For alimony to be deductible under Sec. 215 (a) of the Internal Revenue Code (IRC), the payments must meet all four of the conditions specified in IRC Section 71(b) (1). One of those conditions is that the payment not continue beyond the death of the payee spouse. The payee spouse’s estate must not, under the divorce decree, marital settlement agreement, or, final judgment, have a right to continue to collect the support payments. There must be “no liability to make any such payment for any period after the death of the payee spouse…” IRC Sec. 71 (b) (1) (D). Whether that obligation exists is determined under the law of the state controlling.

Alimony arrearages reduced to money judgment under Colorado law

In Iglicki V. Commissioner, TC Memo. 2015-80, the Tax Court held that a taxpayer was not entitled to the alimony deduction.   The taxpayer had signed a separation agreement in Maryland during 1999 but lived in Colorado at the time of taxpayer filing the Tax Court petition.

The separation agreement that taxpayer was to pay $375 in monthly child support but no spousal support unless he defaulted on the separation agreement. If he did default, he became liable for $1,000 per month in spousal support. The spousal support would then continue until the earlier of taxpayer’s death, the former wife’s death or the 36th monthly payment having been made. The terms of the separation agreement were later incorporated into a final judgment of divorce entered by the Circuit Court for Harford County, Maryland. After the divorce the taxpayer moved to Colorado and defaulted on his obligations under the separation agreement and final judgment. The former wife subsequently filed suit in the District Court of Del Paso County, Colorado (El Paso District Court) to enforce the separation agreement and divorce decree. The former wife obtained a filed a verified entry of judgment with the El Paso District Court, declaring among other things, that the taxpayer owed her $36,000 in spousal support plus $28,156 in interest for a total of $64,156 in spousal support arrears. The judgement is silent as to whether the payments survive the former wife’s death. Former wife then obtained a writ of garnishment against the taxpayer’s wages from the El Paso District Court.

During 2010 the taxpayers made from garnished wages, $50,606 in payments to his former wife of which $11,256 represented child support owed in addition to the spousal support.   He claimed an alimony deduction of $39,350 in his 2010 return. The IRS disallowed the alimony deduction of taxpayer in full.

The payments meet the first three tests of Sec. 71 (b) (1) in that:

  1. The payment is made in cash to or on behalf of the spouse under a divorce or separation instrument.
  2. The divorce or separation instrument does not designate the payment as not includible in the payee spouse’s income and not allowable as a deduction under Sec. 215 (a).
  3. If legally separated under a decree of divorce or separate maintenance, the spouses are not members of the same household at the time such payments are made.

Thus, the only question regarding deductibility was whether the payments, under Colorado law, would continue beyond the former wife’s death.  While the original Maryland divorce decree met this test, the Colorado judgment for arrearages, against which payments were made, did not.   The court examined Colorado law which treats future support payments differently from payments made to satisfy support arrears. Future support payments terminate upon the death of either spouse. “By contrast, an order enforcing spousal support arrears becomes a final money judgment and the applicable statute of limitations is the general 20-year statute applicable to any other court order” (cites omitted). Since the verified entry of judgment was issued to assist Ms. Iglicki in collecting past due but unpaid spousal support, it is treated as a final money judgment” against the taxpayer. Under Colorado law the judgment would be enforceable against the taxpayer’s estate. Therefore the payments from taxpayer’s garnished wages failed to qualify as alimony under Sec. 71 (b).

Durational Alimony held non-deductible / non-taxable under Delaware law

Another recent Tax Court decision is Esther P. Crabtree v. Commissioner T.C. Memo. 2015-163 (filed August 17, 2015), in which the court applied Delaware law to determine that a provision in a divorce agreement created an obligation to make payments after the death of the payee spouse. The provision in question provided that, “Dr. Girard will continue to tender unallocated alimony/ child support in the monthly sum of $5,232.00 for a continued 8 year period with the provision as long as Mrs. Girard should not remarry or cohabitate.” The Delaware court then entered the divorce agreement as an order without hearing. Both the agreement and judgment were silent on whether the payments would survive the payee spouse’s death. The IRS had determined that the payments were taxable alimony and the payee spouse filed the Tax Court petition seeking to reverse that determination.

