Verni Tax Law

Expat Taxes, FATCA, FBAR, Law Office News

FATCA REPORTING CHANGES AND INFLATION REDUCTION ACT SPELL TROUBLE FOR TAXPAYERS WHO HAVE FAILED TO FILE FORM 8938 AND FBARS

A recent report (the “Report”) from The Treasury Inspector General for Tax Administration (“TIGTA”) addressing Non-Filing and Non-Reporting Compliance under the Foreign Tax Compliance ACT (“FATCA”), the Senate Finance Committee’s recent findings related to the use of shell banks to avoid detection by the Internal Revenue Service and increased funding in connection with Inflation Reduction Act (“IRA”) spell trouble for those who have yet to file Form 8938 (“Statement of Specified Foreign Financial Assets”) or FinCEN Form 114, commonly referred to as an “FBAR.”

Taxpayers who have failed to file Form 8938 and/or those who have failed to file FBARS may feel that they have successfully avoided detection by the Internal Revenue Service. There are even some Expats who have concluded, given the amount of time that has passed, that the IRS has forgotten about them or that they are unwilling or incapable of chasing down delinquent Non-Compliant Taxpayers.

The following discussion addresses problems associated with the effective implementation of FATCA and FBAR enforcement efforts, recommendations by TIGTA and the impact increased funding from the IRA will have on the overall effectiveness of these efforts. The discussion follows also addresses problem identified by the Senate Finance Committee with respect to the use of shell companies as a means of avoiding IRS detection of overseas tax evasion. These recent developments should serve as a wakeup call for those who have yet to come into compliance.

Citing lack of resources and other failures on the part of the IRS, the TIGTA Report concludes that the IRS has significantly departed from its original FATCA Compliance Roadmap finalized in 2016 in favor of more limited compliance initiatives. The Report further states that despite spending $573 million dollars on FATCA compliance through fiscal years 2020, the IRS has taken limited or no action with respect to the objectives and initiatives outlined in its FATCA Compliance Roadmap. Instead, the IRS opted to focus on narrower strategy embodied in two Campaigns.

Specifically, TIGTA evaluated two Campaigns established by the Large Business and International (“LBI”) division of the Internal Revenue Service including Campaign 896 (“Offshore Private Banking Related to Individual Taxpayers”) and Campaign 975 (“FATCA Accuracy”).

Campaign 896, which is no longer active, focused solely on Taxpayers who filed Forms 8938, but underreported their foreign assets. The Report also noted that the IRS was in the planning stages of identifying those Taxpayers, who have failed to file Form 8938. The Report cites recent IRS data, which estimates that there are over 330,000 U.S. Taxpayers with foreign accounts over $50,000 who has not filed Form 8938. The IRS data further suggests that this pool of Taxpayers would each owe a minimum of $10,000 in FATCA related penalties and that the total penalties would result in $3.3 billion in penalties.

IRC Section 6038D requires U.S. Taxpayers who meet the filing threshold to report their specified foreign financial assets to the IRS. If the aggregate value of the assets exceed certain dollar threshold, this reporting requirements is satisfied when a U.S. Taxpayer files Form 8938 together with his or her Federal Tax Return. Specified foreign financial assets include Foreign Financial Accounts (“FFA’s”), stocks, securities, financial instruments and contracts issued by a person other than a U.S. Person as well as any interest in a foreign entity.

For its part Foreign Financial Institutions (“FFI’s) are required to file Form 8966 (“FATCA Report”). The objective of Campaign 975 is to identify FFI’s that maintain FFA’s for U.S. Specified Persons, but did not submit Form 8966 on the accounts they hold on behalf of U.S. individuals. The LB&I Division then matches Forms 8938 with Forms 8966, and in certain cases, Forms 1099.

In order to avoid being subject to the 30% on U.S. Source payment received made to them, FFI’s are required to register and agree to report certain information about their accounts owned by U.S. taxpayers including the accounts of foreign entities with substantial ownership. This information is reported on Form 8966. If the FFI fails to certify, it may be subject to termination of the entity’s FATCA status and result in the entity’s Global Intermediary Identification Number (“GIIN”) being removed from the FFI list. Should this occur the FFI would then be subject to the 30% withholding.

In addition to the TIGTA report, the findings by the Senate Finance Committee (the “Committee”), Chair, Ron Wyden, entitled: “The Shell Bank Loophole” together with the indictment of Robert T. Brockman on 39 counts, including tax evasion, failure to file foreign bank account reports, money laundering and other offenses further highlight problems with the effective implementation of FATCA compliance and the enforcement challenges by the U.S. Government with respect to the pervasive use of shell companies. The findings conclude with a recommendation that the IRS needs to focus on increased scrutiny and that funds from the IRA should be use in this regard.

As part of its findings the Committee conducted a case study on the allegations against Robert T. Brockman that he concealed $2.7 billion in income from the IRS and evaded hundreds of millions of dollars in Federal Income Taxes. In this regard, the Committee focused its attention on defects in FATCA’s regulatory framework, and a loophole utilized by Brockman in order to carry out its nefarious scheme.

