April 2011 Archives

IRS Targets Offshore Account Holders at HSBC India

April 9, 2011,

The IRS has filed a "John Doe" summons on HSBC demanding the names of foreign bank account holders who may have committed tax fraud, or failed to file foreign bank account reports TDF 90-22. 1 (FBAR). The federal district court has granted the IRS request. Specifically the IRS is demanding the names of all U.S. taxpayers who at any time from 2002 through 2010 held signatory authority over, or an interest in accounts maintained at HSBC in India. The IRS alleges that there were over 7,500 of HSBC in India who failed to file an FBAR with the IRS, and who also failed to report their income from these accounts.


The John Doe summons is similar to the one filed on Swiss banking giant UBS, AG in 2008 which ultimately resulted in the turnover of the names of about 4,550 Swiss bank account owners, and which continues to provide the IRS with a continuing stream of criminal tax fraud prosecutions.

Our tax lawyers don't expect that the IRS will have much difficulty getting its summons enforced. Indeed HSBC has already been quoted to the effect that "while we haven't seen the summons, HSBC does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes by U.S. taxpayers."

As previously discussed here, the willful failure to file an FBAR is a criminal tax offense, and also subjects the owner of the offshore account to civil penalties which can exceed 6 times the balance in the foreign bank account.

The IRS is currently conduction a partial tax amnesty known as the Offshore Voluntary Compliance Initiative (OVDI) which can insulate against tax evasion and criminal FBAR charges as well as lowering the civil penalties.

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California Franchise Tax Board (FTB) Has New Offshore Voluntary Compliance Initiative (VCIT) Part 1 of 2

April 8, 2011,

Last month I was quoted in a Tax Analysts article by Amy Hamilton on the lack of a California offshore voluntary disclosure program. The FTB responded that there was something in the works. As if owners of offshore bank accounts didn't have enough in the way of tax problems, on March 25th Governor Brown signed into the law the FTB's Compliance Initiative Two ("VCIT"). You have to love all the alphabet soup in the FBAR program. First the IRS had the Offshore Voluntary Disclosure Program (OVDP), and in February it announced their latest tax amnesty the Offshore Voluntary Disclosure Initiative (OVDI).

The VCIT applies to "offshore financial arrangements," which are defined to mean "any transaction involving financial arrangements that in any manner rely on the use of offshore payment cards, including credit, debit or charge cards, issued by banks in foreign jurisdictions or offshore financial arrangements, including arrangements with foreign banks, financial institutions, corporations, partnerships, trusts or other entities to avoid or evade income or franchise tax." [R&T section 19764(a)(1)(B).]

The VCIT runs from Aug. 1, 2011 until Oct. 31, 2011. It features limited penalty relief, and will be of interest to offshore bank account owners who participated in one of the two federal voluntary disclosure programs. In order to participate in the VCIT a taxpayer must make an election to participate under R & T section 19762 and (i) files an amended tax return for each year he failed to include income from the offshore financial arrangement and (ii) pays in full all taxes and interest due. No deduction is allowed for transaction or other costs associated with the offshore financial arrangement. [R&T section 19764(a).]

More on the FTB VCIT later this week.

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75 Percent Civil Tax Fraud Penalty Imposed on Dentist On Top of Criminal Tax Evasion Sentence

April 5, 2011,

The United States Tax Court has upheld the civil tax fraud penalties against a dentist previously convicted of criminal tax evasion. In December 2005, David W. Goldston was sentenced to 48 months in prison and three years' supervised release. He was also ordered to cooperate with the IRS in determining outstanding taxes, interests and penalties. He didn't, and ultimately his case wound up in Tax Court where his tax problems continued. In Tax Court, Goldston represented himself rather than hiring a tax attorney when he contested the civil tax fraud penalties levied by the Internal Revenue Service, which were ultimately upheld by the Tax Court.


The Tax Court found Goldston owed tax in excess of one million dollars before penalties; after taking into account the tax fraud, and other civil penalties, plus interest, the total due will be in excess of $2 million. The Tax Court accepted the IRS arguments that Goldston concealed income by placing funds and property in the names of nominees and trusts, and by using cashier's checks, money orders and cash to conduct transactions. The Tax Court listed a number of so-called badges of tax fraud, including pattern of failure to file returns, failure to report substantial amounts of income, concealing assets dealing in cash, failing to maintain records, giving implausible or inconsistent explanations of behavior, and failure to cooperate
with taxing authorities in determining petitioner's correct liability.

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