The Tax Court, applying Delaware law, found that the payments would continue for the entire 8 years and would not cease if the payee spouse died before the 8 year payment period had run. Thus, the payments failed to meet the condition specified in 71 (b) (1) (D) and were held to be non-taxable and non-deductible.

These cases illustrate how, absent a clear expression in the final judgment of divorce or divorce agreement, whether alimony is deductible alimony will depend in part on determining whether the payments, applying state law, would continue after the death of the payee-spouse. Moreover, even when the original divorce decree does provide that alimony payments cease upon the payee-spouse’s death, alimony arrearages and money judgments obtained for those arrearages may be treated differently.  That determination of whether alimony payments end on the date of the payee-spouse is a legal question that should be addressed by an attorney familiar with the state law of the particular jurisdiction.

What does Florida law say about alimony terminating on death of the payee spouse when the judgment or agreement is silent?

The outcome in Florida seems to turn n what kind of alimony is involved and whether the payments are for current alimony or arrearages.   Florida law contained in FS Sec 61.08 refers to four distinct kinds of alimony two of which terminate upon death and two of which are not presumed to terminate on death, as follows:

  • Bridge the gap alimony – FS Sec. 61.08 (5) – the statute is silent.
  • Rehabilitative alimony – FS Sec. 61.08 (6) (a) – the statute is silent.
  • Durational alimony – FS 61.08 (7) – Terminates upon the death of either spouse.
  • Permanent alimony _ FS 61.08 (8) – Terminates upon the death of either spouse.

Thus, for bridge-the-gap or rehabilitative alimony payments to be deductible, the divorce agreement or judgement would have to state clearly that the payments terminate upon the death of the payee spouse. If an agreement providing for durational or permanent alimony is silent on the death issue, however, the statutory presumption would govern and the payments would be deductible.

Florida arrearages on alimony that is being paid through the court depository

Here the statute (FS 61.14 6 (a) (1) specifically addresses payments made through the court’s depositary. A delinquency on payments to have been made through the court’s depository that continues for 15 days and is not successfully contested, becomes a final judgment by operation of law upon filing a certified copy with the court. “A certified statement by the local depository evidencing a delinquency in support payments constitute evidence of the final judgment.” (FS 61.146 (a) (2).

The final judgment is a money judgment that under FS 55.10 (1) becomes a judgment lien on real property in any county when a certified copy of it is recorder in the official records. The judgment lien has an initial life of 10 years from the date of recording but may be re-recorded for an additional 10-year term. (FS 55.10 (2). The judgment, unless satisfied, would remain valid after the payee-spouse’s death. Hence, payments made towards satisfying the judgment lien would be non-taxable and non-deductible because the Sec. (b) (1) (D) test is not satisfied.

An interesting point about this conclusion is that timely made court depository support payments provided for in an agreement or judgment that either expressly state the payments will end on the death of the payee-spouse, or, is silent on the subject, but are durational or permanent alimony under FS 61.08, are deductible to the payor-spouse and includible in the income of the payee spouse, assuming the other Sec. 71 (b) (1) tests are met: but, if the court depository payments become delinquent and the payee-spouse obtains a judgment, the payments are converted from deductible / taxable to non-deductible / non-taxable.

The payor-spouse does have an opportunity under FS 61.14 (c) to contest the arrearages before they become a judgment by operation of law. The payor-spouse can also pay-up the arrearages before the judgment by operation of law becomes effective and thereby retain the alimony deduction if the other Sec 71 (b) (1) requirements are satisfied. . For example, if the  payor-spouse contests the arrearages and then pays an agreed-upon amount before the judgment is effective.

Florida alimony paid directly and not through the court depository

When alimony payments, by agreement, are not paid through the court depository, the same rules as to deductibility / taxability would apply but the payee-spouse would have to initiate a court proceeding to obtain a money judgment. The threat of losing the alimony deduction could be leverage to encourage the payor-spouse to make timely payments; but, would the payee-spouse rather the payments become delinquent and be reduced to judgment thereby becoming non-taxable? I guess it depends on how badly the payee spouse needs the money and whether the payee-spouse strategically prefers to use the court’s contempt powers to enforce payment of the delinquent alimony in lieu of seeking to collect on a money judgment..

