April 2009 Archives

IRS Offshore Banking Probe Expanding

April 30, 2009,

Reuters has reported that the IRS is set to serve summonses on foreign banks to obtain the names of U.S. citizens who may have committed tax fraud and buried the proceeds in Swiss or other offshore bank accounts. As I have previously blogged, the IRS is already involved in tax litigation with UBS seeking the names of 52,000 holders of Swiss bank accounts.

The Reuters revelation is not good news for those with offshore bank accounts who were hoping to keep them secret from the IRS. Even taxpayers who have reported all of the income that was used to fund the offshore accounts are at risk for a 50% FBAR penalty.

We are now reviewing with some of our clients the advisability of taking advantage of the IRS tax amnesty that is available until September 22nd.

If you would like advice on the IRS voluntary disclosure program or any other tax problem contact the tax controversy attorneys at Brager Tax Law Group, A.P.C.

New York City to Pursue Offshore Tax Evasion

April 29, 2009,

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According to a report on Reuters, UK, Manhattan District Attorney Robert Morgenthau said New York State investigators are looking for more cases like the one in which London-headquartered Llyods agreed in January to forfeit $350 million to the United States and New York in connection with faking records related to clients from Iran.

Morgenthau said he was going to Washington to work on expediting the investigations. Although it appears that the New York investigations are centered on money laundering violations by banks and financial institutions, it is probable that evidence will be uncovered relating to individuals with offshore accounts; and such information will be turned over to the IRS, triggering tax fraud and FBAR violation investigations.

Morgenthau's biography highlights that as a U.S. Attorney, he prosecuted tax fraud cases.

If you have an offshore bank account, you should contact a tax litigation attorney to discuss the current IRS "tax amnesty" before the deadline in September passes.

FBARs Must Be Filed By Non-Residents Who are Doing Business in the U.S.

April 16, 2009,

FBARs (TD F 90-22.1 Report of Foreign Bank and Financial Account) must be filed by U.S. Citizens and residents who have signatory authority over, or a financial interest in a foreign bank account, or other financial account located in a foreign country. This is a topic that I have previously blogged on. Perhaps less understood is that even those who are not citizens or green card holders may be required to file FBARs if they have offshore accounts. The instructions to the FBAR form make clear that persons who are in, and doing business in the United States must also file the FBAR if they have an offshore bank account.

The Internal Revenue Service (IRS) FAQ on FBARs, however, states that this does not include athletes and entertainers who occasionally come to the U.S. to perform.

Whether or not you are a U.S. Citizen or resident, if you have an offshore bank account and have not filed an FBAR, you may wish to consult with a tax attorney to understand whether or not you have a tax problem.

First Data Summonsed By Internal Revenue Service (IRS) to Turn Over Offshore Account Information in Continuing Tax Evasion Probe

April 15, 2009,

According to a report in the New York Times by Lynnley Browning, the Internal Revenue Service (IRS) has announced in a press release that is has applied for permission to serve a John Doe Summons on First Data Corporation. First Data is a leading processor of credit card payments. The information sought by the IRS is expected to be used to identify businesses that have opened offshore bank accounts, and directed the card processor to deposit the proceeds in these offshore accounts. Even if the merchant didn’t use the account to commit tax fraud, the merchant would still be required to file an FBAR form with the IRS.

Clients often ask me something like, “How will the IRS know that I have put my funds in a Swiss bank account?” I usually respond, “I don’t know for sure, but what I do know is if they find out you are not going to be happy with what happens next.” Even assuming that the IRS doesn’t get the information directly from the foreign bank this summons is just one example of the IRS obtaining data in ways which might not be immediately apparent to the casual observer.

I have previously blogged about the tax amnesty for holders of offshore accounts. This new lawsuit is yet another reason why those with offshore accounts need to consult with a tax attorney to determine whether or not a voluntary disclosure makes sense.

United States Tax Court Proposes Rule Changes Impacting Tax Litigation

April 10, 2009,

Tax litigation in the United States Tax Court (Tax Court) would be affected by proposed changes to the Tax Court’s Rules of Practice and Procedure (Tax Court's Rules). Several of the changes are intended to conform the Tax Court’s Rules with the Federal Rules of Civil Procedure which govern tax litigation in the District Courts. For example, Tax Court Rule 71 would be changed to limit the number of interrogatories served to 25.

The Tax Court has requested public comments on the proposed amendments. Written comments must be received by May 27, 2009.

If you have a tax controversy matter which you haven’t been able to resolve contact the tax litigation lawyers at Brager Tax Law Group, A P.C.

Economic Hardship Results in Innocent Spouse Status

April 8, 2009,

One of the factors that the Internal Revenue Service (IRS) takes into account in determining whether or not to grant innocent spouse relief, pursuant to the equitable innocent spouse provisions of Internal Revenue Code (IRC) 6015(f), is whether or not the requesting spouse will suffer economic hardship. Rev. Proc. 2003-61, 2003-2 C.B. 296. Economic hardship occurs where the innocent spouse would not be able to pay reasonable basic living expenses if the tax had to be paid.

