IRS ANNOUNCES MAJOR CHANGES TO AMNESTY PROGRAMS

By Armin Gray, Benjamin Tolub*

The IRS announced major changes to its amnesty programs last month. These changes can be broken into two parts: changes to the 2012 Offshore Voluntary Disclosure Program (“O.V.D.P.”), which can be to referred to as the 2012 Modified O.V.D.P. or the 2014 O.V.D.P., and changes to the streamlined procedures (“Streamlined Procedures”). As the requirements for the latter are relaxed, the requirements for the former are tightened.

The changes in the amnesty programs reflect the new IRS approach for addressing taxpayers with offshore tax issues. The new approach provides one path for willful taxpayers, with steeper penalties but certainty, and another path for taxpayers who believe their conduct was non-willful, with reduced penalties but uncertainty to the extent their conduct is subsequently proven willful.

Changes to O.V.D.P.

The major changes to the 2012 O.V.D.P. include the following:

1.              Changes to Preclearance Process

Under the 2012 O.V.D.P., all that was required was to submit a preclearance request was a fax to the IRS O.V.D.P. department that contained the taxpayer’s name, social security number, date of birth, address, and if the taxpayer was represented by an authorized party, an executed power of attorney (P.O.A.).

The 2014 O.V.D.P. made changes to this procedure effective for O.V.D.P. submissions made on or after July 1, 2014. Revised 2014 O.V.D.P. F.A.Q. # 23 which provides guidance on preclearance requests, now states as follows:

(a) Applicant identifying information including complete names, dates of birth (if applicable), tax identification numbers, addresses, and telephone numbers.

(b) Identifying information of all financial institutions at which undisclosed OVDP assets (see FAQ 35) were held. Identifying information for financial institutions includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers.

(c) Identifying information of all foreign and domestic entities (e.g., corporations, partnerships, limited liability companies, trusts, foundations) through which the undisclosed OVDP assets (see FAQ 35) were held by the taxpayer seeking to participate in the OVDP; this does not include any entities traded on a public stock exchange. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), employer identification numbers (if applicable), addresses, and the jurisdiction in which the entities were organized.

(d) Executed power of attorney forms (if represented).

2.              Penalty May Be Increased to 50%

The offshore penalty will be increased from 27.5% to 50% if, prior to the taxpayer’s pre-clearance submission, it becomes public that the financial institution or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or the D.O.J.

This is reflected in 2014 O.V.D.P. F.A.Q. #7.2, which states:

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.

Foreign banks already under investigation include:

UBS AG;
Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.;
Wegelin & Co.;
Liechtensteinische Landesbank AG;
Zurcher Kantonalbank;
Swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG;
CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates;
Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.;
The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India); and
The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates.[1]

3.              Elimination of Existing Reduced Penalty Structure

The reduced penalty structure under former F.A.Q. #52 and #53 have been eliminated. Former F.A.Q. #52 allowed for a 5% penalty in the case of certain inherited accounts, certain taxpayers who were unaware that they were U.S. citizens, and certain non-U.S. residents who made a good faith showing that the taxpayer complied with their resident country’s tax reporting and payment obligations, and who had $10,000 or less U.S. source income for each year. The available path forward for taxpayers who believe their conduct was non-willful is now exclusively through the new Streamlined Procedures.

4.              Account Statements

Former F.A.Q. #25 required submission of account statements at the time of the full submission package only if the account exceeded $500,000 in any year of the disclosure period. In such event, the taxpayer was required to keep records available upon request. F.A.Q. #25 has been modified to require taxpayers to submit account statements regardless of account balance at the time of the full submission package. It also now provides that voluminous documents not requiring original signatures may be submitted on CD or DVD.

5.              Other Notable Revisions

Other notable revisions include the following:

F.A.Q. #33 reaffirms with no uncertain terms the IRS’s position of tax non-compliance. It now states that “[e]ven one dollar of unreported gross income from an O.V.D.P. asset will bring it into the offshore penalty base.”
F.A.Q. #35.1 is added and states that the offshore penalty will be applied to the taxpayer’s interest in the underlying O.V.D.P. assets without regard to valuation discounts.

6.              Effective Date

The 2014 F.A.Q.s are effective for all new submissions made on or after July 1, 2014.[2]

7.              Consideration Under New Rules

A taxpayer who made an O.V.D.P. submission prior to July 1, 2014 the taxpayer’s case considered under the new guidelines. In this scenario, the taxpayer or the taxpayer’s authorized representative must communicate the request in writing to the examiner assigned to the case and, if no examiner has been assigned, to a specified address.

