IRS Committed to Stopping Offshore Tax Cheating; Remains on “Dirty Dozen” List of Tax Scams for 2017

IRS Newswire Issue No. IR-2017-35, February 16, 2017 is reproduced below in its entirety.

WASHINGTON — The Internal Revenue Service today said avoiding taxes by hiding money or assets in unreported offshore accounts remains on its 2017 list of tax scams known as the “Dirty Dozen.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 55,800 disclosures and the IRS has collected more than $9.9 billion from this initiative alone.

In addition, another 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties. The IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

“Offshore compliance remains a top IRS priority. We’ve collected $10 billion in back taxes in recent years with 100,000 taxpayers making use of our voluntary disclosure programs,” said IRS Commissioner John Koskinen. “The IRS receives more foreign account information each year, making it harder to hide income offshore. I urge taxpayers with international tax issues to come forward and get right with the system.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their tax returns or hire people to help with their taxes.

Illegal scams can lead to significant penalties as well as interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Hiding Income Offshore
Over the years, numerous individuals have been identified as evading US. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. Then access the funds using debit cards, credit cards or wire transfers. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward to voluntarily disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced.

Third-Party Reporting

Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting has entered its second year. The IRS continues to receive more information regarding potential non-compliance by U.S. persons because of the Department of Justice’s Swiss Bank Program. This information makes it less likely that offshore financial accounts will go unnoticed by the IRS.

Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to apply to OVDP to resolve their tax obligations.

RSS COMMENTS
1. The IRS and Department of Justice are relentlessly pursuing offshore tax scofflaws and their efforts will not subside.
2. In this endeavor IRS and DOJ are receiving large volumes of information about possible offshore tax violators from numerous sources of which some are:

a. Foreign Banks that have entered the Swiss Bank Settlement Program.
b. Major Swiss banks seeking to avoid criminal prosecution under Deferred Prosecution Agreements.
c. Data collected from entrants into the Offshore Voluntary Disclosure Program.
d. Information in Non-willful Certification affidavits of Streamlined filers.
e. Whistleblower claims filed by those seeking rewards.
f. Offshore violation enablers who have flipped on their clients and are providing information.
g. John Doe Summons issues to banks and others with information about the identity about possible offshore tax cheats. For example, the DOJ recently sought permission from the U.S. District Court in NY to issue a John Doe Summons to Federal Express in connection with its investigation of offshore merchant accounts.
h. Taxpayer information provided under FATCA agreements.
i. Taxpayer information obtained pursuant to the exchange of information provisions in various tax treaties and Tax Information Exchange Agreements.
j. Information obtained though IRS Criminal Investigation (CI) Country Attachés and Deputy Attachés stationed in permanent posts in Frankfurt, Mexico City, Bogota, Hong Kong, Beijing, London, Bridgetown (Barbados), Ottawa, Panama City and Sydney..

3. These information collection and investigative activities collectively are reducing the ability of taxpayers still out of compliance to avoid detection.
4. Taxpayers who have not taken advantage of the OVDP or Streamlined Filing Compliance Procedures to come into compliance with U.S. tax law should seriously reconsider their decision to remain out in the cold.
5. For a discussion of the OVDP compared to the Streamlined Filing Compliance Procedures see my blog post of May 19, 2016, “Comparison Chart: OVDP vs. Streamlined Filing Compliance Procedures found at: https://the-tax-wars.net/2016/05/19/comparison-chart-ovdp-vs-streamlined-filing-compliance-procedures/

Robert S. Steinberg, Esquire
http://www.Steinbergtaxlaw.com
AV Rated (Pre-eminent) by Martindale Hubbell

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2016 FILING STRATEGY FOR OFFSHORE NONCOMPLIANT TAXPAYERS

I have previously posted on the need for those who are still out of compliance with U.S. tax law to become compliant with their 2016 tax and FBAR filings. “See post of 11/17/16 Taxpayers Must Become Compliant with U.S. Offshore Tax Filing Requirements and FBAR reporting by 2016 – Time May be Running out for Non-willfulness Claims .” https://the-tax-wars.net/2016/11/17/taxpayers-must-become-compliant-with-u-s-offshore-tax-filing-requirements-and-fbar-reporting-by-2016-time-may-be-running-out-on-non-willfulness-claims/

A strategy for coming into compliance should include the following:

1. File an extension for your 2016 income tax return.
2. Your 2016 FBAR, due April 15, 2017, has been automatically extended by FinCEN to October 15, 2017.
3. Retain an experienced offshore tax attorney to determine eligibility for the Streamlined Filing Compliance Procedures and whether your actions in failing to file or report require the greater protection from criminal charges and FBAR penalties offered by the Offshore Voluntary Disclosure Program. See post of 5/1*/16 “Comparison Chart: OVDP vs Streamlined Filing Compliance Procedures.” https://the-tax-wars.net/2016/05/
4. The tax attorney retained will prepare your Streamlined non-willful certification statement if he or she determines that it is safe for you to submit returns under the Streamlined Program.
5. Retain an experienced offshore tax preparer to prepare original or amended returns for the non-compliant years of 2013, 2014 and 2015 and e-file with FinCEN original or amended FBARS for 2010 through 2015. (Note that taxpayers residing in the U.S. cannot file delinquent returns under the Streamlined procedures).
6. File your Streamlined submission (unless it is determined that you must enter the OVDP).
7. It usually takes at least a couple of months to complete the tax return preparation, review and non-willful certification for a Streamlined filing and sometimes considerably longer. The tax attorney will conduct a due diligence inquiry to confirm your claim of non-willfulness.
8. Timely file your 2016 return and FBAR in full compliance with the income tax laws together with all required foreign reporting forms.

