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.
]]> FATCA, as currently written, will require foreign financial institutions to report accounts held by Americans or be subject to a withholding penalty. Foreign banks are concerned that compliance would put them in a position of violating laws on national secrecy.Under the deal announced with the five countries last week, banks in those countries will share the data on American assets not with the IRS, but with their own national governments. Those governments, in turn, will share the data with the U.S.
This government-to-government approach for FATCA compliance is supposed to address the issue of national secrecy laws in the five countries involved. It remains to be seen whether other countries will take similar actions.
Source: "5 European Nations Agree to Help U.S. Crack Down on Tax Evasion," New York Times, 2-8-12
]]>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.
]]> There is concern in Congress that the rule expects too much from small businesses if they have to reconcile the reports they receive from outside companies with their own internal records.Two members of the U.S. House are offering a bill to address this concern. The proposed bill is called the 1099-K Overreach Prevention Act. It would restrict what the IRS is allowed to do with data from 1099-K reports submitted by third parties. The IRS would not be able to require businesses to reconcile these reports with their own internal records.
The proposal has support from the U.S. Chamber of Commerce, as well as the National Federal of Independent Business.
Source: "Lawmakers Introduce Bill to Limit 1099-K 'Overreach'," Accounting Today, 2-7-12
]]>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 increased use of automation can also introduce errors of its own. The taxpayer advocate's report found that the IRS incorrectly disallowed the dependent care exemption to tens of thousands of taxpayers.The main point is that taxpayers need to realize that the IRS is using enhanced automated systems to scrutinize returns more closely. Be prepared to respond quickly if the IRS sends a letter asserting that a return contained an error or errors.
Source: "IRS on autopilot," CNN Money, 1-11-12
]]>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 IRS first implemented an Offshore Voluntary Disclosure Program (OVDP) in 2009, which included a uniform penalty structure for taxpayers who reported previously undisclosed foreign assets and accounts. The agency offers three good reasons behind voluntary disclosure:An individual's decision to participate in the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI) requires a thorough review of income records and tax law. The complexities of any tax evasion scenario are unique to the individual taxpayer. A consultation with an experienced tax lawyer can help business owners, corporate officers and other individuals assess their legal options and the long-term implications of any strategy.
Source: IRS To Let Some Bow Out Of Swiss Account Disclosure Program
]]>"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."
]]> The Dirty DozenThese tax fraud schemes can all lead to federal prosecution, and those charged can face large fines and imprisonment. The Justice Department prosecutes these charges for IRS.
Even if you are an innocent taxpayer, who has inadvertently became involved with any of these activities, if you avoid federal prosecution, you still must repay all taxes due plus interest and penalties.
Serious Charges with Serious Penalties
Federal tax evasion and tax fraud are serious felonies. For instance, a taxpayer using frivolous arguments could face criminal prosecution for attempting to evade taxes, which is a felony, with a fine of up to $250,000 and imprisonment for up to 5 years.
If you have received a letter from the IRS raising questions regarding any of these activities, consulting with an attorney experienced with handling criminal tax charges is a good first step. An attorney can assess the charges and recommend strategies to resolve the charge.
]]>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.
]]> Quiet DisclosureThere is another way that delinquent tax payers can attempt to pay what is owed - called "quiet disclosure." A quiet disclosure is made by filing amended returns and paying back taxes and interest on what is owed. However, this is known as quiet because the taxpayer does not notify the IRS that this is what they are doing. Those that have made a quiet disclosure may still qualify for the 2011 OVDI program, which, at the very least, may allow that taxpayer to avoid jail time for tax evasion.
The 2011 OVDI Process
There are a few steps for participation in the 2011 OVDI program. The IRS lays out the three-step process as:
There are several steps to the process, which take time. If you are considering participating in the 2011 OVDI program, speak with an experienced tax attorney sooner rather than later.
]]>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.
]]> In 2009, UBS admitted that it had been aiding U.S. taxpayers in hiding money from the IRS in foreign accounts. As part of a deferred prosecution agreement, UBS agreed to pay $780 million in fines and restitution, agreed to provide the IRS with the names and account information of its U.S. clients, and to end its practice of providing U.S. customers with undeclared accounts.The IRS is continuing its efforts to recover unpaid taxes and prosecute those with undisclosed accounts. Even though the IRS' prosecution efforts have been aided by UBS, the IRS is offering a program for those that wish to voluntarily pay taxes on their unreported income.
If you have unreported income and unpaid taxes, speak with an attorney to discuss how to report this information while still protecting your rights.
]]>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.
]]> Widening ProbeThe Dahake indictment is another example of the focus by investigators into offshore accounts. Nearly one year ago, a Virginia surgeon was convicted of conspiring with a Swiss attorney and HSBC bankers to hide over $250,000 from the IRS. According to The New York Times, Dr. Andrew Silva attempted to smuggle the money into the U.S. by mailing cash to himself in amounts under $10,000. Silva received four months home confinement, forfeited over $200,000 and was fined $20,000.