8.              Transitional Relief

For taxpayers who already had submitted their intake letter and attachments prior to July 1, 2014, to the extent the taxpayer is eligible for one of the streamlined programs, the taxpayer may apply for a reduced penalty in lieu of the 27.5% O.V.D.P. penalty. However, all other terms of the O.V.D.P., including the disclosure period and tax, interest, and other penalties, will continue to apply.

Applying for the reduced penalty entails signing a certification signed under penalty of perjury. This certification must explain that the taxpayer did not act wilfully with respect to all foreign activities/assets, must specifically describe the reasons for the failure to report all income, pay all tax, and submit all required information returns, including F.B.A.R.s, and, if the taxpayer relied on a professional advisor, must include the name, address, and telephone number of the advisor and a summary of the advice.

Relief is not automatic. Before transitional treatment is given, the IRS must agree that the taxpayer is eligible for transitional treatment and must agree that the available information is consistent with the taxpayer’s certification of non-willful conduct.

Changes to Streamlined Procedures

The Streamlined Procedures were substantially modified. This program is designed for non-willful taxpayers and is divided into two groups: those living in the U.S. (“Domestic Streamlined Program”) and those residing offshore (“Foreign Streamlined Program”). No IRS streamlined questionnaire is now required, although many tax practitioners have made their own questionnaires in order to assist in the process. The taxpayer will have to certify that their conduct was non-willful under the appropriate IRS form. Further, the $1,500 threshold has also been eliminated. Each program is described in more detail below.

1.              Non-Willful Conduct

Willfulness is the voluntary, intentional violation of a known legal duty, may include “willful blindness” or the reckless disregard of known statutory duties. Non-willful conduct includes conduct that is due to negligence, inadvertence, mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. The determination of whether the taxpayer’s conduct was willful or non-willful may be established by inference and circumstantial evidence.

The IRM lists four examples in the context of the failure to file an F.B.A.R. These examples are reproduced below:

Example 1. A person admits knowledge of, and fails to answer, a question concerning signature authority over foreign bank accounts on Schedule B of his income tax return. When asked, the person does not provide a reasonable explanation for failing to answer the Schedule B question and for failing to file the F.B.A.R. The example concludes that a determination that the violation was willful likely would be appropriate in this case.
Example 2. A person files the F.B.A.R., but omits one of three foreign bank accounts. The person had closed the omitted account at the time of filing the F.B.A.R. The person explains that the omission was due to unintentional oversight. During the examination, the person provides all information requested with respect to the omitted account. The information provided does not disclose anything suspicious about the account, and the person reported all income associated with the account on his tax return. The example concludes that the willfulness penalty should not apply absent other evidence that may indicate willfulness.
Example 3. A person filed the F.B.A.R. in earlier years but failed to file the F.B.A.R. in subsequent years when required to do so. When asked, the person does not provide a reasonable explanation for failing to file the F.B.A.R. In addition, the person may have failed to report income associated with foreign bank accounts for the years that F.B.A.R.’s were not filed. The example concludes that a determination that the violation was willful likely would be appropriate in this case.
Example 4. A person received a warning letter informing him of the F.B.A.R. filing requirement, but the person continues to fail to file the F.B.A.R. in subsequent years. When asked, the person does not provide a reasonable explanation for failing to file the F.B.A.R. In addition, the person may have failed to report income associated with the foreign bank accounts. The example concludes that a determination that the violation was willful likely would be appropriate in this case.

2.           Foreign Streamlined Program

In order to qualify for the Foreign Streamlined Program, the taxpayer must, in general, meet the following eligibility requirements:

a.              The taxpayer must have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an F.B.A.R.;

b.              The failure to report income, pay tax, and submit required information returns was due to non-willful conduct;

c.              The taxpayer must meet the following non-residency requirement. The non-residency requirement will vary depending on the status of the individual.

 i.                  U.S. Citizens and Lawful Permanent Residents: Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.

ii.                  Non-U.S. citizens and Other Residents:  Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test (i.e., the 183-day test) under the U.S. tax residency rules.

If the taxpayer is eligible, the taxpayer must:

a.              File delinquent or amended tax returns, together with required information returns, for the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed;

b.              File any delinquent F.B.A.R.’s for each of the most recent six years for which the F.B.A.R. due date has passed;

c.               Remit the full amount of tax and interest due in connection with these filings; and

d.              Sign a written statement declaring under penalties of perjury that the taxpayer is eligible for the program, is now compliant with the F.B.A.R. filing obligations, and that the past non-compliance was due to non-willful conduct.

If the taxpayer is eligible and fulfills the other requirements of the program, the taxpayer will not be subject to the following:

a.              Failure-to-file penalties;

b.               Failure-to-pay penalties;

c.        Accuracy-related penalties;

d.       Information return penalties; and

e.       F.B.A.R. penalties.

