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United States vs Simon in Failure to file FBARs

Failure to file FBARs as a Signatory Authority

The Foreign Bank Account Report (FBAR) can be submitted with the advice of a tax law attorney.Failure to file FBARs as a Signatory Authority to a foreign bank account is an offense punishable by law according the to the Bank Secrecy Act. 

The U.S. Court of Appeals for the Seventh Circuit affirmed the conviction of an Indiana CPA/Accounting professor by a U.S. District Court in United States vs Simon, 7th Cir, No. 11-01837. The conviction was based upon the taxpayer’s filing false income tax returns, failure to file FBARs (Foreign Bank Account Reports), mail fraud and financial aid fraud. One of the four FBAR counts related to Simon failure to file FBARs (reports on foreign bank accounts) for which he was a signatory for the years 2002 through 2007. During this time period he was the managing director of three foreign companies and had signatory authority over foreign bank accounts of these companies.  The companies included: The Simon Family Trust based in the Cook Islands, Elekta Ltd, a Gibralter company and JS Elekta, a Cyprus corporation.

Charges on Failure to File FBARs

Simon was charged with four counts of failure to file FBARs  related to foreign bank accounts according to 31 U.S.C. §§ 5314, 5322. For the years 2005 through 2007, Simon  conceded he was required to file a form TDF 90-22.1 now FinCEN Form 114 by June 30th for the foreign bank accounts aggregating more than $10,000 in the previous years. He also admitted that he failed to do so. However, Simon argued that he did not violate the law.

Simon’s defense

According to Simon, the IRS issued guidance in 2009 and 2010 that granted retroactive extensions for filing FBARs for the year 2008 and preceding years. This guidance was issued through IRS notices.  Taking the notices into consideration, Simon asserted that he filed the required FBARS prior to his indictment. He insisted that he did the filing within the deadlines set forth in the notices 2009‐62 and 2010‐23 and could therefore not face prosecution on failing to meet the original deadlines.

Government’s standing

The Government maintained that Simon’s crimes were complete before the IRS issued the notices. According to the government, Simon could not use the notices to exonerate himself from crimes he had already committed before the notices came into play. According to the Government,

“amendment of a regulation does not relieve the taxpayer of criminal liability for conduct that occurred before the amendment even when the amendment purports to have retroactive application.”

In addition, nothing in the notices promised relief from criminal liability for taxpayers who willfully failed to file FBARs. The only relief in the notices was that the IRS would not impose civil penalties for taxpayers whose failure to comply was non-willful.

Evaluation Points

  1. Setting up and using foreign corporations, trusts and other devices for purposes of hiding foreign funds never works and can be viewed as strong evidence of “willfulness” in an FBAR prosecution.
  2. Masking transfers from foreign corporate  and other third party accounts as “loans” can be used by the Government as strong evidence on intent in a criminal tax prosecution.
  3. The facts in the Simon Case involved a wilful failure to file FBARs.

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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.

fatca foreign account tax compliance act. tax law attorneyThese 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 1st 2014. 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.

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FBAR Case on United States v. Carl Zwerner settled for $1.8 Million

FBAR Case: United States vs. Carl Zwerner is settled for $1.8 Million

The IRS U.S. Court building in Washington DC, a courthouse where cases on the Trust Fund Recover Penalty (TFRP) are held

The United States v Carl Zwerner FBAR case has been finally settled despite the many speculations regarding the Eighth Amendment rights. Carl Zwerner has entered a settlement agreement with the U.S. Department of Justice contrary to what most tax practitioners and attorneys thought. “Mr. Zwerner believed that a settlement at this time was in his best interests,” Press told Bloomberg BNA. “The Eighth Amendment issue will have to be litigated at some future date by others. We were fully prepared to litigate that issue.” This settlement agreement therefore finally closes the case of United States v. Zwerner.

Background

Zwerner opened an account in Switzerland in the 1960s, under the name of two different foundations he created. He used the proceeds of the account for personal expenses. Zwerner failed to report his financial interest in the Swiss bank account on an FBAR and also failed to report any income earned from the Swiss bank account on his original tax returns for 2004 to 2007.  He represented on Schedule B of his original tax returns for those years that he did not have an interest in a foreign financial account by answering “no” in response to question 7(a). Check here for more details on the case.