FFI’s must registered with the IRS and are required to identify and report certain information about U.S. accounts. For purposes of implementing these requirements the United States has entered into Intergovernmental Agreements (“IGA’s”) with foreign partner jurisdictions addressing a number of issues including whether and to what extent an FFI is required to determine if an account is held by a U.S. Person. In cases where an account holder is believed to be a non U.S. financial institution in a partner jurisdiction and where the IRS has issued the account holder a Global Intermediary Identification Number (“GIIN”), depending upon the particular IGA, no further review, identification or reporting is required with respect to the account. The foregoing is applicable to Swiss Banks as well as others.

According to the Committee’s Report, Brockman and his associates were able to exploit the shell bank loophole, by turning these shell companies into IRS approved financial institutions capable of self-certifying their offshore accounts to the IRS. Under the current system, a U.S. Taxpayer is able to create an offshore shell company and register that company with the IRS. By registering with the IRS as a financial institution, the shell company operates as a shell bank and is able to self-certify reporting its offshore accounts for FATCA purposes.

According to the Committee findings and the indictment, Brockman and his associates opened up accounts in Switzerland using entities that had approved GIIN numbers approved and issued by the IRS for purposes of FATCA reporting. Consequently, Brockman and his confederates were able to open accounts in Switzerland without any due diligence conducted by the Swiss Banks. In turn, the Swiss Banks, including Mirabaud and Syz were able to accept billions in wire transfers from the United States into accounts that were opened by the shell companies.

In order to carry out his nefarious scheme, Brockman and his associates took the following steps:

Establish a shell company in a FATCA partner jurisdiction;
Submit IRS Form 8957 to register the shell company as an FFI and obtain a GIIN Number;
Open an account in Switzerland or other FATCA partner jurisdiction, in the name of the IRS registered Shell Company;
Use an attorney or other intermediary as the signatory of the account; and
Invest in a private equity firm or other investment vehicle and direct the fund manager to wire proceeds earned from investment activities in the U.S. to the shell company’s account in Switzerland or in another FATCA partner jurisdiction.

In its findings, the Senate Committee found that under the current system, a shell company is able to obtain a GIIN by simply completing and filing Form 8957 or by registering via an online portal. The application for a GIIN is almost always approved without any IRS scrutiny. In this regard, representatives from the IRS conceded that they never contact a financial institution’s FATCA Responsible Officer prior to the issuance of a GIIN number, nor do they ever make any inquiry into an entity’s assets, source of funds or wealth, beneficial ownership or business and investment activities.

The Senate Committee report includes a finding that there are over 128,000 entities registered with the IRS as FFI’s for FATCA purposes. Citing numerous IRS budget cuts as well as recommendations to gut the IRS, the Senate Report concluded that the IRS lacks the human resources, IT capabilities and financial resources to adequately determine whether offshore entities are properly reporting accounts belonging to U.S. Persons. In its findings, the Senate Committee recommends that the $80 billion in funding from the IRA be used to address FATCA Loophole.

The problems identified in the TIGTA Report and in the Senate Committee Findings include:

Departure from the FATCA Compliance Roadmap due to budget constraints has hampered IRS efforts to improve FATCA compliance;
Pervasive use of shell companies as shell banks and the absence of any meaningful due diligence in obtaining a GIIN Number promotes offshore tax evasion and hampers detection by the IRS;
The IRS provided optional codes for TINs that reduced FFI compliance with FATCA requirements to report TINs for TY 2020;
Campaign 896 has only recently undertaken compliance actions to address potential under reporters;
Campaign 896 initially did not address potential non-filers;
Campaign 975 has not reduced FFI non-compliance;
The use of FATCA data for compliance;
Lack of valid and complete Taxpayer Identification Numbers (TIN) and Global Intermediary Identification numbers (GIIN) reporting continues to provide challenges in matching forms;
FATCA campaigns were established without milestones to determine the level of voluntary compliance; and
Some FFI’s either failed to file Form 8966 of filed Form 8966 with missing or incorrect information.
Lack of fields common to both Form 8938 and Form 8966.

As a result of its review of the two Campaigns, TIGTA made a number of recommendations, some of which have been adopted by the IRS. The recommendations that were agreed to or implemented by the IRS include, but are not limited to:

Additional compliance actions for under-reporters identified in its matching, including assessing penalties to taxpayers based on the variance amounts or conducting examinations on taxpayers who consistently underreport;
Implementing protocols to address noncompliance by the FFIs from Intergovernmental Agreement (IGA) countries and follow through with compliance action on the identified IGAs;
Implementing procedures to identify non-filers of Forms 8938 and encourage compliance of non- filers through examination or penalty assessments;
Establish goals, milestones, and timelines for FATCA campaigns in order to determine whether the campaigns are effective in meeting their goals and affecting tax compliance; and
Partner with the Small Business/Self-Employed (SB/SE) Division Directors for the Examination and Collection functions to establish an information sharing program that would allow the SB/SE Division to conduct examinations and perform collection actions using Form 8938 data.