The accepted definition of willfulness for both criminal and civil penalty purposes is a voluntary and intentional violation of a known legal duty. Thus, willfulness requires both knowledge and a voluntary conscious act to not file or report.

Many offshore taxpayers have been contacted by foreign banks conducting FATCA due diligence inquiries to determine if customers are U.S. citizens or residents. These contacts may put the taxpayer on notice that there are offshore filing requirements to which they must attend. The failure to take corrective action, upon obtaining knowledge of the obligation to file returns, FBARS or other foreign reporting forms, is a fact that may weigh on whether IRS views conduct as non-willful. After knowledge of the tax filing and reporting obligations is obtained, failure to file a timely and correct 2016 income tax return, FBAR and foreign reporting forms,  depending on other facts present, may also be viewed as a criminal violation or as conduct supporting the willful civil FBAR penalty.

Criminal willfulness must be proven by the government beyond a reasonable doubt while civil willfulness for the FBAR penalty need only be proven by a preponderance of the evidence (i.e., more than half of the evidence adduced at trial points towards willfulness).
Thus, the wise course of action for those still out of compliance is to address the problem before the 2016 return and FBAR become either delinquent or are incorrectly filed.
Filing returns and making a non-willful certification under the Streamlined program are serious matters that carry great risk if attempted by those who are not well versed in this specialized area of tax law.
© 2017 by Robert S. Steinberg, Esquire
All rights reserved
http://www.steinbergtaxlaw.com

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DISTRICT COURT CONTINUE TO REQUIRE ONLY A PREPONDERANCE OF THE EVIDENCE TO SUPPORT A FINDING OF WILLFULNESS IN FBAR PENALTY ENFORCEMENT CASES.

The U.S. District Court for the Central District of California in U.S. v. August Bohanec and Maria Bohanec Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16) https://www.pacermonitor.com/public/case/8438973/United_States_of_America_v_August_Bohanec_et_al handed the IRS victories on two important issues:

1. Held that the standard of proof in civil FBAR cases is the lesser burden of “preponderance of the evidence,” and not the higher standard of “clear and convincing evidence,” and,
2. Held that the willful FBAR penalty may be assessed when the taxpayer’s conduct is reckless but not intentional.

Standard of Proof Issue

When the IRS assesses a willful FBAR penalty, it cannot collect the FBAR penalty assessed under the collection procedures employed to collect income taxes. Thus, IRS cannot levy on bank account, record liens or employ the usual summary collection procedures permitted under the Internal Revenue Code for collecting income tax assessments. Rather, generally within two years from the date of assessment, IRS must commence a suit in U.S. District Court to obtain a judgment for the amount of the FBAR penalty assessed. Once a judgment is obtained, IRS may collect the debt over the life of the judgment (generally 20 years with a renewal period of an additional twenty years).

Taxpayers have argued that the burden of proof required of IRS in proving willfulness should be the higher “clear and convincing evidence” standard. They argue that the Internal Revenue Manual (IRM) states that the standard should be the same as is applied for the civil fraud penalty, that is, “clear and convincing evidence.” This is a higher standard than the general burden of proof standard applied in civil tax matters, which is “by a preponderance of the evidence (POE).” Under the POE standard the fact at issue must be established by the weight of the evidence, that is, by more than 50% of the evidence admitted at trial.

This standard of proof required is a big deal because the government has the burden of proving willfulness in seeking to obtain a judgment for a civil willful FBAR penalty assessment. There is a lot at stake in these cases because the civil willful FBAR penalty is the greater of $100,000 or 50% of the value of the unreported foreign financial accounts on the due date of the FBAR in question.

The Court in Bohanec applied the lesser POE standard of proof as had the U.S. District Courts in the much commented on Williams and McBride cases.
In so holding the court noted that the IRM does not have the force of law and is not relevant to the case at hand.

The Bohanec Court cited the Supreme Court decision in Herman & MacLean v. Huddleston, 459 US. 375, 389 (1983) which held that the “clear and convincing” burden of proof applies in civil matters only, where particularly important individual interests or rights are at stake.” Such rights include parental rights, involuntary commitment and deportation. The lower more generally applicable preponderance of the evidence standard applies, however, where “even severe civil sanctions that do not implicate such interest are contemplated.”

The court held that “the monetary sanctions at issue here do not rise to the level of particularly important individual interests or rights.” Thus, the court applied the POE burden of proof in deciding the case.

Scope of “Willful” issue

The taxpayer had also argued in Bohanec.that IRS Chief Counsel Advice, CCA 200603026, establishes that “willful” for purposes of the civil FBAR penalty under 31 USC Sec. 5321 is the same as the criminal standard for “willful,” that is, an intentional violation of a known legal duty; and, that willful conduct therefore does not encompass conduct that is reckless but not intentional.

The Court held that the CCA may not be cited as precedent and that no court has adopted the view stated in the CCA or espoused by the taxpayer.

The Court cited Safeco Ins. Co. of America v. Burr, in which the Supreme Court explained that “willfully is a word of many meanings whose construction is often dependent of the context in which it appears.” 551 U.S. 47, 57 (2007).

The Court stated that “where willfulness is an element of civil liability, the Supreme Court generally understand the term as covering ‘not only knowing violations of a standard, but reckless ones as well.” Safeco 551 U&.S. at 57.   Further citing Safeco at page 68, “Recklessness is an objective standard that looks to whether conducti entails and unjustifiably high risk of harm that is either known or so obvious that it should be known.”