3.           Domestic Streamlined Program

In order to qualify for the Domestic Streamlined Program, the taxpayer must, in general, meet the following eligibility requirements:

a.              The taxpayer must not meet the non-residency requirements described above (for joint filers, one or both of the spouses must fail to meet the applicable non-residency requirement);

b.              The taxpayer must have filed a U.S. tax return (if required) for every year out of the most recent three-year period for which the U.S. tax return due date (or properly applied for extended due date) has passed;

c.              The taxpayer must have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law and may have failed to file an F.B.A.R. and/or one or more international information returns with respect to the foreign financial asset; and

d.              The taxpayer’s failure was due to non-willful conduct.

If the taxpayer is eligible, the taxpayer must:

a.              File amended U.S. tax returns for every year out of the three-year period for which the U.S. tax return due date (or properly applied for extended due date) has passed, including required information returns;

b.              File delinquent F.B.A.R.s for the most recent past six years for which the due date has passed;

c.              Pay a 5% penalty on the highest aggregate balance/value of the foreign financial assets during the years in the applicable tax return and F.B.A.R. period. For these purposes, the 5% miscellaneous offshore penalty applies to foreign financial assets in the following set of circumstances:

 i.                  Ifthe asset should have been, but was not, reported on an F.B.A.R. in a given year;

ii.                  Ifthe asset should have been, but was not, reported on Form 8938 in a given year; and

iii.                  If the asset was properly reported for a given year, but gross income in respect of the asset was not reported in that year.

d.              Submit a signed written statement declaring under penalties of perjury that the taxpayer is eligible for the program, is now compliant with the taxpayer’s F.B.A.R. filing obligations, that the past non-compliance was due to non-willful conduct, and that the 5% miscellaneous offshore penalty is accurate.

If the taxpayer is eligible and fulfills the other requirements of the program, the taxpayer will not be subject to the following:

a.              Accuracy-related penalties;

b.       Information return penalties;

c.       F.B.A.R. penalties.

4.           Disqualifications

It should be noted that if the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the Streamlined Procedures. However, the guidelines note that taxpayers under examination should consult with their agent.

5.           General Treatment Under These Programs

The guidelines note that tax returns submitted under these procedures will be processed like any other return submitted to the IRS. Accordingly, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement.

6.           Caution

The guidelines state that returns submitted under these procedures will not be subject to IRS audit automatically. However, the IRS warns that:

a.              Submission under these procedures disqualifies the taxpayer from participating in the O.V.D.P. at a later date;

b.              Returns may be selected for audit;

c.              Returns may also be subject to independent verification procedures and may be checked against third-party information received from banks, financial advisors, and other sources; and

d.              Returns submitted under these procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Therefore, if willfulness is proven after submission, the taxpayer receives no penalty protection. In other words, the taxpayer may be subject to the 50% F.B.A.R. penalty (per violation) and possible criminal penalties.

The guidelines to the new procedures encourage taxpayers who are concerned that their failures were due to willful conduct to participate in the O.V.D.P. The guidelines also encourage taxpayers to consult with competent tax professionals to assess which program they should enter into before making a decision.

Conclusion

The objective of the changes in the amnesty program is to bring taxpayers that have offshore tax issues back into the system as fully compliant. The prior complaint was the O.V.D.P. was too harsh for non-willful taxpayers. Therefore, certain taxpayers made so-called quiet disclosures, corrected their mistakes only on a go-forward basis, or have refrained from doing anything. Based on these recent changes, taxpayers have no excuse for not correcting known errors.

We expect that the IRS will be harsh on offshore tax compliance issues to the extent the taxpayer refrains from correcting known mistakes. We further expect the IRS to make examples of those who willfully avoided taxes but have entered into the revised Streamlined Procedures in order to receive a reduced penalty that they were not entitled to. The changes in the amnesty programs further reflect the policy shift to use tax professionals as gatekeepers in order to determine which program the taxpayer should enter into. This saves the IRS resources by putting the burden, and the costs, on the taxpayer and the taxpayer’s trusted advisor.

As these programs may close, taxpayers are well-advised to take advantage of these programs sooner than later. Taxpayers living offshore whose conduct was non-willful may be entitled to a path forward as simple as filing late returns without penalties. Taxpayers living onshore may be entitled to a substantially reduced penalty even in the case of non-willful violations that lack reasonable cause. Many tax practitioners believe that the amnesty programs may close when automatic information reporting begins under F.A.T.C.A., which may be as early as March of next year for the 2014 calendar year. Therefore, prompt attention is recommended.

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[1]           A current list can be found at the following link: http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators.

[2]           2014 O.V.D.P. F.A.Q. #1.2.