For its part the Senate Finance Committee recommended that Congress and the Treasury Department should consider the following:

The imposition of additional due diligence requirements on transfers between FFI’s involving large transfers into small, closely held FFI’s;
Improve and develop more rigorous screening of applications for GIIN numbers;
Strengthen incentives for Whistleblowers to come forward and report incidence of offshore tax evasion;
Increase IRS enforcement resources, including increasing human resources and IT capabilities;
Increase the number of audits of partnerships;
Increase disclosure of high value financial accounts domestically; and
Increase information sharing and coordination among partner jurisdictions and align U.S. reporting with the Organization for Economic Cooperation and Development’s (“OECD”) Common Reporting Standards (“CRS”).

While many Taxpayers have been lulled into a false sense that they will not be detected, the TIGTA and Senate Committee reports make clear that the Government considers offshore tax evasion and unreported foreign financial assets a serious problem and is a top priority to the IRS. Given the new round of funding under the IRA and the additional 87,000 new IRS agents, there is a substantial likelihood that both non-filers as well as those who deliberately underreport there foreign financial assets will be detected.

A number of options are available for those who have yet to report their foreign financial assets and income including utilizing the Voluntary Practice Rules or making a disclosure using the Streamlined Foreign or Domestic Offshore Procedures.

Failure to come forward more than likely will result in dire consequences including additional income tax, civil tax and FBAR penalties, interest and the possibility of criminal prosecution.

November 1, 2022/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FATCA, FBAR, Law Office News, OVDP

Willful FBAR penalty Case Study.

Wilfull FBAR Penalty.

The following is intended as an update to my January 26, 2019 Blog on the subject of the limitation of the willful FBAR (Foreign bank Account Report) penalty under United States v. Colliot, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018) which capped the maximum willful FBAR penalty at $100,000. The predicate for the District Court’s decision is 31C.F.R. § 1010.820. In addition to Norman v United States (Ct. Fed. Cl. Dkt 15-872T, Order dated 7/31/18- (please see my January 26, 2019 Blog)), United States v. Horowitz, 2019 U.S. Dist. LEXIS 9484 (D. Md. 2019) and other recent decisions have dealt the Colliot decision a fatal blow. Consequently, individuals who are subject to the willful FBAR penalty should avoid using the Colliot decision as a basis for limiting their liability.

The District Court in Colliot held that the earlier regulation was still valid, notwithstanding the changes to the FBAR penalty structure under the American Jobs Creation Act of 2004 (AJCA), which increased the maximum FBAR penalty for willful violations to the greater of $100,000 or 50% of the Balance of the Account. § 5321(a) (5) (C)(i). The Court’s logic in reaching its conclusion was the absence of a new regulation adopting the higher penalty amount provided for under § 5321(a) (5)(C)(i).

The Horowitz and other recent decisions make clear that the Colliot decision is fatally flawed. While the Horowitz decision focused on the taxpayers’ “willful blindness” in sustaining the willful civil FBAR penalty, the Court also addressed the taxpayers’ reliance on the Colliot in asserting that the willful civil FBAR penalty was capped by 31 C.F.R. § 1010.820. The Horowitz decision came before the Court on a Motion for Summary Judgment filed by the Government seeking to sustain the FBAR penalties assessed against the Horwitz’s. The taxpayers filed a Cross Motion for Summary Judgement.

Is willful civil FBAR penalty limited?

The following discussion only addresses the issue of whether the willful civil FBAR penalty is limited under 31 C.F.R. § 1010.820(g) (2) in light of the 2004 Amendment which increased the maximum willful civil FBAR penalty to the greater of $100,000 or 50% of the account balance at the time of the violation.

United States v. Horowitz case analysis.

Peter Horowitz and his wife, Susan, lived in Saudi Arabia from 1984-2001 where Peter worked as an anesthesiologist. In 1988 the taxpayers opened a joint bank account at UBS. The account was funded with the money Peter earned as an anesthesiologist. The taxpayers returned to the United States in 2001 but did not close their UBS account, which as of 2008 had a balance of almost $2 million. Late in 2008, after learning of the legal problems UBS was experiencing, Peter travelled to Switzerland and closed the UBS account. After closing the UBS account, Peter transferred the account balance to an account that he opened at Finter Bank, another Swiss Bank, in which he designated the account as a “hold mail” account. The Finter bank account was opened solely in Peter’s name because Susan was not present at the time.

Peter was responsible for communicating with the taxpayers’ accountant who prepared their 2007 and 2008 federal income tax returns. Peter never disclosed the foreign financial accounts to the taxpayers’ accountant. In response to the questions that appear on Schedule B, Part III, concerning the existence of foreign financial accounts, the taxpayers always checked the “No” box. In addition, the Horwitz’s failed to file FBAR reports for 2007 and 2008. The taxpayers subsequently entered the Offshore Voluntary Disclosure Program sometime in January of 2010, but later elected to opt out.

The IRS assessed the willful FBAR penalty against each of the taxpayers for both the 2007 and 2008 tax years in the amount of $247,030. The Horwitz’s filed a timely protest letter and the matter was affirmed by IRS Appeals. The Government thereafter brought suit to reduce the assessment to a judgment.