Applying the law as stated, the Court found that the government had proved by a POE that August and Maria Bohanec were at least recklessly indifferent to ta statutory duty to file an FBAR for the following reasons:
• They were reasonably sophisticated people who ran a highly successful camera shop that for a time was the only exclusive Leica dealer in the world. They negotiated very lucrative deals with Leica.
• When other dealers protested that circumvented Leica’s supply restrictions through a negotiated agreement with Walter Kluck president of Leitz Canada, Leica’s subsidiary there. They had a worldwide reputation and sold and shipped to customers around the world.’
• August Bohanec was sophisticated enough to obtain two patents without the assistance of an attorney.
• They also managed the construction of a home along the coast of Mexico including the hiring of a contractor and the opening of Mexican bank accounts.
• They knew they had to pay taxes and had to file returns and yet did not file returns after 1998 until they attempted to enter the OVDP in January of 2010.
• In connection with the sales of Leica cameras Walter Kluck of Lietz opened a UBS Swiss bank account for them into which was deposited commissions or finders fees for steering international buyers to Kluck.
• They did not report the commissions on federal income tax returns.
• On at least two occasions they directed their international customers to directly deposit money into their UBS account.
• After closing the camera shop they sold used Leicas on EBay without reporting the income.
• The Bohanec’ did not provide UBS with their home address.
• The Bohanec told only their children about the Swiss account and no one else.
• They did not tell their return preparer for the camera shop returns about the account.
• They did not seek professional advice about reporting requirements.
• They never used a bookkeeper to keep books once the account was opened.
• Part II of Schedule B of their 1998 return put them on notice that they needed to file an n FBAR.
• Defendant’s credibility was damaged by their false statements and omissions in their submission to the OVDP which ultimately cause their application to be rejected, namely
o That all of the funds in the UBS account were after tax proceeds from their camera business.
o Omitted from their FBARS other foreign accounts in Mexico and Austria.
o Returns filed with OVDP omitted all income from E-bay sales

Although not specifically cited as a reason for the court’s finding of recklessness, the decision may also have been influenced by other findings of fact, namely:
•The UBS account was managed by Walter Kluck while he was alive and thereafter by UBS.
• They made occasional withdrawals from the account, for example, for their daughter, to transfer fronds to an account in Austria owned by August and to an account they had both opened in Mexico.
• The UBS account had a high value in 12/31/99 of $1,096,500 and a value on 6/30/2008 when the failure to file being alleged occurred of $643,662.
• They moved the entire account to Austria in 2009 when the balance was $523,677 and later repatriated the funds to their U.S. account  Although not commented on by the court, this was following the UBS criminal investigation becoming public.
• Schedule B was included in their 1998 return (last return filed before the OVDP submission) included the following question: At any time during 1998 did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account:? See page B-2 for exceptions an filing requirements for Form TD F 90-22.1.(Now FinCEN Form 114)
o  Page B-2 of the instructions for Schedule B for 1998 states: See (FBAR) Form TD F 90-22.1 to find out if you are considered to have an interest in or signature or other authority over a financial account in a foreign country (such as a bank account, securities account or other financial account)”
o  Page B-2 of the instructions for Schedule B of 1998 also states: “if you checked the Yes box on line 7a file Form TD F 90-22.1 by June 30, 1999, with the Department of the Treasury at the address shown on that form.”
• The IRS assessed additional tax for 2003, 2005-2010 in the amount of $172,291 and penalties including a civil fraud penalty. The taxpayers had not disputed the deficiency in Tax Court and owed IRS a total of $492,163 at the time of trial on the FBAR penalty assessment.

RSS Comments:
Regarding recklessness – We cannot look into someone’s mind to see what is going on his or her brain with regard to FBAR reporting obligations. Thus, evidence of knowledge or wanton disregard of warning signs will be deduced from circumstantial evidence. Thus, it appears to me that if facts would put a reasonably prudent person with the same education, background, experience and sophistication on notice that there is a danger of non-compliance with the tax law and the person proceeds in wanton disregard of the risk, the conduct is reckless. It is not difficult perhaps to distinguish reckless conduct from ordinary negligence or ignorance of the law. It may be more difficult to distinguish reckless conduct which makes one ineligible for a streamlined filing from gross negligence which IRS has stated does not disqualify one from the streamlined procedures..
Regarding Schedule B – The court spells out the language on the 1998 Schedule B which was the last personal return filed by the Bohanec before the OVDP filing. This return was filed 8 years before the 2007 FBAR on which the penalty is assessed was not filed.
Question: Was it reasonable to presume that the taxpayer’s recalled the 1998 return language and instructions in 2007, the year for which they are being assessed the FBAR penalty or on June 30, 2008 the FBAR due date

The IRS states in its Streamlined FAQ 6 for persons residing outside of the U.S., that:
We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation

I suggest perspective Streamlined filers read the entire case which has lengthy findings of fact that are instructive with regard to preparing streamlined non-willful certifications. The case may be found at https://www.pacermonitor.com/public/case/8438973/United_States_of_America_v_August_Bohanec_et_al
© 2016 by Robert S. Steinberg, Esquire
http://www.Steinbergtaxlaw.com

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CURRENT LIST OF U.S. EXHANGE OF TAX INFORMATON AGREEMENTS AND AUTOMATIC EXCHANGE OF TAX INFORMTION AGREEMENTS IN FORCE

Under various income tax treaties and other agreements a foreign country may make a treaty request for information about income earned in the U.S. by one of its citizens or residents. Other agreements provide for the automatic exchange of tax information. The IRS has just updated the list of countries with which it has tax information sharing agreements and those with which it has automatic exchange of information agreements regarding interest income.