The New York Times reports that the IRS is giving those individuals with offshore accounts until August 31st of this year to report offshore activities. While there are penalties associated with the voluntary disclosure, they are far less than a person would normally face. According to the Times report, the IRS will require individuals to pay a 25 percent tax in the year with the highest account balance from 2003 to 2010.
The tax is significant but is far less than the 50 percent penalty usually associated with offshore accounts. There are also significant fines, and criminal penalties normally associated with those accounts which are not assessed under the new voluntary disclosure program. Participants will, however, have to pay back taxes, interest and delinquency penalties.
]]>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.
]]> The trend is clear; the IRS is scrutinizing the activities of non-profit organizations claiming tax-exempt status, and those filing tax returns must be careful to avoid any inaccuracies or misstatements when preparing the returns.In the annual report for 2010, EO also announced several priorities for Fiscal Year 2011 that are likely to affect organizations across the non-profit sector.
Clearly, the IRS will be seeking to properly implement recent legislation, and the EO Examinations office will be evaluating some organizations directly affected by this legislation. For example, the Hiring Incentives to Restore Employment Act allows tax-exempt organizations to claim a payroll tax exemption for certain newly-hired employees. A division of the EO Examinations office has already started reviewing organizations claiming this credit.
International tax enforcement remains an ongoing focus area. Specifically, the report expresses concerns that charitable assets are being used for non-charitable activities overseas. The IRS has a variety of efforts underway to further address these concerns.
As one might expect, the IRS will continue to focus on non-filers. Within the Exempt Organizations office, this will involve compliance checks for those organizations who have not consistently filed.
Finally, a recent study indicated that one of the most significant tax issues comes from the misclassification of employees - both in the non-profit and private sectors. The IRS plans to address problems with employment taxes with a comprehensive study to measure compliance, and the EO division will participate in this study.
For more information regarding changes affecting the non-profit sector in the coming year, speak with a knowledgeable tax attorney.
]]>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.
]]> Those who support the IRS actions say that it will allow U.S. companies to be more competitive for work within the region, as well as ensure safer working conditions for those aboard the vessels. The Congressional hearings held on the matter attempted to allow lawmakers to get a better handle on the scope of the problem, as well as reduce any potential loopholes in the current regulations.If you have received a letter from the IRS, take it seriously. With the potential for back taxes and penalties, the IRS will be aggressively pursuing those foreign companies and vessel owners it believes skirted tax laws. An experienced tax attorney familiar with U.S. tax laws can help you prepare a defense against these charges. Do not ignore this letter, as that could cause penalties to increase.
]]>The case was dismissed-as negotiated-when UBS signed an 18-month probation agreement to hand over data on 4,500 accounts and pay a fine of $780 million. Douglas Shulman, IRS commissioner, believes that the IRS may receive 7,000 names from UBS when deliberations with the bank cease. Since the agreement, signed in February 2009, the Justice Department has charged 17 American UBS clients, two UBS bankers and three others accused of aiding tax evaders. Approximately, 150 other individuals are currently under investigation by the IRS.
]]> The IRS probe into UBS escalated in 2007, when Bradley Birkenfeld, a private banker, told U.S. law enforcement about how he and his colleagues came to the United States to recruit new clients with deep pockets. He also stated that UBS bankers helped the clients, collectively worth almost $20 billion, to avoid paying the IRS. Birkenfeld is now serving a 40-month prison term for his actions.The 18-month probation agreement with UBS coincided with a voluntary disclosure period during which other banks could turn over data on tax evasion activity with immunity from prosecution. Commissioner Shulman claims that 20,000 accounts have been voluntarily submitted to the IRS for review, including accounts held at UBS, Credit Suisse, HSBC and other foreign banks.
Shulman says that the IRS may again pursue UBS via a civil case for the release of another 52,000 accounts. There may also be another voluntary disclosure period, but it will not include immunity from prosecution.
]]>The crackdown was announced, in part, because one of Switzerland's largest banks, UBS, had been helping U.S. citizens hide assets from the IRS in foreign accounts for years. According to Reuters, UBS paid $780 million in February to settle civil and criminal charges related to the case.
Recently, in the first trial since the emphasis on offshore accounts was announced, a father and son development team in Florida was found guilty of filing false tax returns and conspiracy.
]]> According to a Bloomberg report, prosecutors alleged that Mauricio Cohen Assor and Leon Cohen Levy hid $33 million in proceeds from the sale of a New York hotel. The men used offshore accounts, forged documents and had friends and family pose as owners to avoid paying taxes on the sale. Assor was accused of failing to report nearly $12 million in income, while Levy was alleged to have hid over $4.4 million.Though both men lived in expensive homes, drove luxury cars and had significant investments in other companies, Assor and Levy both reported incomes of under $50,000 on their taxes for the years in question.
The two men, according to prosecutors, put a majority of the money in one of Europe's largest banks, HSBC, and moved it to other offshore accounts to conceal the income. HSBC itself was under investigation by the Justice Department and, according to a Wall Street Journal report, the DOJ ordered HSBC to strengthen its compliance with federal anti-money laundering laws.