* The following article was published in Insights, by Ruchelman P.L.L.C.  Insights was originally designed, created, and edited by Armin Gray. Kyu Kim of Kyu & A LLC, a design company, substantially assisted in its design as well. Co-authors originally included Fanny Karaman, a team member supervised by Armin Gray, but Armin Gray and Benjamin Tolub were the principal contributing authors. We thank them for their support. 

CREDIT SUISSE PLEADS GUILTY TO ASSISTING IN TAX EVASION BY U.S. TAXPAYERS

By Armin Gray*

Credit Suisse AG pleaded guilty to conspiracy to aid and assist U.S. taxpayers with the filing of false income tax returns and other documents. Credit Suisse admitted to operating an illegal cross-border banking business that knowingly and willfully aided and assisted thousands of U.S. clients in opening and maintaining undeclared financial accounts and concealing their offshore assets and income from the IRS, thus evading U.S. taxes. The bank has agreed to pay $2.6 billion to the U.S. government, which will be divided among several agencies. 

Although the agreement does not require that Credit Suisse provide names of its U.S. clients who had undisclosed accounts with the bank, which was required under the plea agreement made by UBS in 2009, Credit Suisse agreed to:

  • Promptly disclose all evidence and information described in Section II.D.I. and II.D.2 of the U.S-Swiss bank voluntary disclosure program, which includes making a complete disclosure of its cross-border activities and providing all information (including the debits and credits on a monthly basis) with respect to its U.S. accounts other than the name of the individual; 
  • Provide testimony or information for admission into evidence of documents or physical evidence of any criminal or other proceeding as requested; 
  • Provide all necessary information for the U.S. to draft treaty requests to seek account records and other account information; 
  • Close accounts of account holders who fail to come into compliance with U.S. reporting obligations; 
  • Implement procedures to ensure compliance with U.S. laws including those under F.A.T.C.A. and relevant tax treaties in all its current and future dealing with U.S. customers.
  • As such, those with undeclared Credit Suisse accounts should promptly seek the advise of a competent professional. 

___________________

* The following article was published in Insights, by Ruchelman P.L.L.C.  Insights was originally designed, created, and edited by Armin Gray. Kyu Kim of Kyu & A LLC, a design company, substantially assisted in its design as well. Co-authors originally included Fanny Karaman and Cheryl Magat. We thank them for their support.

ISRAEL'S BANK LEUMI AIMS TO AVOID GUILTY PLEA IN SETTLING U.S. TAX PROBE

By Armin Gray*

Bank Leumi Le-Israel Ltd. recently said it is in advanced talks to settle a U.S. investigation into whether it helped Americans evade taxes in a deal that may not include a guilty plea. Israel's second-largest bank said it has set aside 950 million shekels ($275 million) to resolve the problem. Leumi would be the first Israeli bank to settle a tax probe with the Department of Justice. U.S. persons who have deposited funds with the bank may find that their income from those deposits may be disclosed to the U.S. once a final agreement is reached. 

Thus, Leumi joins the list of banks which the U.S. Department of Justice has been pursuing with respect to offshore tax evasion.  In 2009, UBS AG, the largest Swiss bank, avoided prosecution by paying $780 million and handing over the names of 4,700 U.S. account holders. As noted above, a guilty plea was just secured from Credit Suisse Group AG's main bank subsidiary, along with a $2.6 billion penalty. The Department of Justice has expanded its enforcement actions to banks outside of Switzerland in recognition of the fact that non-Swiss banks and other financial institutions have also played an active role in aiding U.S. persons in avoiding U.S. taxes. The Leumi case is evidence of one such situation, but it will not be the last with efforts expanding in Israel, India, and elsewhere around the world. 

Where there is a deadlock, the buy/sell arrangement is probably the best solution. It allows one of the partners to continue the business, does not force the partners to continue the business notwithstanding the disagreement, and provides the departing partner with a fair value for his ownership interest.

It is also important for any exit provision to take into account other aspects of the business. For example, in the Haley case, the parties were 50/50 owners of the limited liability company and co-guarantors of the company’s debt. The exit provision was silent as to the treatment of the debt if the buy/sell procedure was initiated. The court used this as another reason to bypass the exit provision and judicially dissolve the company.

In summary, whenever one is entering into a business venture consideration should be given to how to break a deadlock. If exit mechanisms are clearly worded and take into account all aspects of the parties’ business, resorting, or being subject to, judicial dissolution with all its inherent costs and uncertainties can be avoided.

___________________

* The following article was published in Insights, by Ruchelman P.L.L.C.  Insights was originally designed, created, and edited by Armin Gray. Kyu Kim of Kyu & A LLC, a design company, substantially assisted in its design as well. Co-authors originally included Fanny Karaman and Cheryl Magat. We thank them for their support. 