Section 3 of Rev. Proc. 2016-56 IRS updates the list of countries with which it has Tax Treaties or other agreement that contains a provision relating to the exchange of tax information upon appropriate request. Section 3 of the Rev. Proc. is reproduced below.

SECTION 3. SUPPLEMENT TO SECTION 3 OF REV. PROC. 2014-64
Section 3 of Rev. Proc. 2014-64 is supplemented to read as follows:
The following are the countries with which the United States has in effect an
income tax or other convention or bilateral agreement relating to the exchange of tax
information within the meaning of section 6103(k)(4) pursuant to which the United
States agrees to provide, as well as receive, information and under which the
competent authority is the Secretary of the Treasury or his delegate:

• Antigua & Barbuda
• Aruba
• Australia
• Austria
• Azerbaijan
• Bangladesh
• Barbados
• Belgium
• Bermuda
• Brazil
• British Virgin Islands
• Bulgaria
• Canada
• Cayman Islands
• China
• Colombia
• Costa Rica
• Croatia
• Curacao
• Cyprus
• Czech Republic
• Denmark
• Dominica
• Dominican Republic
• Egypt
• Estonia
• Finland
• France
• Germany
• Gibraltar
• Greece
• Grenada
• Guernsey
• Guyana
• Honduras
• Hong Kong
• Hungary
• Iceland
• India
• Indonesia
• Ireland
• Isle of Man
• 4
• Israel
• Italy
• Jamaica
• Japan
• Jersey
• Kazakhstan
• Korea, Republic of
• Latvia
• Liechtenstein
• Lithuania
• Luxembourg
• Malta
• Marshall Islands
• Mauritius
• Mexico
• Monaco
• Morocco
• Netherlands
• Netherlands island territories: Bonaire, Saba, and St. Eustatius
• New Zealand
• Norway
• Pakistan
• Panama
• Peru
• Philippines
• Poland
• Portugal
• Romania
• Russian Federation
• Saint Lucia
• Slovak Republic
• Slovenia
• South Africa
• Spain
• Sri Lanka
• St. Maarten (Dutch part)
• Sweden
• Switzerland
• Thailand
• Trinidad and Tobago
• Tunisia
• Turkey
• Ukraine
• United Kingdom
• Venezuela

Section 4 of the Revenue Procedure updates the list of countries with which the U.S. has in effect provisions for the automatic exchange of information regarding the reporting of interest income. Section 4 of Rev. Proc.

SECTION 4. SUPPLEMENT TO SECTION 4 OF REV. PROC. 2014-64
Section 4 of Rev. Proc. 2014-64, as supplemented by Rev. Proc. 2015-50 and
Rev. Proc. 2016-18, is further supplemented to read as follows:
The following list identifies the countries with which the automatic exchange of
the information collected under §§ 1.6049-4(b)(5) and 1.6049-8 has been determined
by the Treasury Department and the IRS to be appropriate:

• Australia
• Azerbaijan
• Brazil
• Canada
• Czech Republic
• Denmark
• Estonia
• Finland
• France
• Germany
• Gibraltar
• Guernsey
• Hungary
• Iceland
• India
• Ireland
• Isle of Man
• Israel
• Italy
• Jamaica
• Jersey
• Korea, Republic of
• Latvia
• Liechtenstein
• Lithuania
• Luxembourg
• Malta
• Mauritius
• Mexico
• Netherlands
• New Zealand
• Norway
• Poland
• Saint Lucia
• Slovak Republic
• Slovenia
• South Africa
• Spain
• Sweden
• United Kingdom

Citizens or residents of other countries living in the U.S. should be aware of these agreements.

Robert S. Steinberg, Esquire
www.steinbergtaxlaw.com

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SLIP-SHOD STREAMLINED NON-WILLFUL CERTICATIONS WILL CAUSE TROUBLE AND EXPENSE THAT WILL EXCEED THE COST SAVINGS FROM HIRING A LESS EXPERIENCED TAX ATTORNEY

Some who call me shop around after we speak seeking a less expensive tax attorney. My billing rate is at the lower range of what equally experienced AV-rated tax attorneys charge. I know how much time at a minimum it takes to properly and professionally prepare the non-willful certification statement of facts supporting non-willfulness.

What is involved in preparing the non-willful certification?
The tax attorney must conduct a due diligence inquiry to determine the client’s state of mind as to knowledge and intent. The purpose of this inquiry is to determine if the client had known of the requirement to file FBARs and made a conscious decision not to file when he or she was otherwise able to file timely.

How does the tax attorney determine knowledge and intent?
The client will almost always claim he or she did not know about the FBAR filing requirement. How do you look into their mind to determine knowledge and intent? Well, there is no X-ray or MRI that reveals what was in their brain on the FBAR filing due date for each year. Consequently, knowledge and intent or lack of knowledge and intent must be established by what is called circumstantial evidence. Circumstantial evidence includes all of the surrounding facts and circumstances related to the creation, and operation of the foreign financial account. It also includes facts and circumstances that go to determining whether it is reasonable to conclude that the taxpayer would likely have known about the FBAR filing requirement and other facts that tend to either indicate knowledge and/or intent or the absence hereof.