In response to the Government’s Motion for Summary Judgment, the taxpayers filed a Cross Motion for Summary Judgment asserting their conduct did not rise to the level of willfulness. In their Cross Motion, the taxpayers, relying upon Colliot, also asserted that the willful FBAR penalty should be capped at $100,000. They cited 31 C.F.R. § 103.27, which is now 31 C.F.R. § 1010.820(g) (2) in support of their argument.

In granting the Government’s Motion for Summary Judgment, the District Court of Maryland for the Southern District laid to rest any hope of future reliance on Colliot. The Court, citing United States v. Larionoff, 431 U.S. 864, 873, 97 S.Ct. 2150, 53 L.Ed.2d 48 (1977 articulated a long standing principle that: “it is settled law that an agency’s regulations “must be consistent with the statute under which they are promulgated.” Furthermore, the Court, quoting from Norman v. United States 138 Fed.Cl. at 196 stated:

“Since the civil penalty amount for a “willful” violation in 31 U.S.C. § 5321(a)(5) (2003) was replaced with 31 U.S.C. § 5321(a)(5)(C)(i) (2004), the April 8, 1987 regulations are “no longer valid.”

The Norman decision is bolstered by Kimble v. United States No. 17-421, 2018 WL 6816546, at *15 (Fed. Cl. Dec. 27, 2018), a recent 2018 decision by the United Court of Claims, wherein the Court rejected the conclusion reached in Colliot that the IRS was bound by the maximum penalty provided for prior to the amendment in 2004. In Kimble, the Court, in sustaining the IRS assessment for willful violations of the FBAR statute, stated that the conclusion reached in Colliot:

“conflicts with the decision of the United State Court of Appeals in Barseback Kraft AB v. United States, 121 F.3d 1475 (Fed. Cir. 1997), where the Federal Circuit concluded that the fact that regulations ‘had not been formally withdrawn from the Code of Federal Regulations [did] not save them from invalidity’ based on a conflicting federal statute.” Id.

Finally, the Court in Horowitz’s case, in rejecting the taxpayers’ arguments, cited I.R.M. § 4.26.16.6.5(3) which provides:

“[f]or violations occurring after October 22 2004, the statutory ceiling is the greater of$100,000 or 50% of the balance in the account at the time of the violation.” I.R.M. § 4.26.16.6.5(3) (Nov. 6, 2015).

Considering the Horowitz, Kimble and Norman decisions as well as I.R.M. § 4.26.16.6.5(3), a successful challenge to the willful FBAR penalty based upon 31 C.F.R. § 1010.820(g) (2) is no longer viable. Congress also created a separate provision for a civil penalty for Non-Willful violations, making a clear distinction between willful and non-willful violations. H.R. Rep 108-755 at 615 (2004) (Conf. Rep.).

United States v. Colliot case analysis.

In Colliot, the IRS filed a lawsuit against Dominque G. Colliot to reduce the assessed penalties to a money judgment. The action filed in the United States District Court for Western Texas related to penalties that were assessed for willful failure to file FBAR’s for 2007-2010. The IRS assessed a $544,773 penalty for the tax year 2007 and $196,082 for the tax year 2008. Smaller penalties were also assessed for the tax years 2009 and 2010. In assessing the penalties, the IRS relied upon the authority contained in § 5321(a) (5) and 31 C.F.R. § 1010.820(g)(2). In response, Colliot filed a motion for summary judgment asserting that IRS incorrectly applied the law in calculating the civil willful FBAR penalties.

In its analysis, the Court discussed the 2004 amendment to § 5321 which increased the maximum civil penalties that could be assessed for the willful failure to file an FBAR, and in doing so, acknowledged the increase in the willful FBAR penalty to a minimum of $100,000 and a maximum of 50% of the balance in the unreported account at the time of the violations. The Court also noted the absence of any change to 31 C.F.R. § 1010.820(g) (2), which caps the maximum willful FBAR penalty at $100,000. In granting Colliot’s motion for summary judgement, the Court wholly ignored United States v. Larionoff, 431 U.S. 864, 873 (1977) and instead focused on the powers delegated by Congress to the Treasury Secretary under § 5321(a)(5) to determine the amount of penalty so long as it did not exceed the ceiling set by § 5321 (a)(5)(C).

In Larionoff, the Supreme Court, citing Bowles v.Seminole Rock Co, 325 U.S. 410,414 (1945) and quoting language from the Bowles decision stated:

“In construing administrative regulations, ‘the ultimate criterion is the administrative interpretation, which becomes of controlling weight, unless it is plainly erroneous or inconsistent with the regulation”. Id. at 873.

The Court, citing Manhattan General Equip Co. v Commissioner, 297 U.S. 129,134(1936) further stated:

“For regulations, in order to be valid, must be consistent with the statute under which they are promulgated.” Id at 873.

In Manhattan General Equip Co., the Supreme Court held that:

“A regulation which does not do this, but operates to create a rule out of harmony with a statute, is a mere nullity” Id at 134.

United States v. Norman case analysis.