IRS ANNOUNCES MAJOR CHANGES TO OVDP AND STREAMLINED PROCEDURES

By Armin Gray*

After more than two weeks of speculation,  on June 18, 2014, the IRS announced major changes to its current offshore voluntary disclosure programs earlier today. The programs affected are the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers (the “Streamlined Procedures”) and the 2012 OVDP.

In general, as will be discussed in more detail below, the changes to the programs relax the rules for non-willful filers and at the same time potentially increase penalties for willful non-compliance.  

  • The changes to the OVDP, as announced today, include the following:
  • Additional information will be required from taxpayers applying to the program;
  • The existing reduced penalty percentage for non-willful taxpayers will be eliminated;
  • All account statements, as well as payment of the offshore penalty, must be submitted at the time of the OVDP application; 
  • Taxpayers will be able to submit important amounts of records electronically; and
  • The offshore penalty will be increased from 27.5% to 50% if, prior to the taxpayer’s pre-clearance submission, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or the Department of Justice. 

The changes to the Streamlined Procedures include the following:

  • The availability of the program is extended to certain U.S. taxpayers residing in the U.S.;
  • The requirement that the taxpayer have $1,500 or less of unpaid tax per year is eliminated;
  • The Streamlined risk questionnaire is eliminated; and
  • The taxpayer is now required to certify that previous failures to comply were due to non-willful conduct.

All penalties will be waived for eligible U.S. taxpayers living outside the United States. Eligible taxpayers living in the U.S. will only incur a 5% miscellaneous offshore penalty on the foreign financial assets that gave rise to the tax compliance issue.

It should be noted that taxpayers who, prior to July 1, 2014, submitted their intake letter and attachments, can benefit from the expanded Streamlined Filing Compliance Procedures if they are eligible for this program.

At first glance, the changes appear to officialize the prior avenue of silent disclosures that were made by many U.S. persons residing in the U.S. and abroad who believed the OVDP penalties were too harsh by providing an official path forward to come into compliance on a penalty free or penalty limited basis. 

The open question is how the IRS will treat silent disclosure filers currently under audit as a result of being discovered.

We will follow up shortly on the specifics, but you may review the details of the changes at www.irs.gov. 

CREDIT SUISSE PLEADS GUILTY TO ASSISTING IN TAX EVASION BY U.S. TAXPAYERS

Credit Suisse AG pleaded guilty to conspiracy to aid and assist U.S. taxpayers with the filing of false income tax returns and other documents. Credit Suisse admitted to operating an illegal cross-border banking business that knowingly and willfully aided and assisted thousands of U.S. clients in opening and maintaining undeclared financial accounts and concealing their offshore assets and income from the IRS, thus evading U.S. taxes. The bank has agreed to pay $2.6 billion to the U.S. government, which will be divided among several agencies. 

Although the agreement does not require that Credit Suisse provide names of its U.S. clients who had undisclosed accounts with the bank, which was required under the plea agreement made by UBS in 2009, Credit Suisse agreed to:
•    Promptly disclose all evidence and information described in Section II.D.I. and II.D.2 of the U.S-Swiss bank voluntary disclosure program, which includes making a complete disclosure of its cross-border activities and providing all information (including the debits and credits on a monthly basis) with respect to its U.S. accounts other than the name of the individual; 
•    Provide testimony or information for admission into evidence of documents or physical evidence of any criminal or other proceeding as requested; 
•    Provide all necessary information for the U.S. to draft treaty requests to seek account records and other account information; 
•    Close accounts of account holders who fail to come into compliance with U.S. reporting obligations; 
•    Implement procedures to ensure compliance with U.S. laws including those under F.A.T.C.A. and relevant tax treaties in all its current and future dealing with U.S. customers.
As such, those with undeclared Credit Suisse accounts should promptly seek the advise of a competent professional. 

ISRAEL'S BANK LEUMI AIMS TO AVOID GUILTY PLEA IN SETTLING U.S. TAX PROBE

Bank Leumi Le-Israel Ltd. recently said it is in advanced talks to settle a U.S. investigation into whether it helped Americans evade taxes in a deal that may not include a guilty plea. Israel's second-largest bank said it has set aside 950 million shekels ($275 million) to resolve the problem. Leumi would be the first Israeli bank to settle a tax probe with the Department of Justice. U.S. persons who have deposited funds with the bank may find that their income from those deposits may be disclosed to the U.S. once a final agreement is reached. 