Some of these factors are:

• Educational background, including advanced degrees and areas of study.
o Tax and finance courses included in curriculum.
o Generally, the more educated the more likely IRS will deem knowledge and intent present. But, focus of studies is important.
•Work history and experience – did positions held bring client into contact with tax and FBAR information?
• Level of sophistication of investments – more sophisticated investor is more likely to have heard of FBAR.
• Publication subscriptions – Wall Street and Economist reader more likely to have heard of FBAR than Miami Herald and Facebook reader.
• Unusual health, family and job stresses in life that may have distracted the client from inquiring or rendering client unable to timely file.
• Communications with bank – foreign banks keep records of emails and calls. Does the client have copies of all such communications?
o Relying solely on memory is extremely dangerous.
• Communications with return preparer
o Was organizer provided? Used?
o Face to face meetings?
o Emails? Does client have copies of all written communications?
o Must confirm answers directly with return preparer.
• Self-prepared returns:
o Which software program used?
o Which version of software as different versions may have different prompts regarding FBARS?
o Do returns contain Schedule B?
o Anyone assist? Must confirm facts.
• How the account came to be opened?
o Inherited?
o Outbound transfer of funds?
o Local banking needs for expatriate.
• Where the accounts were located?
o The IRS will look closely at streamlined filings including accounts at UBS or other financial institutions on its list of enablers.
o Similarly, if the taxpayer was involved with an identified enabler individual broker, attorney or banker, IRS may look askance at a taxpayer’s claim of non-willfulness.
• Source of funds must be determined and verified
 Legal activity?
 Untaxed funds?
• Obtain account opening documents
o Hold mail instruction?
o Nominee entity title holder?
• How account operated:
o Serial transfers back to U.S. in amounts under $10,000?
o Transfers to other foreign accounts in countries where client does not reside?
• How client learned of FBAR requirements?
o When? From what source?
• What client did to come into compliance after learning about FBAR reporting requirements?
o Name, address and telephone number of each professional contact.
o Advice provided.
o Date of communication.

The above facts take considerable time to marshal and incorporate into a coherent and cogent statement for non-willfulness.

What else must the tax attorney do in representing the potential streamlined client?

The tax attorney must first analyze these facts and determine that no tax (Title 26 U.S.C.), Bank Secrecy Act crime (Title 31 U.S.C.) or other crime (e.g. Title 18 U.S.C.) has been committed. The tax attorney must then determine if the facts and circumstances establish non-willfulness. Since the Streamlined Filing Compliance Procedures are internal IRS procedures contained in the Internal Revenue Manual but not in the Internal Revenue Code or Bank Secrecy Act, returns will be processed as streamlined returns at the discretion of IRS. Thus, the taxpayer’s affidavit must establish non-willfulness to the satisfaction of IRS for the taxpayer to be entitled to the streamlined penalty relief. Of course, ultimately, should IRS assess a willful FBAR penalty, it will have the burden of proving willfulness. The National Taxpayer Advocate may be able to assist if a taxpayer is unreasonably denied streamlined filing penalty relief.

The tax attorney must also determine that the client is either a person living in the U.S. or living outside of the U.S. This is not simply a matter of where the taxpayer happens to reside at the time of filing. The test for U.S. citizens or Green Card holders involves either meeting or failing to meet a non-residency test for any one of the three streamlined years (three most recent years for which the return due date has passed). For others, residency is determined under the substantial presence test for determining income tax residency. In this regard, taxpayers who are resident aliens under the SPT cannot user a tax treaty closer connection test to escape the 5% miscellaneous offshore penalty that applies to persons living in the U.S.

Finally, the tax attorney must review the streamlined returns to make sure there is nothing facially incorrect and that the facts stated in the returns are consistent with the statements in the non-willful certification statement.

The streamlined filing should be submitted by the tax attorney with a cover letter.

How much time does will the tax attorney spend in advising a potential streamlined client?
It should be apparent to even the naïve tax filer that this process cannot be completed in a few hours. I have found it impossible to complete in less than eleven hours. Some non-willful certifications take much longer. The many non-willful certification statements I have prepared ranged from a low of six pages to a high of over thirty-five pages

What are the potential consequences of a botched streamlined filing?
I have heard stories of clients paying as little as $1,000 for preparation of the streamlined non-willful certification statement. Frankly, someone charging such a fee cannot possibly do what must be done to insure that the filing won’t exacerbate the client’s tax problems by:

• At worst getting the client charged with a tax crime, FBAR crime or perjury for filing a false affidavit which is possible if:
o .The non-willful statement is found to be false.
o The non-willful affidavit cherry-picks the helpful facts but does not include facts that are not helpful or even that work against non-willfulness.
o The non-willful affidavit makes statements that are later contradicted by others such as the bankers or return preparers.
• At best, having the returns treated like regular tax filings not covered by the streamlined filing penalty relief which are later audited.

Shopping for a tax attorney is not akin to shopping for an automobile. Autos of the same make, model and with similar options are comparable. Each tax attorney is unique in his or her knowledge, experience and ethical behavior, Clients should be suspicious when a much lower fee is suggested by a particular attorney. The old adage should warn: “If it sounds too good to be true, it is.” Bargain-basement streamlined filings may turn out to be very expensive filings if any of the above bad things happen because bad advice is received from an inexperienced “inexpensive.” tax attorney. Streamlined filings are consequential matters that should be approached with great caution and care.

© 2016 by Robert S. Steinberg, Esquire
AV rated (preeminent) by Martindale Hubbell
http://www.steinbergtaxlaw.com

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TAXPAYERS MUST BECOME COMPLIANT WITH U.S. OFFSHORE TAX FILING REQUIREMENTS AND FBAR REPORTING BY 2016 – TIME MAY BE RUNNING OUT ON NON-WILLFULNESS CLAIMS

For some time now, I’ve been receiving frequent calls from U.S. citizens or Green Card holders living outside of the U.S. and U.S. citizens, Green Card holders and residents living in the U.S. who have been out of compliance with U.S Tax Law vis a vis their foreign income producing activities and foreign financial assets.