Thanks to Miami family law attorney Kurt Klaus who providing valuable insight into the court depository system and effect of a money judgment in Florida.

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

Posted in DIVORCE TAX | Tagged , , , , , , , | Leave a comment


In my blog post of August 10, 2015 (Statutes of Limitation and Streamlined Filings or File Forward Strategies) I discussed the impact of various statutes of limitations (SOLs) on Streamlined Filing decisions.   It is important to remember that SOLs are a double-edged sword. They permit IRS to make assessments within the permissible periods be it the general-rule SOL of three-years, the extended SOL of six-years or the tolled SOL under various circumstances discussed in the earlier blog post. SOLs by the same token prohibit IRS from making an assessment after the running of the applicable SOL. Once the applicable SOL has tolled, IRS is out of luck, absent fraud.


Consider a U.S. resident taxpayer who failed to report income from an offshore account and likewise failed to file and FBAR for years 2011, 2012 and 2013. The taxpayer and his spouse had filed joint returns before April 15 for each of the three prior years but did not include the foreign bank account interest. The income not reported is less than 25% of the taxpayer’s gross income for 2011, 2012 and 2013.   Assume that the taxpayer was negligent in failing to timely file but his conduct was not willful. No other foreign reporting forms were required to be filed as the highest value of the account was $100,000 and no PFICs, foreign gifts or nominee entities were involved.

The taxpayer has properly filed his 2014 FBAR and his 2014 Form 1040. The amount of income tax owed as indicated on the amended returns is as follows:

2011 $5,000
2012 $3,000
2013 $1,000

The amended returns are filed on August 26, 2015 along with the Streamlined Filing non-willful certification.

No Form 872 required

Note that the Streamlined Filing Compliance Procedures, unlike the OVDP, do not require that the taxpayer execute a Form 872 extending the time within which the IRS can assess additional tax. Since the three-year SOL applies under our assumptions stated above, the SOL on assessment with regard to the tax-year 2011 would have expired on April 15, 2015.  Thus, the $5,000 stated to be due on the 2011 amended return is time-barred and cannot be collected by IRS.

Language in Streamlined Filing Compliance Procedures

Yet, the Streamlined Filing procedures instruct the taxpayer to remit payment for the amount shown on the tax returns for all three years, to wit:

Submit payment of all tax due as reflected on the tax returns (emphasis added) and all applicable statutory interest with respect to each of the late payment amounts.  Your taxpayer identification number must be included on your check.  You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.

So, the dilemma: follow the procedure to the letter, which makes no sense; or, remit the tax due on returns not time barred with the cover letter explaining the omitted 2011 payment.  The concern being that to do so might cause the Service robot-reviewers to knee-jerk reject the Streamlined Filing and process the return under the normal return processing procedures; and, issue a non-willful penalty notice for $10,000, instead of the $5,000 penalty (5%) under the Streamlined Process, which would then be appealed.  The trouble is the taxpayer won’t know IRS has taken that action until he or she receives a penalty or audit notice down the road.

If payment is made for all years, IRS will automatically refund the payment for the time barred year since it cannot legally make the assessment. Thus, for small or nominal amounts it may be procedurally more expeditious to remit payment for all three years regardless of the SOL. I would note in the Streamlined Filing cover letter that payment is remitted pursuant to the Streamlined Filing Compliance Procedures, but that a refund is requested for the payment with respect to the year that is time-barred. For, larger amounts I would likely withhold payment and explain why payment has been withheld in the Streamlined Filing cover letter. But, such considerations follow no template and require case by case consideration.

Note that if Form 8938 or any of the required foreign reporting forms mentioned in my August 10 blog post were not filed, the above consideration is moot since the three-year SOL does not begin to run until the forms are filed.  Also, if original timely filed returns were not filed, the statute of limitations on assessment for the delinquent filed returns does not begin to run until the returns are filed.