Thus, Leumi joins the list of banks which the U.S. Department of Justice has been pursuing with respect to offshore tax evasion.  In 2009, UBS AG, the largest Swiss bank, avoided prosecution by paying $780 million and handing over the names of 4,700 U.S. account holders. As noted above, a guilty plea was just secured from Credit Suisse Group AG's main bank subsidiary, along with a $2.6 billion penalty. The Department of Justice has expanded its enforcement actions to banks outside of Switzerland in recognition of the fact that non-Swiss banks and other financial institutions have also played an active role in aiding U.S. persons in avoiding U.S. taxes. The Leumi case is evidence of one such situation, but it will not be the last with efforts expanding in Israel, India, and elsewhere around the world. 

Where there is a deadlock, the buy/sell arrangement is probably the best solution. It allows one of the partners to continue the business, does not force the partners to continue the business notwithstanding the disagreement, and provides the departing partner with a fair value for his ownership interest.

It is also important for any exit provision to take into account other aspects of the business. For example, in the Haley case, the parties were 50/50 owners of the limited liability company and co-guarantors of the company’s debt. The exit provision was silent as to the treatment of the debt if the buy/sell procedure was initiated. The court used this as another reason to bypass the exit provision and judicially dissolve the company.

In summary, whenever one is entering into a business venture consideration should be given to how to break a deadlock. If exit mechanisms are clearly worded and take into account all aspects of the parties’ business, resorting, or being subject to, judicial dissolution with all its inherent costs and uncertainties can be avoided.

___________________

* The following article was published in Insights, by Ruchelman P.L.L.C.  Insights was originally designed, created, and edited by Armin Gray. Kyu Kim of Kyu & A LLC, a design company, substantially assisted in its design as well. Co-authors originally included Fanny Karaman and Cheryl Magat. We thank them for their support. 

FATCA UPDATE

By Armin Gray* 

IRS PUBLISHES 1ST FFI LIST

On June 2, implementation of the Foreign Account Tax Compliance Act (“FATCA”) reached another milestone. On that date, the IRS published its first list of foreign financial institutions (“FFI’s”) that have registered with the IRS to show intent to comply with FATCA and have received a Global Intermediary Information Number (“GIIN”) to document that compliance. The IRS list is important since U.S. withholding agents who are being asked by FFI’s not to remit the 30% withholding tax imposed under FATCA must first obtain a GIIN from the FFI and then confirm on the IRS published list that the GIIN is accurate and in full force.

More than 77,000 FFI’s appear on this first list and include foreign affiliates of some of the U.S.'s largest financial institutions. Among those financial institutions are Bank of America, JPMorgan Chase, Merrill Lynch, and Franklin Templeton.

Withholding agents and others looking to search the website are given three options. First, the GIIN of an FFI can be entered to see if it is accurate and has not been revoked. Second, the name of the FFI can be entered. If the full name of the FFI is not known, the website allows entry of part of the name and will then show all FFI’s whose name includes the entry so that the desired FFI can then be found. Third, the website allows entry of the country of the FFI or its branch; this list will produce the most options, requiring the most review.

The website will now be updated each month to add the names of new FFI’s that agree to participate in the FATCA program or are registered deemed compliant FFI’s that fit within one of the exceptions to full compliance. The list will also be updated to remove the names of any FFI whose FATCA compliant status may have been lost.

IRS UPDATES FATCA FAQs

On May 29, the IRS updated its FATCA FAQs by addressing the protocol for a taxpayer whose registration under FATCA is put into “registration under review” status. The IRS said if a taxpayer's registration status is noted as being under review, the taxpayer should contact e-Help at 866-255-0652 and indicate that status. In addition, the taxpayer should provide the name of the financial institution and its FATCA identification and the name, telephone number, and e-mail address of either the FATCA responsible officer or a point of contact.

NEW I.G.A. COUNTRIES ADDED

The, Antigua and Barbuda, Belarus, Azerbaijan, Barbados, Georgia, Liechtenstein, New Zealand, Paraguay, Seychelles, Solvenia, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, Turkey, Turkmenistan, Turks and Caicos Islands, United Arab Emirates, have entered into intergovernmental agreements (“I.G.A.’s”) or I.G.A.’s in substance under FATCA The countries listed above, except Paraguay which signed a Model 2 I.G.A. in substance, agreed to Model 1 I.G.A.’s or Model 1 I.G.A.’s in substance.