In the Norman decision, the IRS assessed a penalty against Mindy P. Norman in the amount of $803,530 for the willful failure to file an FBAR in connection with a Swiss bank account she maintained during the tax year 2007. The taxpayer appealed the assessment with the IRS Office of Appeals, who affirmed the IRS assessment, concluding that Ms. Norman willfully failed to file an FBAR. The Taxpayer then paid the penalty in full and instituted an action In the United States Court of Federal Claims. Following a one day trial and in response to a letter sent by the Norman citing the Colliot decision, the Court of Claims, Ordered the IRS to respond and comment on Colliot. The IRS filed a timely response. However, the Court did not permit the Taxpayer to file a reply. After considering the IRS response and the trial testimony and other documents, the Court ruled in favor of the IRS and concluded that Ms. Norman willfully failed to file an FBAR in 2007 and that the assessed penalty in the amount of 50 percent of the balance of the unreported account was proper.

In arriving at its decision, the Norman Court painstakingly dissected the Colliot decision and properly pointed out the defects in the District Court’s logic in ruling in favor of the Ms. Colliot. The Court of Claims traced the legislative history of the BSA, the relevant statutory and regulatory provisions and the impact of the changes to the FBAR penalty structure as a result of the AJCA. The Court concluded that the District Court in Colliot ignored the mandate created by the amendment in 2004 and instead elected to focus on the language in §5321(a) (5) that vests the Secretary of the Treasury with the discretion to determine the amount of the penalty.

The Court of Claims cited the following language used by Congress in amending the statute as a basis for invalidating C.F.R. § 1010.820:

“Congress used the imperative ‘shall’ rather than the permissive, ‘may,’ thereby raising the ceiling for the penalty, and in doing so, removed the Treasury Secretary’s discretion to regulation any other maximum.” Norman at Pg. 8.

The Norman Court cited Larionoff for the proposition that Congress has the power to supersede regulations by amending a statute. The Court stated that “in order to be valid [,] [regulations] must be consistent with the statute under which they are promulgated.” The Norman Court concluded that § 5321 (a) (5) (C) (i) which sets the maximum penalty to the greater of $100,000 or 50% of the balance of the account, is inconsistent with 31C.F.R. § 1010.820 rendering 31 C.F.R. § 1010.820 invalid.

Conclusion.

The foregoing has particular relevance for those who have failed to take advantage of the Offshore Voluntary Disclosure Program, which is now closed, or otherwise failed to utilize the Streamlined procedures and those who have made quiet disclosure and now found themselves the subject of a grand jury subpoena. The IRS has consistently maintained that offshore financial crimes are a top priority and continues to work with its global partners in unmasking those with unreported foreign financial accounts. FATCA is also producing a steady stream of taxpayer information from which the IRS develops leads. In addition, current prosecutions of facilitators and taxpayers as well as taxpayers who have elected to come forward have yielded a treasure trove of information which the IRS is using to identify other non-compliant taxpayers.

Those who have failed to come forward and report their foreign financial accounts are more likely than not, going to be subject to the willful civil FBAR penalty consistent with Norman decision. Mitigation of the willful FBAR penalty is only possible where the taxpayer comes forward and makes an honest disclosure.

By: Anthony N. Verni, Attorney at Law, CPA

February 1, 2019/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FATCA, FBAR, Law Office News, OVDP, Tax Returns

Streamline Disclosures- The Art of the Non-Willful Certification.

Offshore disclosure to IRS.

The key to making an offshore disclosure to the IRS using either the Domestic or Foreign Filing Compliance procedures requires a thorough and painstaking analysis of the facts involving an individual’s failure to;

report his or her foreign financial accounts.
report income from foreign sources.
make the necessary disclosures.
report foreign financial assets consistent with FATCA.

Details in a Non-Willful Certification can spell the difference between closure and a subsequent examination by the IRS which leads to assessment of multiple Civil FBAR Non-Willful Penalties over a number of years, or even worse, the assessment of the Willful Civil FBAR Penalty.

Components of offshore disclosure.

The starting point for any case is gathering all facts, including whether the tax return was self-prepared or prepared by a paid preparer, the length of time the foreign financial accounts have been open and the Taxpayer’s status in the United States. It is also necessary to determine whether Schedule B was included with the Taxpayer’s original returns, and if so, whether the Taxpayers checked “no” in response to Question 7(a) and 7 (b) concerning the existence of Foreign Financial Accounts and the acknowledgement of an obligation to file an FBAR.

In addition, detailing the origin of the funds in the Foreign Financial Accounts and whether those funds represent after tax dollars as well as the initial purpose for opening the Foreign Financial Accounts. Closely tied to this inquiry is whether the Foreign Financial Accounts are legacy accounts, which were in existence prior to an Individual’s arrival in the United States.

Since Streamlined Filing Procedures are less costly to a Taxpayer than participating in the Offshore Voluntary Disclosure Program (both in terms of penalties and legal cost), there is a tendency by those considering an offshore disclosure to default to the Streamlined Filing Procedures, without first considering all of the facts. This can have catastrophic consequences especially in light of the recent IRS announcement that OVDP will be closed on September 18, 2018. The IRS has also intimated that it may also scrap the Streamlined Filing Procedures. This means that those who have failed to come forward can expect turbulence in the future.