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

Posted in STREAMLINED FILINGS | Tagged , | Leave a comment


In earlier blog posts I have discussed how Streamlined Filings differ from OVDP submissions. One major difference: unlike an OVDP submission, a taxpayer making a Streamlined Filing is not informed upfront whether his or her filing has been accepted as qualifying for the zero-penalty regime for those residing outside of the U.S. or 5% penalty for those residing in the U.S.

Rather, the streamlined filer must wait to learn whether IRS will audit the returns and conclude that the taxpayer’s conduct was willful or worse criminal either in failing to file on time, filing a false return, not reporting a foreign bank account, filing a false FBAR, or, filing a false non-willful certification.

How long a taxpayer must wait for a decent night’s sleep depends on what are called Statutes of Limitations (SOL). These statutes define the time period within which IRS or Department of Justice, as the case may require, is allowed to assess additional tax or penalty, collect a tax liability assessed or charge someone with a tax or FBAR related crime.

The limitations periods are also central to the strategy some have adopted or are considering, that is, to simply begin reporting their offshore bank accounts and offshore income prospectively and do nothing about part transgressions.

What are these statute of limitations periods?[i]

Civil income tax assessments:

Income tax Assessments

Generally IRS must assess additional tax within three years from the due date of the return or filling date, if the return is filed after the due date. (Sec. 6501 (a) and (b)).

This period, however, is extended to six years if unreported gross income exceeds more than 25% of total gross income (Sec. 6501(e) (1)).   For this purpose overstating cost basis on the sale of an asset is now considered an understatement of gross income. Sec. 6501(e)(1)(B) as amended by a Highway Funding Bill, H.R. 3236, signed by President Obama on July 31, 2015 and effective for returns filed after July 31, 2015 and returns filed previously that are still open under Sec. 6501 (the three-year rule). This new code section overrides the contrary Supreme Court decision in US v. Home Concrete & Supply LLC. (566 U.S. ___ (2012), 634 F2d 249).

Special extended income tax limitations period if required foreign forms not filed

Section 6501 (c) (8) (A), however, allows the IRS to assess income tax on a return at any time within three years after the date on which the IRS is furnished the information required to be reported on certain foreign related forms including:

  • Form 8621, Information Return by Shareholder of a Passive Foreign Investment Company (PFIC) or Qualified Electing Fund.
  • Form 5471, Information Return of US. Persons with Respect to Certain Foreign Corporations.
  • Form 5472, Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business.
  • Form 8938, Statement of Specified Foreign Financial Assets.
  • Form 8865, Return of US Person with Respect to Certain Foreign Partnerships.
  • Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
  • 3520A, Annual Information Return of a US Trust with a Foreign Owner (Under Section 6048(b)).

If the taxpayer has a reasonable cause for failing to file the omitted report, the statute extension will apply only to the foreign items omitted and not to the entire return (Sec. 6501 (c) (8) (B)).

Substitute for return

Section 6501 (b) (3) makes the civil SOL period inapplicable to a return (called A Substitute for Return) filed by the IRS under Section 6020 for a taxpayer who has not filed a return.

False, fraudulent or unfiled returns

The civil SOL is also inapplicable to false or fraudulent returns, or, where there has been a willful attempt to evade tax. In these cases the tax may be assessed at any time as is the case with regard to any year for which no return has been filed. (Sec. 6501 (c)).

FBAR civil penalty assessments – 31 USC 5321 (b) (1)[ii] / IRM 11-3-(2014)

The FBAR civil penalty can be assessment for one or both of two omissions:

  1. Failing to file an FBAR, both willful and non-willful.
    1. The penalty can be assessed within 6 years following the due date of the FBAR (June 30). Thus, the penalty for failing to file the 2014 FBAR, due June 30, 2015, may be assessed before June 30, 2021.
  2. Failure to maintain required records.
    1. The penalty may be assessed within six years following the IRS first request for the records.

The civil FBAR penalty statute of limitations is absolute as there is no tolling exception to its running. And while the Title 26 SOL does not begin to run until a return is filed, the Bank Secrecy Act FBAR SOL starts to run on the due date of the FBAR whether or not falsely filed or not filed at all.

