Fort Worth, TX Tax Controversy and Litigation Blog

The IRS is going after assets held in foreign accounts like never before. First it was not one but two iterations of the Offshore Voluntary Disclosure Initiative (OVDI). Coming soon is a new law called the Foreign Account Tax Compliance Act (FATCA).

FATCA is an offshore account enforcement law passed by Congress in 2010. It aims to enlist foreign financial entities in collecting tax owed to Uncle Sam by Americans with foreign accounts.

Though FATCA will not fully take effect until 2014, planning for the implementation of the law has already begun. There have strident objections to it by foreign banks and other financial institutions who assert that the cost of compliance will be excessively burdensome.

The latest development is that the U.S. and five European countries have agreed to an information-sharing deal that is supposed to help implement FATCA. The five countries are Germany, France, Britain, Italy and Spain.

Small businesses are greatly affected by tax reporting requirements. If the government isn't careful, compliance with these requirements can become excessively burdensome for business. And that, in turn, can hurt productivity and make small businesses less competitive.

In other words, business income taxes involve a fine line. Our tax system is based on the premise that both individuals and businesses will pay their fair share. But if businesses are subject to too many reporting requirements, it becomes harder for those businesses to generate the jobs America needs to regain strong economic growth.

Consider, then, one particular tax reporting requirement: a relatively new one involving 1099-K reports. In 2008 legislation, Congress required the IRS to collect 1099-K reports from credit card companies and other third party payment companies. The purpose is to document credit transactions that have occurred within a merchant's business during the tax year.

The digital revolution is underway everywhere in America. The payment of taxes, and the administration of the tax system by the IRS, are certainly not exceptions to this.

In fact, increased use of technology may make IRS tax audits more likely. According to a recent report by the national taxpayer advocate, the IRS is using automated systems to find more mistakes in tax returns than it ever has before.

The report found that in 2005, the IRS identified 4 million returns with math and clerical errors. By 2010, the number of errors had more than doubled to 10.6 million.

Through greater use of electronic systems, the IRS is better able to identify mismatches between the data on an individual return and the corresponding data from third parties. These third party sources include employers' pay records, the Social Security Administration, and others.

To be sure, sometimes the discrepancies with third party data can benefit the taxpayer. This happened, for example, with many employers who were seeking to claim a refundable tax credit called the Making Work Pay credit.

Indeed, mismatches relating to this particular tax amounted to over half of the 10.6 million errors the IRS flagged for review in 2010.

The Internal Revenue Service issued new guidelines in early June regarding its voluntary disclosure program to mitigate penalties for failing to report income in Swiss bank accounts and other offshore locations to avoid tax liability. Some U.S. taxpayers will have 90 days beyond the August 31, 2011, deadline to disclose foreign bank accounts.

The IRS is offering the extension to taxpayers who have made good faith efforts to assess taxes and penalties related to the Report of Foreign Bank and Financial Accounts (FBAR) (Form TD F 90-22). Applications for the 90-day extensions must include properly completed paperwork and details about missing information, why it has not been included, and what steps are being taken to secure the information.

The Internal Revenue Service (IRS) recently highlighted some the top abusive tax scams for 2011. Activities such as, hiding income in offshore accounts, identity theft, return preparer fraud and filing false or misleading tax returns forms the Service's the annual list of "dirty dozen" tax scams in 2011.

"The Dirty Dozen represents the worst of the worst tax scams," IRS Commissioner Doug Shulman said. "Don't fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them."

With the rollout of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), the Internal Revenue Service is offering "incentives" through reduced penalties to those who have either knowingly or unknowingly failed to report income from monies in foreign bank accounts. This is the second such initiative in the last few years by the IRS to recover unpaid taxes. The Miami Herald reports that $345 billion in taxes is not paid to the federal government each year because of foreign bank accounts.

Voluntary Disclosure

The 2011 OVDI is a voluntary disclosure program. Voluntary disclosure means that the taxpayer makes it known to the IRS that he or she knows and understands that he or she is delinquent on certain taxes. The IRS states that the current voluntary disclosure program, 2011 OVDI, allows the taxpayer to calculate with near certainty the costs associated (back taxes, interest and penalties) with the unpaid taxes.

Failing to disclose bank accounts and earnings to the Internal Revenue Service (IRS) is generally a practice that can bring legal difficulties, particularly in recent years when the focus has been placed on investigating offshore accounts. The IRS has vast resources at its disposal and does not hesitate to use them in its effort to collect what is owed to the government. The IRS, when aided by banks, is an even more formidable foe.

In the latest case stemming from UBS' admission of aiding tax evaders, a taxpayer was put on probation for three years, ordered to pay the IRS more than $96,000 in civil liability for failing to report money in offshore accounts, failing to report interest income on those accounts and allegedly filing false tax documents from 2000-2008.

According to a Reuters report, bankers with HSBC conspired with a New Jersey businessman to hide bank accounts in India and avoid detection from the Internal Revenue Service. The indictment is another indication of the widening probe into offshore accounts, and into HSBC, by federal investigators. Vaibhav Dahake, who has been a U.S. citizen since 2006, faces one count of conspiring to defraud the IRS for having maintained the Indian accounts from 2001 to 2010.

Pushing Clients to Offshore Accounts

The indictment accuses the bank, which is not named in the document, of running a division called NRI Services. This division, according to a Bloomberg report, marketed offshore accounts to clients of Indian descent.

The indictment notes that Dahake met with an HSBC banker in 2001 to discuss the advantages of the Indian accounts. Dahake was told that no U.S. forms or Social Security number would be required to open the account, that it was not taxable in India and that the interest would not be reported to the IRS. According to a Justice Department press release on the case, Dahake was also advised to transfer amounts under $10,000 to avoid detection and "stay below the radar."

Though the bank is not named in the indictment, the London-based HSBC does, however, run a division called NRI Services. The New York Times also cites sources close to the investigation confirming HSBC as the bank behind the accounts.

Recently the Internal Revenue Service (IRS) has stepped up its enforcement efforts to ensure that non-profit organizations comply with tax laws and regulations.

The Exempt Organizations (EO) Examinations office is tasked with analyzing the operational and financial activities of exempt organizations.

According to a recent IRS report highlighting the accomplishments of Fiscal Year 2010, throughout the year, the office conducted 11,449 audits - an increase of 12 percent over the number conducted in Fiscal Year 2009. The number of audits conducted in 2009 already marked a 30 percent increase over those conducted in Fiscal Year 2008. This increased scrutiny is undoubtedly aided by the addition of 100 employees to the EO Examinations division.

In late 2009, officials with the Internal Revenue Service (IRS) began to examine the issue of foreign vessels operating on the Outer Continental Shelf (OCS) in the Gulf of Mexico. The agency was concerned that these vessels were registering under foreign flags in an attempt to avoid paying the required taxes. After the tragic explosion that killed 11 people aboard the Deepwater Horizon offshore drilling platform, the IRS has intensified their efforts at tracking and investigating those it believes owe back taxes.

The IRS sent letters to those foreign vessels it believes operated within the OCS over the past ten years. It is targeting those who have been engaged or contracted by U.S. companies to aid in the removal of natural resources. The letter is demanding that foreign vessel owners pay taxes, or state why they feel they are exempt. The agency will also pursue withholding taxes from U.S. companies who may have contracted with the non-U.S. vessel owners.