January 31, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FATCA, FBAR, News

Offshore Tax Compliance Prosecutions by the IRS

Offshore Tax Compliance Update – Recent IRS Tax Prosecutions

The following convictions represent recent successful prosecutions by the Department of Justice, Tax Division and reinforce the Government’s commitment to ferret out tax cheats, wherever they may be located.

Case 1

On October 7, 2016 a Michigan business man and owner of several mining related businesses, pleaded guilty to concealing $2.6 million held in a Swiss bank account.

According to the facts set forth in the plea agreement, the defendant transferred $2.6 million from his parents trust account to a bank account at Credit Suisse. In order to conceal the account from IRS detection, the defendant set up Hong Kong Company and had the Credit Suisse account held in the company name. The Hong Kong Company’s only business purpose was to act as the named account holder. The defendant falsely states on his 2008-2012 federal income tax returns that he had no interest in a foreign financial account and also failed to report the income from the Credit Suisse account. To exacerbate matters, in 2010 the defendant filed an amended tax return for the tax year 2008. Once again, the defendant failed to report the income generated in 2008 from the Credit Suisse account.https://www.justice.gov/opa/pr/michigan-business-owner-pleads-guilty-concealing-swiss-bank-account

Case 2

On September 28, 2016, a New York City resident pleaded guilty to using a sham foreign entity and numbered accounts in Switzerland and Israel in order to evade taxes.

From 1987 to 2008 the defendant maintained a number of undeclared foreign financial accounts and accounts at UBS held in the name of Contactus Partnership Associated, SA (Contactus) a sham entity organized in the British Virgin Islands.In 2008 the defendant closed the UBS accounts and transferred the assets to a newly opened account at Clariden Leu. The newly opened account was held in the name Contactus.

Shortly thereafter the defendant closed the account at Clariden Leu and transferred the assets to a newly opened Swiss bank account in the name of the same sham entity. The defendant was successful in getting the Swiss Bank to falsely record the defendant’s Belgian cousin as the owner of the assets in the Contactus account. Six months later the defendant closed the Contactus account at the Swiss Bank and transferred the assets to a newly opened bank account in Israel held in the name of a different cousin.From 2005-2011 the defendant also maintained an undeclared account at Bank Leumi in Israel under the name of a non-resident alien, residing outside of the United States.

In 2010 the defendant was able to obtain an Israeli Identity Card. The defendant then opened an account in his own name at Bank Leumi, claiming that the defendant resided in the United Kingdom. He also signed a document under penalty of perjury affirming that he was not a U.S. Citizen.

Subsequently, the defendant repatriated the funds from his undeclared accounts to the United States. In order to carry out the scheme, the defendant had his attorney draw up a sham loan agreement between the defendant and Contactus and then caused the funds to be transferred to his attorney escrow account.

The defendant filed fraudulent federal and New York State tax returns by deliberately omitting the income from the foreign financial accounts and by failing to pay income taxes on the omitted income. As a result, the defendant was able to evade paying $653,580 in federal income tax for the tax years 2002-2005 and 2007-2010.

The defendant also failed to report his ownership and control of his foreign financial accounts on FinCen Form 114 despite being advised by an accounting firm that he had an obligation to file FinCen Form 114 and that failure to do so could result in civil and criminal penalties being imposed. https://www.justice.gov/opa/pr/new-york-city-resident-pleads-guilty-using-sham-foreign-entity-and-secret-foreign-accounts

Case 3

On September 21, 2016 a Weston Connecticut man pleaded guilty to concealing over 1.5 million in income from an undeclared foreign financial account.

According to the DOJ press release, the defendant conspired with another individual in the United States and others to conceal his assets and income. The scheme was designed to evade paying income tax derived from the sale of duty free alcohol and tobacco products. The defendant used a sham entity, Centennial Group, a registered Panamanian corporation to buy and sell duty free products. In order to carry out the scheme, the defendant arranged to have alcohol shipped through a custom bonded warehouse in the Foreign Trade zone in Southern Florida. The tobacco products passed through a customs bonded warehouse in North Bergen, New Jersey. In total, the defendant was able to transfer $1,627,832 to his undeclared bank account in Panama. The defendant repatriated some of the proceeds from his Panamanian account for the purchase of a Mercedes and to pay $19,000 in interior design goods. The defendant failed to report the income earned on his Panamanian account and also failed to file an FBAR for the relevant tax years. https://www.justice.gov/opa/pr/connecticut-man-pleads-guilty-concealing-income-undeclared-panamanian-bank-account

Deputy Assistant Attorney General Ciraolo reaffirmed that “the Department of the Treasury will: “continue to vigorously pursue and prosecuted those who conceal their assets and income in offshore accounts in an effort to evade paying their fair share of taxes.”

The above prosecutions have common some common elements including:

The establishment of a Foreign Financial Account.
The creation of a sham entity for purposes of becoming the named account holder of the Foreign Financial Account.
Actions taken by the true account holder to conceal the existence of the Foreign Financial Account as well as the income generated from the account.

11/11/2016

November 11, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FATCA, News

Michigan Man Pleads Guilty To Tax Obstruction

“ANOTHER KNUCKLEHEAD BITES THE DUST”

The definition of a Knucklehead is“someone considered to be of questionable intelligence.”