FBAR limitations period on collection:

It is important to note that the normal assessment and collection procedures under the Internal Revenue Code (Title 26 USC) do not apply to the civil FBAR penalty which is governed by Title 31 USC. When a civil FBAR penalty is assessed, the IRS cannot simply give notice and demand and then start to levy on bank account (subject to appeals and Tax Court review). IRS must commence a civil suit in the US. District Court to collect the FBAR penalty before the end of the two-year period beginning on the later of:

  1. The date the penalty was assessed (date that the IRS designated official stamps IRS Form 13448): or,
  2. The date any judgement becomes final in any criminal action in connection with the same omission on which the FBAR civil penalty was assessed. (31 USC Sec. 5321 (b) (2).

A monetary judgment obtained by the IRS in a suit to collect an FBAR penalty would then have the life of federal judgment (20 years / can be renewed for an additional 20 year term – 28 USC Sec. 3201. Appeals could toll the running of such SOL. So, the IRS could have many years to attempt to collect its judgment on the FBAR penalty.

Income tax SOL on IRS collection efforts

The general collection period of limitations on income tax assessments is ten years from the date of assessment subject to many tolling exceptions (e.g., Collection Due Process Hearing Request, Offer in Compromise submission), and the IRS right to commence suit in US District Court to reduce the tax lien to judgment. The federal tax lien under the IRC does not merge into the judgment. Thus, IRS can proceed to collect the tax under the IRC provisions or under the Federal Debt Collection Practices Act. (IRM (12-07-2010)).

There is no tolling of the civil tax SOL on assessment when the taxpayer is outside the US. But the SOL on collection is suspended when the taxpayer has been outside of the U.S. for a continuous period of six months and the SOL will not expire until six months following his or her return to the U.S. (Sec. 6503 (c)).

Limitations periods for bringing some common criminal charges.

Title 26 income tax crimes

  • Tax Evasion under Sec. 7201 – six years from commission of offense (usually due date or filing date of return) (Sec. 6531(2) but can be extended to the date of the last act of evasion. For example, see U.S. v. Irby, 703 F2d 380 (5th Cir. 2012) where the last act of evasion of payment was the use of nominee trusts to conceal assets in 2006 on an unfiled 2001 return year. (6501 (2)).
  • Filing a false return under Sec. 7206 – six years from filing date (6531(5).
  • Delivering a false document under Sec. 7207 – six years from date of delivery (6531(5)).

Note especially that the Statute of Limitations for Title 26 offenses and Klein conspiracies discussed below is tolled tor any period during which the taxpayer charged is outside of the U.S. regardless of the reason for being outside of the U.S. (Sec. 6531) or is a fugitive from justice (18 USC 3290). Obviously, this could impact a taxpayer with an offshore account who either lives abroad or spends considerable time overseas.

Title 18 crimes (Title 18 USC is the general federal criminal code)

  • 18 USC 371 (called Klein conspiracy after case US. v. Klein) – six years from the last act in furtherance of the conspiracy.
  • Sec. 6531 applies to Klein conspiracy offenses and thus, the statute of limitations period would be extended for the period of absence from the U.S.
  • But, 18 USC 3290 provides: “No statute of limitations shall extend to any person fleeing from justice.”   Whether someone is fleeing from justice is a question of fact. This section is also applicable to Title 26 offenses and applies to fleeing felons within or outside of the US.
  • The SOL for Title 18 offenses is also suspended under 18 USC 3292 while a U.S. government request to a foreign government for evidence located in the foreign country is pending.

Title 31 (Bank Secrecy Act) crimes (FBAR criminal violations)

  • Five years from the date the offense is committed (due date of FBAR or June 30) – 18 USC 3282.
  • 18 USC 3290 discussed above could, in the opinion of some, apply to extend the SOL and whether one living outside of the US is a fleeing felon would be decided on the facts of each case. Physical presence outside of the U.S. alone should not be enough to toll the SOL when not outside the country as a fleeing felon. But, the application of 18 USC 3290 to FBAR violations is still an open question. It is more likely to be applicable, if at all, to fleeing felons where the government can prove that the person has been attempting to shield himself or herself from being apprehended. You would expect such person to have committed overt acts that show an intent to conceal that goes well beyond passively or benignly residing outside of the U.S.