I explain to them that to qualify for the Streamlined Filing Compliance Procedures, which provide a relatively simpler and less painful path back to compliance, they must certify under penalties of perjury that their failure to properly report income, file FBARs and foreign reporting forms was the result of non-willful. Further, that non-willful means that their conduct was not willful. And, that the courts have defined willfulness as the intentional violation of a known legal duty.

Thus, they either must have been ignorant of their duty to file FBARs and other foreign reporting forms and report foreign interest and other income; or, having knowledge, must have been negligent or careless in failing to file or report, but not willful. (For a discussion of willfulness see blog post of September 1, 2014 “Will-O-The Wisp Willfulness in the Streamlined Process.”

Beginning in  2015 and more urgently in 2016 Foreign Financial Institutions (FFEs) seeking to comply with FATCA’s due diligence requirements have begun inquiring of depositors whether they are U.S. citizens or residents and requesting completed Forms W-9 from deposits who are U.S. citizens or residents. Moreover, the FFEs are telling U.S. depositors to inquire about their U.S. tax reporting obligations.

Thus, U.S. expatriates and citizens and residents living in the U.S. who have been contacted by an FFE are learning of the U.S. income tax and foreign financial account reporting requirements and may no longer be able to state, under penalties of perjury, that their conduct at least with respect to 2015 and 2016 filings was non-willful.

To qualify for the Streamlined Filing Compliance Procedures the taxpayers conduct must have been non-willful for the entire period of noncompliance. Thus, absent other exigent facts and circumstances, if a taxpayer knew of the offshore reporting requirements for 2015 or 2016 filings and consciously or voluntarily did not or do not file or report, he or she will not be eligible to file amended or delinquent returns (persons living outside of the U.S) using the Streamlined Procedures.

Some examples:
1. A U.S. expatriate living in and paying taxes in a European country with unfiled U.S. returns is contacted by his or her foreign bank in November of 2015 requesting a Form W-9 and informing him of U.S. income tax filing and FBAR reporting requirements. The taxpayer who was previously ignorant of the offshore reporting requirements completes and returns the form to the bank but decides to ignore the newly acquired knowledge and does nothing about coming into compliance. In November of 2016 the taxpayer seeks professional assistance about how to come into compliance and plans to file delinquent returns for 2013, 2014 and 2015 and FBARs for 2010 through 2015 in early 2017.

2. Same facts as in example I above, except that the taxpayer upon being contacted by the bank immediately seeks professional help, files for an extension for 2015 in April 2016 but does not complete the delinquent returns for 2013, 2014 and 2015 or file FBARs for 2010 through 2015 until November of 2016. The delay is caused by the difficulty in obtaining all of the necessary information to file complete and accurate returns and in retaining a qualified return preparer and experienced tax attorney to assist with the Streamlined Filing Non-willful Certification.

3. Same facts as in example 1 above, except that the bank does not contact the taxpayer until June of 2016.

Conclusions: Caveat: these are overly simplified fact patterns that focus solely on when the taxpayer obtained knowledge of the offshore reporting requirements.  The examples and conclusions are based on my discussion of November 15, 2016 with an OVDP Revenue Agent in Austin following my call to “The OVDP Hotline.” I had posed the question stated in Example 1.  The agent emphasized that the timing of obtaining knowledge would be critical but that all facts and circumstances would be considered.  The answers provided are informal opinions of the agent and are not necessarily binding on the IRS.  Certainly, making willful versus non-willful determinations requires close and careful examination of all relevant facts and circumstances. See IRS FAQs for Streamlined Filing Compliance Procedures and Forms 14653 and 14654. For Tax Wars Blog discussions about what must be included in the Non-willful Certification see blog posts of January 28, 2016, “Non-willful Affidavits under the Streamlined Filing Compliance Procedures;” March 9, 2015, “Don’t Lie, Don’t Exaggerate and Don’t Cherry Pick Your Facts,” and others.

• Example 1: Absent extenuating facts and circumstances, the IRS would likely view the taxpayer’s conduct as willful. On April 15, 2016 the taxpayer knew he or she was required to file an income tax return for the year 2015 and on June 30, 2016, knew he or she was obligated to file and FBAR, but consciously did not file. Thus, the taxpayer is ineligible for making a Streamlined Filing because his or her conduct would be deemed willful with respect to 2015 even though conduct was non-willful prior to the 2015 filing deadlines

• Example 2: Absent other damaging facts the IRS would likely view the taxpayer’s conduct as non-willful for all relevant years. If damaging facts are present, they must be stated in the non-willful certification statement and explained, if there is a cogent explanation.

• Example 3: As in example 3, absent other damaging facts the IRS would likely view the taxpayer’s conduct as non-willful for all relevant years.
In addition, as noted in prior blog posts Caroline Ciraolo, Principal Deputy Assistant Attorney General in the Tax Division of the Department of Justice, has stated her skepticism whether any taxpayer could claim to be non-willful at this late date, after all of the publicity about offshore non-compliance. While I have disagreed with her statement in prior blog posts, it is certainly becoming more difficult, although not impossible in every case, to disagree with that conclusion.