On October 7, 2016 a Michigan business man plead guilty to tax obstruction for filing a false amended tax return for the tax year 2008. The guilty plea echoes the sentiments of Chief Richard Weber of the Internal Revenue Service, Criminal Investigation that: “There are no safe havens for hiding money in secret bank accounts around the globe.” The case also makes clear that substance will always prevail over form for purposes of determining the true beneficial owner of a foreign financial account or asset and whether the income from any such account or asset is subject to U.S. tax. The following case is just one of many examples of the pervasive use by U.S. Taxpayers of abusive offshore tax avoidance schemes and the consequences of getting caught.

On or about November of 2004, Robert Rumbold (“Rumbold” or the “Defendant”), a manager of a trust account owned by his parents, transferred $2.6m from his parents’ account into Credit Suisse Bank AG in Switzerland. In order to evade income tax and to conceal the identity of the beneficial owner, the Defendant arranged for the account to be held in the name of Wisdom City Limited, a Hong Kong company. Although Wisdom City Limited was set up to be the named the account holder, the Defendant effectively controlled and was the beneficial owner of the account until December 2008, when Rumbold transferred control to a relative.

Rumbold failed to report any interest, dividends or capital gains received from the Wisdom City Limited Credit Suisse account on the Defendant’s personal tax returns for the tax years 2006-2008. The Defendant also falsely stated on each of his three tax returns that he did not have an interest in any foreign financial account. In 2010 the Defendant amended his 2008 income tax return, where he once again failed to report the income generated from the foreign financial account and failed to make any disclosure concerning his interest in the Wisdom City Limited Credit Suisse account.

The takeaways from this case are the following:

A U.S. Taxpayer’s worldwide income is subject to federal income tax;
Depending upon the circumstances, a U.S. Taxpayer may have to comply with certain financial reporting requirements under the Bank Secrecy Act and FATCA and may be required to make other financial disclosures;
Irrespective of the form, abusive offshore tax avoidance schemes (“tax schemes”) are devised for the purpose of carrying out two objectives: First, to conceal the true identity of the owner of any foreign financial account or other foreign financial asset; and Second, to conceal income derived from those foreign assets that is subject to tax by the United States;
These tax schemes may include, but are not limited to, the use of foreign trusts, foreign corporations, offshore partnerships, limited liability companies, and international business companies. The tax schemes can also include using anon-resident alien or maintaining funds in a foreign attorney’s trust fund account in order to carry out a taxpayer’s nefarious plan;
The element of intent in a criminal tax prosecution more often than not is proven by circumstantial rather than direct evidence. Therefore, it logically follows that the more elaborate the tax scheme is, the easier it will be to establish intent. . Remember! “If it walks like a duck and talks like a duck, it’s probably a duck;” and
Taxpayers, attempting to game the system, by creating and/or participating in these knucklehead schemes will eventually find themselves in deep trouble due to recent global tax enforcement initiatives and the financial reporting requirements established under the Bank Secrecy Act, FATCA, the Common Reporting Standards and other protocols.

If you are the architect, principal or a participant in such a tax scheme, you are either aware or should be aware that what you are doing is illegal. If you do not think what you are doing is illegal, you are probably in a state of denial. You only need ask yourself: “Does it pass the smell test?”

Any path to redemption with the IRS involves taking personal responsibility, making a conscious decision to right the ship and thereafter taking remedial action. Remember, you can generally recover from a financial setback. In contrast, imprisonment and the financial and emotional toll to you and your family may be insurmountable.

The immediate action should start with your speaking with a tax attorney to discuss your particular situation and evaluating whether making an offshore voluntary disclosure is a viable option for you.

October 14, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, FATCA, News

FATCA, Transparency Efforts Curb Offshore Tax Evasion

Everyone’s Getting FATCA Compliant

The worldwide landscape of transparency is changing as the United States works with other nations to increase information sharing around the world. Work to implement Foreign Account Tax Compliance Act (FATCA) is headlining these efforts to fight tax evasion.

Enacted in 2010, FATCA requires foreign financial institutions to tell the Internal Revenue Service about their U.S.-owned accounts or face, in some cases, a 30 percent withholding tax on certain U.S.-source payments that are made to them.

The Treasury Department is engaged in negotiating dozens of pacts, known as intergovernmental agreements (IGAs), that would allow financial institutions to report the information to their own governments, which then would share the information with the United States.

So far, FATCA has proved successful.

“Countries worldwide have demonstrated a strong interest in becoming transparent on that level,” Robert B. Stack, Treasury Deputy Assistant Secretary for International Tax Affairs, told Bloomberg BNA. “This interest shows how seriously countries around the world are taking this. FATCA has pushed that effort further and is rapidly becoming the global standard for exchange of information.”

April 9, 2015/by Anthony N Verni, Attorney at Law, CPA

FATCA, News

Global Tax Transparency Rises as FATCA, OECD Initiatives Gain Momentum

As the growth of global tax transparency rises, individual taxpayers and financial institutions must exercise new levels of caution.