At this time, the countries that are Model I partners by execution of an agreement or concluding an agreement in principle are:

Antigua and Barbuda
Belarus
Australia
Azerbaijan
Bahamas
Barbados
Belgium
Brazil
British Virgin Is.
Bulgaria
Canada
Cayman Islands
Colombia
Costa Rica
Croatia
Curacao
Czech Republic
Cyprus
Denmark
Estonia
Finland
France
Georgia
Germany
Gibraltar
Grenadines Guernsey
Hungary
Honduras
India
Indonesia
Ireland
Isle of Man
Israel
Italy
Jamaica
Jersey
Kosovo
Kuwait
Latvia
Liechtenstein
Lithuania
Luxembourg
Malta
Mauritius
Mexico
The Netherlands
New Zealand
Norway
Panama
Peru
Poland
Portugal
Qatar
Seychelles
Singapore
Slovak Republic
Slovenia
St. Kitts and Nevis St. Lucia
St. Vincent and the Grenadines
South Africa
South Korea
Spain
Sweden
Romania
The U.K.
Turkey
Turkmenistan
Turks & Caicos Is.
UAE

The countries that are Model II partners are: Armenia, Austria, Bermuda, Chile, Hong Kong, Japan, Switzerland, and Paraguay.

___________________

* The following article was published in Insights, by Ruchelman P.L.L.C.  Insights was originally designed, created, and edited by Armin Gray. Kyu Kim of Kyu & A LLC, a design company, substantially assisted in its design as well. Co-authors originally included Philip Hirschfeld, who substantially contributed to the article. We thank them for their support. 

U.S. V. ZWERNER: WILLFUL NON-FILINGS RESULT IN MONSTROUS CIVIL PENALTIES

By Armin Gray

United States v. Zwerner{C}[1] illustrates the potential for monstrous civil penalties resulting from willful failure to file F.B.A.R.’s. It further confirms the point that, if evidence of willfulness exists even in a sympathetic case, the I.R.S. may assert willful penalties in the case of “silent” or “quiet” disclosures, which the I.R.S. and its officials have consistently warned in official and non-official statements.{C}[2]

The facts of the case in brief are as follows:

From 2004 through 2007, Carl Zwerner, currently an 87-year-old Florida resident, was the beneficial owner of an unreported financial interest in a Swiss bank account that he owned indirectly through two successive entities. He did not report the income on the accounts for the period of 2004 through 2007, according to the complaint filed by the United States, but in his answer to the complaint, Zwerner, while admitting that he filed a delinquent F.B.A.R. for 2007, denied filing an amended return for that year, stating that his financial interest in the foreign account was reported on his timely-filed 1040 for that year. The complaint also alleged that, for 2006 and 2007, he represented to his accountant that he had no interest or signature authority over a financial account in a foreign country. Zwerner denied those allegations.

According to the answer to the complaint, Zwerner made, what he thought to be, a voluntary disclosure. However, he was poorly represented. His attorneys advised him that a voluntary disclosure occurred, and that he should file amended returns and delinquent F.B.A.R.’s based on the advice of his then “counsel,” and he was subsequently audited in 2010. His defense appeared to be reasonable reliance on what he thought to be competent attorneys and for the fact that, under past and then-existing programs, the penalties would be substantially reduced if not eliminated, to the extent that an actual voluntary disclosure would have been made.

Pursuant to an audit, Zwerner apparently admitted that he was aware of his reporting obligations in a statement addressed to the I.R.S. in hopes – or promise – of reduced penalties.[3]  Citing this admission, the I.R.S. assessed a penalty for willful failure to file an F.B.A.R. in an amount of 50% of the highest balance of the unreported account for every year of this four-year period. The penalties were as follows:

·                2004 - $723,762, assessed on June 21, 2011;

·                2005 - $745,209, assessed on August 10, 2011;

·                2006 - $772,838, assessed on August 10, 2011; and

·                2007 - $845,527, assessed on August 10, 2011.

Zwerner refused to pay the fines. The U.S. filed a complaint to collect on June 11, 2013. The total sum of the amount of the fines, plus interest and additional amounts, owed to the United States as of the date of filing was $3,488,609.33. Zwerner responded in an answer to the complaint with multiple defenses, including a defense based on the Eighth Amendment to the Constitution, which prohibits excessive fines.

On May 28, 2014, a U.S. District Court jury ruled against the taxpayer finding three willful violations of failing to file an F.B.A.R.

The consequences to the 87-year old taxpayer were chilling: he faced civil penalties amounting to 150% of the highest balance on the unreported account plus interest and additional amounts. This by far exceeded the value of the defendant’s unreported account. Attorneys representing Zwerner stated they would present an Eighth Amendment challenge to the fines. In U.S. v. Bajakajian,{C}[4] the Supreme Court ruled that forfeiture of $357,114 transported out of the country in violation of statute requiring reporting of transport of more than $10,000 would constitute an excessive fine. The Supreme Court stated:

The forfeiture of respondent’s entire $357,144 would be grossly disproportional to the gravity of his offense. His crime was solely a reporting offense. It was permissible to transport the currency out of the country so long as he reported it. And because §982(a)(1) orders currency forfeited for a “willful” reporting violation, the essence of the crime is a willful failure to report. Furthermore, the District Court found his violation to be unrelated to any other illegal activities. Whatever his other vices, respondent does not fit into the class of persons for whom the statute was principally designed: money launderers, drug traffickers, and tax evaders. And the maximum penalties that could have been imposed under the Sentencing Guidelines, a 6-month sentence and a $5,000 fine, confirm a minimal level of culpability and are dwarfed by the $357,144 forfeiture sought by the Government. The harm that respondent caused was also minimal. The failure to report affected only the Government, and in a relatively minor way. There was no fraud on the Government and no loss to the public fisc. Had his crime gone undetected, the Government would have been deprived only of the information that $357,144 had left the country. Thus, there is no articulable correlation between the $357,144 and any Government injury. 