It is imperative for those desirous of employing the Streamlined Filing Compliance Procedures to come into compliance to make sure to be fully compliant regarding offshore activities and assets in their 2016 income tax return and FBAR.  That means filing a timely and accurate Form 1040 with all required foreign reporting forms as well as a timely and accurate FBAR.  Those taxpayers having knowledge of the filing and reporting obligations who do not file timely compliant 2016 returns will have a difficult time establishing non-willfulness and, depending on the specific facts and circumstances, may need to enter the OVDP or file amended returns outside of the formal IRS OVDP or Streamlined procedures with statements claiming non-willfulness and/or claiming mitigating factors that justify  abatement or reduction of the willful or non-willful FBAR penalty.   Properly filed amended returns, in an appropriate case, may be viewed by IRS as a traditional Voluntary Disclosure under the IRS’s long-standing informal Voluntary Disclosure Policy.  (See IRM 9.5.11.9 Voluntary Disclosure Practice).  If deemed a Voluntary Disclosure, the taxpayer would not likely be charged with a tax crime.

It is also imperative that those seeking to come into compliance under either the Streamlined Filing Compliance Procedures or the Offshore Voluntary Disclosure Program do so at the earliest possible time. Following his inauguration, President Trump will nominate a new Secretary of the Treasury and IRS Commissioner. Both will be confirmed unless the Senate Democrats filibuster to delay the nominations from taking effect. In that case, the Republican majority may change the 60 vote requirement to a simple majority. Thus, there likely will be a new Treasury team running the show sometime in 2017. The new sheriff in town may decide that the two amnesty programs have run their course and that leniency is no longer desirable tax policy. Thus, either one or both programs may be eliminated. The IRS has repeatedly stated that there is no guarantee that these special programs will continue in their present form or at all.

The need to take action about coming into compliance is made more compelling by the growing likelihood of discovery. See blog post of November 3, 2016 “18 USC 3287 – The Statue without Limitations – Impact on OVDP Decisions.”
For a discussion of the OVDP compared with the Streamlined Filing Compliance Procedures, see blog post of May 19, 2016, “Comparison Chart – OVDP vs. Streamlined Filing Compliance Procedures.”

© 2016 by Robert S. Steinberg, Esquire
http://www.steinbergtaxlaw.com

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18 USC 3287- THE STATUTE WITHOUT LIMITATIONS – IMPACT ON OVDP DECISIONS

Title 18 of the United States Code Section 3287 – Wartime Suspension of Limitations Act (WSLA), provides as follows:

When the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)), the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not (emphasis added), or (2) committed in connection with the acquisition, care, handling, custody, control or disposition of any real or personal property of the United States, or (3) committed in connection with the negotiation, procurement, award, performance, payment for, interim financing, cancelation, or other termination or settlement, of any contract, subcontract, or purchase order which is connected with or related to the prosecution of the war or directly connected with or related to the authorized use of the Armed Forces, or with any disposition of termination inventory by any war contractor or Government agency, shall be suspended until 5 years after the termination of hostilities as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress. (Emphasis added).

Definitions of terms in section 103  [1] of title 41 shall apply to similar terms used in this section. For purposes of applying such definitions in this section, the term “war” includes a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).

Some individuals who have unreported foreign financial accounts may be thinking to continue to hide and out-wait the Department of Justice and IRS to the statute of limitations for crimes under Title 26 (tax), Title 31 (Bank Secrecy Act) and Title 18 (General federal criminal statute).

Apart from the increasingly heightened risk of discovery and other events that toll the various statutes of limitations (continuing conspiracy or concealment of conspiracy, out of the country, fleeing felon – see below.) 18 USC 3287 is perhaps the scariest tolling provision. While the statute does not apply to Title 26 crimes, such as tax evasion under IRC Section 7201, it does apply to Klein conspiracy crimes under 18 USC 371.

The SOL on conspiracy, six years, is extended when it is a continuing conspiracy or when a conspirator commits acts to conceal the crime. But, 18 USC 3287 eliminates the need for the government to prove these extending elements. The SOL under the WSLA is suspended until 5 years after the “termination of hostilities” as proclaimed by the President with notice to Congress or by a concurrent resolution of Congress.

To trigger the SOL suspension the U.S. does not require a formal declaration of war although that would trigger the section’s application. It is triggered when Congress enacts a specific authorization for the use of the Armed Forces as described in section 5(b) of the War Powers Resolution (50 USC 1544 (b).

Presently there are two active authorizations for the use of the Armed Services that have not been revoked by Presidential proclamation with notice to Congress or by a concurrent resolution of Congress. These are:
• Congress authorizing on September 18, 2001,the use of military force against those tied to the attacks of September 11, 2001, and,
• Congress authorizing on October 11, 2002 the president’s use of military force relating to the weapons of mass destruction threat posed by Iraq.

The Fifth Circuit Court of Appeals in United States v. Pfluger, 685 F. 3d 481 (June 21, 2012) has held that the “termination of hostilities” test in the WSLA is a formal test that requires the specific action stated in the statute, that is a proclamation of the President with notice to Congress or a concurrent resolution of Congress. Termination of hostilities cannot be established as a result of termination of the conditions justifying the original authorization for the use of military force.

The U.S. Supreme Court unanimously held in Kellogg, Brown & Root Services Inc. v. U.S. ex rel Carter (576 U.S. __, 12-1497, slip op. at 11 (May 26, 2015). that the WSLA does not suspend the applicable statute of limitations (SOL) in civil litigation, in Kellogg Brown & Root a civil false claims act case. Kellogg Brown & Root, however, also confirms that the criminal statute of limitations in criminal fraud cases is indefinitely suspended as long as Congressional authorizations for military force in Afghanistan and Iraq continue in force.
Moreover, civil tax assessments may be made at any time by IRS if fraud is proved.

