLFUL CERTIFICATIONS: DON’T LIE, DON’T’ EXAGGERATE AND DON’T CHERRY-PICK YOUR FACTS

The Department of Justice Tax Division acting assistant attorney general, Caroline Ciraolo, speaking at the Federal Bar Association Tax Section annual tax conference (reported by Nathan J. Richman, Tax Analysts Tax Notes Today, March 9, 2015), stated:

We are taking particular interest if we find evidence of an account holder claiming non-willful conduct in a streamlined compliance filing or delinquent submission only to find that evidence produced by the Category 2 banks suggests otherwise. We are using information gleaned from the program to open new investigations, pursue new targets around the globe, and we will continue to do so as the information is developed.

The reference to Category 2 banks refers to Swiss banks participating in the DOJ Swiss Bank Settlement Program under which the DOJ is receiving information. The DOJ is using that information to verify certifications of non-willfulness under the Streamlined Filings Procedures.

Jack Townsend in his Federal Tax Crimes blogs discussed the likelihood of one being prosecuted for a false certification. Jack compares the analysis to a spectrum at one end being non-willful and at the other end being willful. I prefer to analogize to the Bell Curve because it’s more visual. The left-hand flat extreme deviation represents non-willful and the right-hand flat extreme deviation willful.

So, what are the odds of being prosecuted for one’s certification?

  • Those at the left will likely not be prosecuted for an unintentional factual error in their certifications.
  • Those at the right-hand extreme deviation are willful and will also face perjury charges and possible extended stature of limitations issues if they certify that they were non-willful.
  • For those in the middle bulge of the Bell Curve astute legal analysis and sound judgment are required to determine whether it is wiser to proceed under the more risky Streamline Filing Process than to have the client enter the no-prosecution safety-net of the OVDP.

Townsend surmises that those in the middle may have their certifications denied for want of sufficient facts to establish non-willfulness but will not be charged criminally. That assumes that the certification is truthful and contains no material false statements or misleading statements.

Remember also that the Streamlined Filing Process offers not specific timetable for obtaining closure on one’s voluntary disclosure. It is simply a filing process with penalty relief (no penalty for qualifying non-U.S. persons and a 5% penalty for U.S. persons). The IRS may re-open the issue of non-willfulness at any time within the statute within the statute of limitations (or, without limitation if fraud is found) as it receives information from its varying sources.

The lesson to be gleaned: Make the certification factual and truthful; and, do not cherry-pick facts, leaving out negative facts, or exaggerate so as to make the certification misleading.

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

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