With more than 100 intergovernmental agreements (IGA) under the Foreign Account Tax Compliance Act (FATCA) and many countries participating in the Organization for Economic Cooperation and Development’s (OECD), a new level of transparency is emerging.

“I think the world’s changing,” said Alan Granwell, of counsel with Sharp Partners PA. “The significant issue is global transparency. Look at where we were a few years ago. We were nowhere. I think the difference is really incredible.”

Many practitioners have noted that banks and financial institutions have made a concerted effort to prepare for the next stage of reporting expected in 2015.

“I think many institutions are in pretty good shape,” said Jonathan Jacket, a partner at Burt, Staples, & Maner. “They had a plan and they worked through their plan. Many are on schedule and they’ve done what they need to do.” The question remains, however, “Is it the best version? Is it as good as it could be?” he told Bloomberg BNA. “We won’t find that out for sure until we’ve gone through a few cycles of reporting.”

March 15 kicked off the staggered implementation of several new phases of reporting, a major point in global tax transparency. “It’s the real start,” said Susan Grbic, a tax partner at WeiserMazars LLP. “It’s exciting that it’s happening. This is the beginning of real FATCA, of fully implementing and working out wrinkles and discrepancies between the different types of reporting that will be required.”

March 31, 2015/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FATCA, News

IRS Clarifies Rules on FATCA Announcement

In a Dec. 1 2014 update, the Internal Revenue Service (“IRS”) stated that jurisdictions can continue to be treated as though they have an intergovernmental agreement (“IGA”) after Dec. 31, 2014, as long as the Treasury Department determines they are making efforts to finalize the agreement as soon as possible.

In a Dec. 22 update, the IRS clarified that foreign financial institutions still must have a certificate identifying them as being compliant with the international tax law to avoid certain withholdings. Those in jurisdictions that are treated as having IGAs must obtain a Global Intermediary Identification Number.

February 20, 2015/by Anthony N Verni, Attorney at Law, CPA

FATCA, News, OVDP

IRS modifications to OVDP and streamlined procedures a Relief to offshore bank account holders

IRS modifications to OVDP and streamlined procedures

The Offshore Voluntary Compliance Program

Internal Revenue Service’s major revisions in its Offshore Voluntary Compliance Program may just be the light at the end of the tunnel for tax payers with offshore bank accounts. The revisions provide a new path for tax payers with offshore bank accounts to come into compliance with their tax obligations. The modifications of the OVDP 2012 and the expansion of streamlined procedures (IR-2014-73) are just a relief. They are more inclusive for both U.S tax payers residing abroad and in the U.S.

IRS launched the Offshore Voluntary Compliance program in 2012 following the success of its prior voluntary programs offered in 2009 and 2011. The 2012 OVDP was launched to help people with undisclosed income from offshore accounts get current with their tax returns. It encourages taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution. All the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.

These current modifications in the OVDP 2012 have been fueled by the implementation of the Foreign Account Tax Compliance Act (FATCA) and Department of Justice determination to deal with tax evasion. FATCA will soon go into effect, as a matter of fact, from July 1^st2014. With FATCA in place, foreign financial institutions will start reporting to the IRS foreign accounts held by U.S persons. The IRS enforcement efforts and implementation of FATCA, have made taxpayers are more aware of their obligations. This means that it’s going to be so hard for U.S. citizens in the U.S or overseas to conceal foreign bank accounts and assets.. That is why the IRS has come up with the modifications in the 2012 OVDP to help U.S Citizens who have undisclosed foreign bank accounts or assets to come to compliance, including those who are not willfully hiding assets. The IRS is providing the tax payers this golden chance through these modifications to help them avoid prosecution and limit their exposure to civil penalties.

Streamlined Procedures and OVDP 2012 changes

OVDP’s 2012 changes just expand the Streamlined Procedures put in place in Sept 2012. The streamlined filing compliance procedures were put in place to help U.S. taxpayers living abroad comply with their tax obligations. The IRS recognized that some of the U.S taxpayers residing abroad may not have been aware of their filing obligation. They failed to timely file U.S. federal income tax returns or report Foreign Bank and Financial Accounts (FBARs) not because they wanted but because they were unaware. This program is available to non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed U.S. tax returns during the same period. These taxpayers must also present a low level of compliance risk.

The changes to the Offshore Voluntary Compliance Program (OVDP 2012) will expand on streamlined procedures to help accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts. The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States.

Changes to streamlined procedure include:

The changes to streamlined procedures will help cover a much broader group of U.S. taxpayers who have failed to disclose their foreign accounts but who aren’t willfully evading their tax obligations. To encourage these taxpayers to come forward, IRS is expanding the eligibility criteria. These changes include:

Eliminating a cap on the amount of tax owed to qualify for the program (requirement that the taxpayer have $1,500 or less of unpaid tax per year).
Doing away with the risk questionnaire that applicants were required to complete.
Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

These modifications provide an ease avenue for taxpayers who have been looking for a better easy way to comply with their tax obligations. Taxpayers with offshore accounts should take advantage of these changes in the OVDP while it lasts. This grace period is something that U.S. taxpayers should not overlook.

June 24, 2014/by Anthony N Verni, Attorney at Law, CPA