What is the implication of the WSLA? Rosa Brooks in her book “How Everything Became War and the Military Became Everything”, states that a global war on terror, “was a war that could by its nature have no boundaries; no geographic limits, no limits on who could be targeted, captured or killed and no end.”

Since almost all offshore tax fraud involves an implicit agreement between two or more persons (U.S. taxpayer and at least one enabler) and overt acts in furtherance of the agreement, the SOL on tax fraud will remain open and waiting will not make the problem go away. The tax fraud also vitiates the tax SOL on assessment of the tax and civil fraud penalty by IRS.

On the other hand the FBAR civil penalty SOL is not suspended by the WSLA and waiting can eliminate that penalty if the foreign financial accounts have been closed and funds repatriated to the U.S. or moved into non-reportable assets. Although in the latter case the criminal conspiracy SOL would be suspended by virtue of additional acts committed in furtherance of the tax fraud scheme. Such individual may think to wait and then enter the OVDP after the FBAR SOL has expired. He or she would then opt-out of the OVDP penalty regime while preserving the criminal amnesty feature of the OVDP. While FBAR penalties would be time barred if 6 years had elapsed since the last required FBAR filing, Title 26 penalties could still be assessed if fraud is proved. Presumably, such individual will have closed all foreign financial accounts and repatriated the funds to U.S. accounts to turn-off the FBAR filing requirement.

This plan may seem plausible but waiting is a very dangerous tactic because:
• The likelihood of discovery is growing exponentially.
• There is no guarantee that the OVDP will continue in its present form.

Why is likelihood of being found out growing?

OECD CRS (Common Reporting Standard) – 100 countries are on board with about 60 to begin reporting in 2017.
Heightened pressure on tax haven countries by G20 nations to adopt the CRS.
• Swiss Bank Settlement Program – DOJ obtaining information from which to make treaty requests for specific taxpayer information.
• .IRS data base from OVDP and Streamlined filings (Over 100,000 combined participants)
Investigations extending beyond Switzerland – Caribbean, Asia, Middle East
FATCA (Foreign Account Tax Compliance Act) – Information Sharing Agreements have been signed and banks are asking for W-9s as part of their due diligence obligations.
Panama Papers – DOJ opened investigation
John Doe summonses continue to be obtained which seek information from foreign banks about the identity of U.S. account holders.
Summons or subpoena issued to taxpayer – Courts have uniformly held there is no Fifth Amendment defense to act of production of documents concerning accounts under Required Records doctrine.
Under examination disqualifier – Receipt of an audit letter ends eligibility for both programs until audit is closed.
o When is audit considered closed? Per my conversations with OVDP Hotline personnel:
 Receipt of Form 987 in agreed case officially closes audit after which a Code 300 series entry will appear on the taxpayer’s account transcript.
 Signing Form 4549 is not official end of audit
 But if the taxpayers fears his or her name is about to be disclosed, the individual can fax names to CI with copy of the signed 4549 and CI might accept that person into the OVDP. But, there is no guarantee of acceptance.

TIME IS ON IRS’ SIDE

Any one of a number of Statutes of Limitation (SOL) tolling provisions will suspend the running of the SOL and enable IRS to assess additional tax or the DOJ’s to bring criminal charges. For example:

o As to Civil tax and penalty assessments:

   IRC 6501 (c) (8) – extends SOL on return to 3 years after the date that all required foreign reporting forms (not FBARs) are filed (limited to foreign items if failure to file due to reasonable cause). This is civil SOL.
• Reasonable Cause – “taking that degree of care that a reasonably prudent person would exercise.” CCA 200748006 (Chief Counsel Advisory). What it means? Absence of negligence.
• Likelihood of establishing reasonable cause decreased over time as more years go by.
Unfiled returns – No SOL Sec. 6501 (c).

o As to tax crime SOLs:

   Normal criminal SOL is 6 years / Title 31 crimes 5 years.
Tolled:
• Outside U.S – Sec. 6531.
• Fleeing felon – 18 USC 3290
• During U.S. Gov’t request for evidence located in foreign country – 18 USC 3292
• Even worse – 18 USC 3287 – discussed above

Possible Loss of Passport – IRC Sec. 7345. Seriously delinquent tax debt over $50K can lead to denial, revocation or limitation of a passport. If Sec. of State is notified by IRS, must not issue new passport and can revoke a passport previously issued.
o Could be big problem for expats who do not necessarily receive all tax notices mailed to out of date addresses.

Cost rising – 47 more banks, brokers, individual advisors being added to IRS enablers list that increased OVDP misc. offshore penalty to 50% – Now 144 enables on list
o Less warning to taxpayer that individual enabler will soon be added to list. Banks usually attract headlines when investigation begins before DOJ makes public.
o Taxpayers connected to these individuals will pay the higher OVDP penalty.
o 4 WEEK GRACE PERIOD – These latest additions begin to trigger the 50% penalty for any taxpayer who has not come forward by November 15, 2016.
o Individuals – either under investigation or cooperating.
 Anyone who assisted with offshore arrangement.
 Mangers of offshore account
 Lawyers who set up nominee entity
 Bankers who assisted in hiding account
 No Mossack Fonseca lawyer names yet (Panama Papers law firm).

For all of these reasons waiting is generally not a safe plan as continued secrecy is a poor tax planning strategy. Someone always knows and someone is always willing to testify to save his or her own skin.

© 2016 by Robert S. Steinberg, Esquire
All rights reserved
http://www.steinbergtaxlaw.com

 

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