The Tax Law

U.S. District Court for the Southern District of Florida jury scrutinized the evidence and found that Zwerner knew of his obligation to file FBARs. According to the jury, Zwerner’s failure to file FBARs for the years 2004 through 2006 was willful. See (U.S. v. Carl Zwerner, Civil Docket Case #1:13-cv-22082-CMA). The balance of the account for each of the years at issue exceeded $1.4 million and Zwerner committed FBAR violations by not complying with the law as required by 31 U.S.C. § 5314 and its implementing regulations. The law requires that U.S. citizens who have an interest in or signature authority over, a financial account overseas are required to disclose the existence of such account on Schedule B, Part III of their individual income tax return. Additionally, U.S. citizens must file an FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signatory or other authority. Those who willfully fail to file their FBARs on a timely basis, due on or before June 30 of the following year, can be assessed a penalty of up to 50 percent of the balance in the unreported bank account for each year they fail to file a required FBAR.

Settlement

The FBAR Case on United States v. Carl Zwerner was finally settled for $1.8 Million. Zwerner agreed to pay about $1.8 million in penalties and interest to settle the case.

The penalties Zwerner will pay for failure to file the FBAR include; $723,762 for 2004 and $745,209 for 2005. Zwerner also agreed to pay the U.S. interest of $21,336.11 for the 2004 failure and $20,947.52 for the 2005 failure. In addition, he will pay statutory penalties of $128,016.64 for 2004 and $125,685.11 for 2005.

The defendant agreed to make all of these payments by Sept. 2. Once the payment is made, the parties will stipulate to dismiss the action with prejudice, according to the court document. Check here for more information.  Zwerner’s attorney, Martin Press, told Bloomberg BNA on June 10 that the final settlement was less than half of the amount originally sought by the government for the four-year period. Press said it was his client’s decision to settle the case. “The government is looking at multiple FBAR penalties and will increase the assertion of multiple FBAR penalties in the future,” Press said. “And this may apply to both civil cases and criminal cases. I believe this is an initiative by the Justice Department to assert penalties in more than one year.”

FBAR Case on United States v. Carl Zwerner is just an eye opener to U.S. Citizens and Residents with foreign financial accounts that are not reported.

“As this jury verdict shows the cost of not coming forward and fully disclosing a secret Offshore bank account to the IRS can be quite high,” said Assistant Attorney General Kathryn Keneally for the Justice Department’s Tax Division. She added that “Those who still think they can hide their assets offshore need to rethink their strategy,” http://www.woodllp.com/Publications/Articles/pdf/Zwerner.pdf.

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IRS Deadline for U.S. Citizens and Resident Aliens Abroad

IRS Expectations of U.S. Citizens and Resident Aliens Abroad

IRS  (Internal Revenue Service) in one of its news releases has reminded U.S. citizens and resident aliens abroad of the deadline on their tax obligations. According to the IRS, U.S Citizens and permanent residents who lived or worked abroad in 2013 in full or in part may have a U.S. tax liability and a filing requirement in 2014. The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas including those serving in the military abroad.

IRS has provided a filing deadline of June 16 to U.S. Citizens and alien residents. To cater for tax payers residing overseas who cannot meet this deadline, IRS has provided an automatic extension to Oct. 15, 2014 to the taxpayers. However, it is important to note that the extension by the IRS is on time to file and not time to pay. An interest rate interest rate of 3% p.a. is compounded daily applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month applies to payments made after June 16, 2014.

Federal Law takes on IRS tax obligationa abroad

U.S. citizens and resident aliens living abroad are required by Federal law to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. The IRS requires the affected taxpayers to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their tax return Form 8938 (statement showing their financial assets abroad). U.S. Citizens and resident aliens with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 should these accounts. IRS requires tem to file Form 114 electronically with the Treasury Department. This is known as Reporting of Foreign Bank and Financial Accounts (FBAR). For more information on how to file the FBAR, click here.

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Tax Evasion Not Cured with QI Pacts

Tax Evasion under QI agreements

The IRS U.S. Court building in Washington DC, a courthouse where cases on the Trust Fund Recover Penalty (TFRP) are held

On Feb. 28 2014, Thomas Sawyer, senior counsel on international tax matters with the DOJ’s Tax Division, clarified that banks who have helped clients hide assets from the US government aren’t immune from penalty simply because they have complied with a qualified intermediary (“QI”) agreement.

Mistaken Beliefs

Sawyer addressed the misconception of some banks that may have decided not to come forward under the mistaken belief that their QI agreements will protect them from enforcement. “If you’re hearing that advice, you should be put on notice that that’s wrong,” Sawyer said. Another misconception is that all banks have to do is pay a fine and they can simply move forward, he said.