Concluding comments

The above summary is not all-inclusive of every SOL applicable to tax crimes and every tolling period. But, it should give pause to one who is thinking about riding out the storm regarding the past and simply starting to file going forward. The storm could turn out to be much longer than anticipated and the boat could get swamped.

Filing forward without addressing the past is a dangerous strategy but might be appropriate is some cases with exceptional facts, such as very small income in the non-compliant years or where the SOL is close to running and the taxpayer has not resided outside the U.S.. But, the safest path for most will usually be to come into compliance under one of the IRS sanctioned programs where the outcome is clearer.

Non-willful Streamlined filers, at least those properly characterized, are not tax criminals but may have large amounts of unreported income with little tax owed as a result of the foreign tax credit or foreign earned income exclusion. Thus, the six-year SOL could apply if they have large unearned income not previously reported in a return.

Expats who choose to file forward can be audited as far back as IRS wants to go since the civil SOL will not commence to run if no return has been filed. Those in high-tax jurisdictions, however, will in most cases owe little tax to the U.S. Treasury. Persons living in the US usually will have filed returns although I have come across many habitual non-filers who live in the U.S.

Those who unknowingly make a streamlined filing when tax crimes have been committed or worse who commit a crime by submitting a false non-willful certification are in a very exposed position. That is why it is imperative for a tax lawyer, experienced in these matters, to oversee the Streamlined Filing.

There are no general rules that can be applied to every case and no templates for safely navigating the treacherous waters of coming into compliance from offshore transgressions or omissions. Every case must be carefully evaluated to ascertain a course of action that will most likely lead to a safe landing.

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

[i] Unless otherwise noted all section references are to the Internal Revenue Code of 1986, as amended, also sometimes referred to as Title 26 USC (United States Code).

[ii] Title 31 USC is the Bank Secrecy Act.




It is rare but occasionally congress enacts a law that makes eminent good sense. Tucked away in the Highway Funding Bill (HR 3236) signed by President Obama on July 31, 2015 are tax provisions, among which is a provision that changes the FBAR due date effective for taxable years beginning after December 31, 2015:

  • The FBAR filing date has been moved up to April 15 from June 30 of the year following the reporting year beginning with the 2016 report. Thus, the 2016 FBAR will be due on April 15, 2017.
    • The law also provides for a six month extension of time to file the 2016 FBAR to October 15, 2017.
    • This change will be welcome because the June 30 filing date was an aberration having no connection to any tax return due date.
    • Note, however that the 2015 FBAR is still due on June 30, 2016.
    • The law also will allow IRS to waive the FBAR penalty for first time FBAR filers who failed to obtain an extension of time to file.
  • The law also changes other return due dates for taxable years beginning after 2015, namely:
    • Both partnership returns S Corp. returns will be due on March 15 with an automatic extension allowed to September 15.
    • C Corporation returns (yes, there still are some C Corporations around) will be due on April 15 with an automatic five month extension to September 15. Fiscal year filers with a year-end of June 30 will be allowed a seven month extension. This provision sunsets in 2026.
    • Trust returns on Form 1041 will continue to be due on April 15 but with an automatic five and one-half month extension being allowed to September 30.


As of August 5, 2015, the list has grown to 38 foreign financial institutions as follows:

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)
  27. Privatbank Von Graffenried AG (effective 7/2/15)
  28. Banque Pasche SA (effective 7/9/15)
  29. ARVEST Privatbank AG (effective 7/9/15)
  30. Mercantil Bank (Schweiz) AG (effective 7/16/15)
  31. Banque Cantonale Neuchateloise (effective 7/16/15)
  32. Nidwaldner Kantonalbank (effective 7/16/15)
  33. SB Saanen Bank AG (effective 7/23/15)
  34. Privatbank Bellerive AG (effective 7/23/15)
  35. PKB Privatbank AG (effective 7/30/15)
  36. Falcon Private Bank AG (effective 7/30/15)
  37. Credito Privato Commerciale in liquidazione SA (effective 7/30/15)
  38. Bank EKI Genossenschaft (effective 8/3/15)

Robert S. Steinberg, Esquire


Posted in 2014 OVDP, FBARS, FINCEN FORM 114 | Tagged , , , | Leave a comment


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

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


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 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