Ultimately, the I.R.S. and the defendant settled, leaving the Eighth Amendment challenge for another day.

Under the terms of the settlement, Zwerner agreed to pay to the U.S. two of the 50% FBAR penalties assessed against him relating to 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, plus interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively.

The end result in Zwerner is bitter sweet for taxpayers. Facing four willful F.B.A.R. penalties, through litigating, Zwerner reduced it to two. However, two F.B.A.R. penalties, plus interest and penalties for late payment, is devastating to the taxpayer as the penalties exceed the balance of the unreported account. Further, although the U.S. settled, indicating doubt as to the strength of their position on the Eighth Amendment challenge, they can use this, and other cases, to incentivize taxpayers into compliance through voluntary disclosures as the Eighth Amendment issue remains unsettled.

 

 

{C}[1]           United States v. Zwerner, S.D. Fla., No. 1:13-cv-22082, 5/28/14.

{C}[2]           See, e.g., O.V.D.P. FAQ #15, encouraging participation in the O.V.D.P. and stating that “[t]hose taxpayers making ‘quiet’ disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.”

{C}[3]           The answer alleges that the I.R.S. agent coerced an admission through an empty promise of reduced penalties.

{C}[4]           524 U.S. 321 (1998).

FBAR UPDATE: WHAT YOU NEED TO KNOW

By Armin Gray

Notwithstanding Official comments, Bitcoin Exchange Accounts Should Be Reported on FBAR’s

The IRS clarified the tax treatment of Bitcoin, ruling that Bitcoin will not be treated as foreign currency but will be treated as property for U.S. Federal income tax purposes. As a result, the IRS ruling may allow for capital gains treatment on the sale of Bitcoin. However, the ruling did not address whether Bitcoin is subject to Form 114 reporting.

This month, pursuant to a recent IRS webinar, an IRS official stated that Bitcoins are not required to be reported on this year’s Form 114. However, the official noted that the issue is under scrutiny, and caveated that the view could be changed in the future.

Notwithstanding the official’s comments, whether Bitcoin is a reportable asset will depend on the nature and manner it is held.

  •  If Bitcoin is treated as property (not currency), the situation is analogous to a U.S. person who directly holds non-U.S. real property or any other valuable asset, which is not a foreign financial account.
  • If Bitcoin is held through an entity (e.g., a (non-grantor) trust), the situation is analogous to the “look-through” rule, in which case reporting is required only with respect to the entities foreign financial accounts if and to the extent the indirect holder has control of the entity (using a greater than 50% test).
  • However, if and to the extent a U.S. person holds Bitcoin or shares of an entity that holds Bitcoin through, e.g., an offshore custodial account or other financial account, the account will likely be an FBAR reportable asset.

An interesting question involves exchange accounts. Exchanges that convert Bitcoin in and out of other currencies function similarly to brokerages and offer a variety of financial services similar to banks or other financial institutions. Without official guidance that can be relied upon, we would advise our clients to disclose these accounts under a protective filing. United States v. Hom, discussed above, is noteworthy. The court ruled an online poker player was liable for penalties after concluding that online poker sites PokerStars.com and PartyPoker.com operated as commercial banking financial institutions under the Bank Secrecy Act, and therefore, non-U.S. accounts held with them were FBAR reportable assets.

Mutual Funds in Brokerage Accounts Don't Have to Be Separately Reported on FBAR’s

Mutual funds held in brokerage accounts generally don't have to be separately reported on the FinCEN Form 114. Therefore, an IRS official recently confirmed that the taxpayer would be reporting only on the brokerage account that holds the mutual fund. However, if the mutual funds and the brokerage accounts were separate, they would each require separate FBAR’s. This would also be true of other types of financial holdings in the brokerage account.

Child Filing Requirements

Recent updates to the instructions to Form 114 (06/11/2014) provide that, in general, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. In addition, if the child cannot sign his or her FBAR, a parent or guardian must electronically sign the child's FBAR and in item 45 Filer Title enter “Parent/Guardian filing for child.”