An official from the IRS also said that the IRS has attaches in multiple countries to assist with investigations, and is looking at whether taxpayers who renounce their citizenship may be doing so for tax evasion purposes.  Since the enactment of the Foreign Account Tax Compliance Act (“FATCA”), the government has seen an increase in these renunciations. It is very clear that the U.S. Government is committed to combating tax evasion. Foreign Financial Institutions holding U.S. Citizens bank accounts have to either comply with IRS under FATCA or face penalties or to the worst case, close the bank accounts.

Sooner or later, the government will catch up with non-compliant banks and non-compliant U.S. Citizens in foreign countries. There is no option to tax evasion.

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Tax Evasion Causes Cash Abroad to Rise

Tax Evasion and Profits

Folder tabs with focus on offshore account tab. Business concept image for illustration of tax evasion.US-based companies added $206 billion to their offshore profits last year, shielding earnings in low-tax countries.

Bloomberg News reports that multinational companies have accumulated $1.95 trillion outside the US, up 11.8 percent from last year. Three companies—Microsoft Corp., Apple Inc., and International Business Machines Corp.—account for 18.2 percent of the total increase.

Tax Loopholes

“The loopholes in our tax code right now give such a big reward to companies that use gimmicks to make it look like they earn their profits offshore,” said Dan Smith, a tax and budget advocate at the U.S. Public Interest Research Group, which seeks to counteract corporate influence.

Many of these companies are moving patents and other intellectual property to low-tax locales. US multinational companies reported earning 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.

“If you can choose between San Antonio and Shanghai, and you pay no taxes one place and 25 to 35 percent at home, you’re encouraged to move jobs overseas,” said Paul Jacobs, CEO of Qualcomm Inc., in his Mar. 4 farewell address. For US corporations, these overseas profits are building up and they are choosing to not bring the cash home and face the tax consequences. Because of this, CEOs like Jacobs are urging Congress to pass legislation that allows American companies to be able to bring money back to the United States without tax penalty. Doing so, they argue, would decrease tax evasion and increase domestic investment.

22 Companies

The majority of the offshore profits are held by a small number of companies. The top 22 corporations in Bloomberg’s analysis have more accumulated earnings outside the US than the other 285 combined. Under U.S. accounting rules, companies don’t have to assume they will pay federal taxes on profits they have deemed indefinitely reinvested outside the U.S.

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OECD Releases First Pillar of Model Framework

The Organization for Economic Cooperation and Development (“OECD”)

The Organization for Economic Cooperation and Development (“OECD”)

The Organization for Economic Cooperation and Development (“OECD”)

The Organization for Economic Cooperation and Development (“OECD”) has released the first pillar of its model framework for automatic exchange of tax information.

Standardized Form and Automatic Exchange

The “Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard” establishes a standardized form that banks and other financial institutions would be required to use to gather a range of client account and transaction data to submit yearly to their domestic tax authorities. The different tax authorities would then exchange this information automatically, either bilaterally or multilaterally, depending on the specific agreement.

As summarized by the OECD: “The standard . . .  calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.”

Swiss Banking Skepticism
The Swiss Bankers Association (“SBA”) noted that the recommendations from the OECD “are in general a step in the right direction,” yet continued to have problems with the overall framework:

“Firstly, the basis to be used for client identification are domestic money laundering regulations,” the SBA said. “There are still different standards in this area.” Secondly, “it is becoming apparent that the U.S. will not be prepared to offer full reciprocity,” the SBA said.

Finally, the Swiss Bankers Association noted the high costs that are likely to result with implementation of the new OECD standard. The new standard, claims the SBA, will be significantly higher than the costs of implementing FATCA.

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Offshore Accounts and the Offshore Voluntary Disclosure Program

The Justice Department Crackdown on Offshore Foreign Accounts

Offshore financial accounts are the target of a recent IRS crackdown on tax evasionSince the Justice Department raised the threat of prison time for Americans who did not reveal their offshore accounts, the tax-evader crackdown has proven very successful for the United States government. Since 2008—when the Justice Department began a push against Swiss banks—the U.S. has prosecuted 103 people, including 62 guilty pleas and 5 trial convictions.

Of the 103 people prosecuted, only 18 received prison time. In almost every single case, the defendants received sentences that were below the set advisory guidelines. During sentencing, judges must weigh guidelines that seek to provide both consistency and fairness across the board. Although the guidelines still exist, they became advisory rather than mandatory as a result of a 2005 Supreme Court ruling in United States v. Booker [543 U.S. 220 (2005)]. Because the average defendant charged with tax evasion is both a first-time offender and likely very charitable due to their wealth, virtually all judges give out sentences below the guidelines.