While this rule is well established, in Williams v. Commissioner, T.C. Summ. Op. 2009-19, the Tax Court made a strong taxpayer friendly statement as to how the term economic hardship is to be interpreted. Mrs. Williams had received nearly $500,000 in her divorce settlement. Nevertheless, the Tax Court found that she would suffer economic hardship if the $25,000 tax payment were made. The Tax Court made its determination because the $500,000 was paid to Mrs. Williams’ parents to reimburse them for the amounts that they had lent to her to pay the legal fees incurred in the divorce. It was the IRS position that this money should have been used to pay the taxes, and therefore Mrs. Williams was not an innocent spouse . The Tax Court held that “Taxpayers are not required to choose among which debt to pay for determining economic hardship….”

This is a very important principle, and one which the IRS almost universally overlooks. This statement from the Tax Court could be useful in future cases; however, its value is limited because Williams is a “summary opinion,” and therefore is not legal precedent.

If you believe you may be an innocent spouse or have other IRS tax problems or Franchise Tax Board problems, contact the tax controversy lawyers at Brager Tax Law Group, A P.C.

Foreign Bank Account Report Tax Penalty Chart

April 5, 2009,

Over the last few days I have blogged about the IRS "tax amnesty," or settlement initiative, for owners of offshore bank accounts who make a voluntary disclosure to the IRS concerning the existence of those offshore bank accounts. It is because the potential tax penalties are so severe that the IRS settlement initiative may be attractive.

The following chart is from the IRS website and sets forth the civil tax penalties and the criminal tax penalties that may be asserted for not complying with the FBAR reporting and record keeping requirements. The citations are to the Bank Secrecy Act, and the code of Federal Regulations; not the Internal Revenue code.

Violation Civil Penalties Criminal Penalties Citation
Negligent Violation Up to $500 N/A 31 U.S.C. § 5321(a)(6)(A) 31 C.F.R. 103.57(h)
Non-Willful Violation Up to $10,000 for each negligent violation N/A 31 U.S.C. § 5321(a)(5)(B)
Pattern of Negligent Activity In addition to penalty under § 5321(a)(6)(A) with respect to any such violation, not more than $50,000 N/A 31 U.S.C.§ 5321(a)(6)(B)
Willful - Failure to File FBAR or retain records of account Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation up to $250,000 or 5 years, or both 31 U.S.C. § 5321(a)(5)(C) 31 U.S.C. § 5322(a) and 31 C.F.R. § 103.59(b) for criminal. The penalty applies to all U.S. persons.
Willful - Failure to File FBAR or retain records of account while violating certain other laws Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation up to $500,000 or 10 years, or both 31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal.
Knowingly and Willfully Filing False FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation up to $10,000 or 5 years, or both 18 U.S.C. §1001, and 31 C.F.R. § 103.59(d) for criminal.
Civil Tax Penalties and Criminal Tax Penalties may be imposed together. 31 U.S.C. §5321(d).

The chart does not include the civil tax fraud penalty under the Internal Revenue Code which is 75% of the understatement of tax, or the accuracy related penalty of 20% of the understatement of tax.

If you have a Swiss bank account or an offshore bank account in another country, you may wish to contact the tax litigation attorneys at Brager Tax Law Group to see whether a voluntary disclosure makes sense for your situation.

IRS Files First UBS Tax Fraud Charges in Offshore Bank Account Case

April 3, 2009,

On April Fool’s Day, with no apparent sense of irony, the Internal Revenue Service (IRS) filed a criminal tax complaint against Steven Michael Rubinstein, an accountant, but apparently not a Certified Public Accountant (CPA), charging him with one count of filing a false tax return pursuant to Internal Revenue Code Section 7206(1). According to the criminal complaint, Rubinstein failed to disclose that he had an interest in, or signatory authority over UBS Swiss bank accounts. Apparently this is the first criminal tax fraud case the IRS has filed involving a UBS Swiss bank account holder.

As readers of this blog know, holders of offshore bank accounts with a balance of over $10,000 are required to disclose the existence of the account on Form 1040, Schedule B. In addition, owners of such accounts must file a Form 90.22-1 (aka an FBAR) separate from the tax return. Failure to file an FBAR is a separate crime. Rubinstein’s name was turned over to the IRS by UBS pursuant to the deferred prosecution agreement that it entered into with the IRS. Although only the 2007 tax year was charged, according to the criminal complaint, Rubinstein had a Swiss bank account at least since 2001. The complaint does not indicate whether or not Rubinstein failed to declare income, other than the income generated by the Swiss Bank account itself. However, at some point there was at least $3 million in the offshore bank accounts, and perhaps more.

The filing of the tax fraud charges illustrates the potential dangers of waiting too long to file a voluntary disclosure with the IRS. According to an article in the New York Times by LYNNLEY BROWNING there are 100 open tax fraud investigations in the UBS matter.

If you have tax problems including an offshore bank account call the tax lawyers at Brager Tax Law Group, A P.C.