The men, who were arrested on April 15th, will remain in custody until their sentencing in December. Assoc and Levy both face up to 11 years in prison.
]]>Quellos' clients have paid $240 million in back taxes. The government does not appear to be planning to charge them with any crimes.
"Magical Transactions ... Secret Agreements"
Greenstein and Wilk allegedly set up a shell investment fund, located on the Isle of Man, that would allow customers to deduct the fund's false losses from their capital gains. The service was called Portfolio Optimized Investment Transaction (POINT).
The prosecutors who filed court documents against the pair stated that "[t]hese seemingly magical transactions that purportedly offered attractive investment returns while at the same time providing hundreds of millions of dollars in tax savings were nothing but sham transactions based on false statements, fraudulent documents, secret agreements, and concealment of the truth."
Clearly, the government is intent on prosecuting those it views as conspiring to circumvent tax laws.
Sentencing in January
Greenstein and Wilk each face up to six years in prison. Their sentencing is scheduled for January 2011.
In exchange for the pair's agreement to pay $7 million in fines and speak about business ethics to their graduate schools, the IRS is recommending no more than six years in prison.
Seek Advice
The IRS stated that this case should be a warning to those who would conspire to illegally avoid taxes: "The IRS will diligently investigate and seek to prosecute those who peddle bogus tax shelter schemes, whether domestic or offshore, which are designed to evade federal income taxes."
Although the defendants' scheme was allegedly a fund with no investments, other tax shelters may be legal. The advice of an experienced business attorney, therefore, is invaluable. Whether you have questions about your investments or you believe your business may come under investigation, contact an attorney who can provide insight.
]]>The Internal Revenue Service filed a lawsuit against UBS bank in February 2009, seeking data on more than 50,000 UBS accounts. Last August, UBS agreed to provide information on 4,450 of those accounts. The deadline of one year just expired, and it appears that the Swiss Federal Tax Administration is handing over the information.
The U.S. government is likely to withdraw its "John Doe summons" -- requesting information on subjects whose names are unknown, but whose alleged crimes are known -- this fall. The ultimate effect of this case, however, is not yet known.
The Swiss Advantage
Life in Switzerland is peaceful and stable. So, for the most part, is its economy. This contributes to its attractiveness to outside corporations. Indeed, foreign corporations produce 10 percent of the country's gross domestic product.
Switzerland has a history of friendliness toward corporations, especially foreign ones. The advantages the country offers to businesses include lower taxes and a tight-lipped approach to banking. This reputation has changed somewhat, however, with the deal the Swiss government arranged with the U.S. government to reveal the details of 4,450 accounts.
On the other hand, by giving the U.S. what it asked for, Switzerland has likely avoided the continuation of the lawsuit. With this controversy coming to a close, it is possible that business will resume as usual.
The Stakes
The Swiss government understands what is at stake if American and European businesses stop viewing Switzerland as a favorable venue. In 2007 and 2008, over 500 companies moved to Switzerland each year. This number has slowed due to the sluggish economy, but Switzerland is still seen by many as welcoming, especially compared to the European Union.
The Strategy
The Swiss government has handed over information on 2,000 accounts. The U.S. government expects the other 2,450 files in the fall. Given the recent changes in Switzerland's approach to banking privacy, American corporate investors must thoroughly research their options before proceeding.
If you or your business is considering moving assets to Switzerland, speak with an attorney who is well versed in international business law. Set out a wise strategy now, rather that reacting to changes you should have anticipated.
]]>ZURICH - Switzerland's Chairman of Financial Regulation, Eugen Haltiner, announced that he will step down from his position at the end of the year. The Swiss government issued a statement thanking the Chairman for his services and stating that it will be nominating a replacement in November.
Mr. Haltiner's tenure was marked by controversy and speculation. He was criticized for his close relationship with UBS and his relaxed position on the rising mortgage losses facing the Swiss government.
Most recently, Mr. Haltiner made headlines in Switzerland for his role in the issuance of an emergency order that UBS turn over to the Internal Revenue Service the names of 250 wealthy Americans holding offshore accounts at the bank. The emergency order was issued and the disclosure of the account holder names was made as part of the strategy to head off an indictment of UBS by the United States Department of Justice, which might have had a devastating effect on the Swiss economy.
Despite Mr. Haltiner's efforts, the United States government sued UBS in civil proceedings seeking information on over 50,000 U.S. citizen account holders. Last August, settlement in this matter was reached and UBS agreed to turn over information relating to 4,450 accounts. The Swiss parliament approved the settlement in June and it is expected that this new disclosure will be made by UBS sometime in August or September 2010.
Expect the IRS to continue to ramp up its efforts in the area of offshore compliance and enforcement. Any U.S. taxpayer with offshore accounts that have not yet been disclosed should seek legal advice as soon as possible.
At Brown, PC offshore account compliance and international tax disputes are a large part of our practice. Please contact us for a confidential consultation about offshore account compliance.
For more information on offshore tax matters and international tax disputes, please see our "Hot Topics" area on the homepage of http://www.browntax.com/.
To read an additional article with more information, please see http://online.wsj.com/article.