The Case of Beanie Babies creator Ty Warner and Tax Evasion

Such is the case with billionaire Beanie Babies creator H. Ty Warner. Warner pleaded guilty Oct. 2 to tax evasion related to Swiss accounts in which he held as much as $107 million. Before sentencing, he had paid a $53 million civil penalty and $27 million in back taxes. Though the guidelines called for between 46 to 57 months in prison, U.S. District Judge Charles Kocoras sentenced Warner to two years’ probation, ordering him to perform 500 hours of community service and pay a $100,000 fine. Remarking upon the relatively light sentence, Judge Kocoras stated, “Society will be best served to allow [Warner] to continue his good works.”

Making a Voluntary Disclosure to the IRS

Since 2009, more than 38,000 taxpayers have joined the government’s amnesty program and paid $5.5 billion in back taxes, interest, and penalties. Deciding whether to participate in the Offshore Voluntary Disclosure Program (“OVDP”) or proceeding under an alternative voluntary disclosure protocol requires careful evaluation of the specific facts in each case and should not be undertaken without the assistance of a competent tax attorney.

Dealing with delinquent foreign financial accounts or unreported income from offshore activity is not a matter that should be handled by the taxpayer without the assistance of competent tax counsel.

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Don’t pack your bags just yet

Don’t pack your bags just yet; you may not be going anywhere.

Tax evasion is a crime, it is better to get the help of a qualified tax attorney to help you file your FBAR returnsThe Senate  bill 1813 may just be the reason why you as a tax payer that owes the IRS taxes might just not be in a hurry to pack up your bags. In case you are planning on going anywhere, don’t pack your bags just yet; you may not be going anywhere. If this bill goes through, you might want to consider your tax debt first.

If your tax debt amounts to $ 50,000 and above, you may as well say bye to your traveling rights.

This is because your passport may be revoked soon. As a tax payer, you may want to consider the Senate bill 1813  introduced by Senator Barbara Boxer (D-Los Angeles) in November and passed by Senate on a 74 – 22 vote on March 14th  2012. The Highway Bill, also known as MAP-21 (Moving Ahead for Progress in the 21st Century) is to “reauthorize Federal-aid highway and highway safety construction programs and for other purposes.”

Your concern as a US citizen should be in the “Other purposes” section of the bill. Part of this is an amendment written by Senate Majority Leader Harry Reid, seeking to prevent any American citizen from leaving the country based upon a determination by the Internal Revenue Service (IRS) that you owe the government back taxes. The amendment, under Section 40304 of the legislation provides for “Revocation or denial of passport in case of certain unpaid taxes.” This would authorize the State Department to revoke passports for anyone the IRS certifies as having “a delinquent tax debt in an amount in excess of $50,000. The responsibility to prove that you owe taxes is solely vested in IRS and not any court. All the IRS need to do is to prove this without following any due process. IRS can move to suspend or revoke your passport on pure suspicion of tax delinquency before you even have a trial. Nothing will stop an IRS agent from flagging you with a lien to stop travel, even if the lien turns out to be false. It is important to note that the bill does not allow for exceptions in the following cases; emergency, humanitarian situations, limited return travel to the U.S., tax debt is being repaid in a timely manner and in situations where collection efforts have been suspended.

This bill is a step away from becoming law.

There is a high possibility that this bill will become law despite the stiffer opposition it is expected to face from Republicans in the House of Representatives. The provision for passport provocation is not so conspicuous; it is sandwiched deep within the very important transportation bill. The importance of saving the Highway Trust Fund from becoming bankrupt seems to be a priority overshadowing your need to travel freely. The need for the government to raise more finances in light of the shrinking economy may be the driving force to this provision. According to Lesniewski, passport provision has a good chance of becoming law for one reason; money. This provision is expected to raise almost $750 million in the 10-year budget window period. According to Senator Barbara, thousands of businesses are at stake, and nearly three million jobs at stake. She notes that, “there are many people on both sides of the aisle in the Senate who want to get our bill … passed into law, and I am going to do everything I can to keep the pressure on the Republican House to do just that.”

What does this mean to a U.S citizen with a delinquent tax debt in the excess of $50,000?

It means that if the house passes the bill, which has already been passed by Senate, then the IRS will have the power to revoke your passports. Constitutional Attorney Angel Reyes notes that this provision takes away your right to enter or exit the country based upon a non-judicial IRS determination that you owe taxes. Many businesses will be affected and so is the economy.

To be able to survive this, those with delinquent tax debts should make an effort to clear their debts with the IRS to avoid falling prey to this part of the bill; that is if it becomes law. Those with foreign bank accounts should report them and pay their taxes promptly to avoid this trap.

By Anthony N. Verni

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