December 2011 Archives

More Swiss Banks to Turn Over Offshore Bank Account Information to IRS?

December 23, 2011,

According to press reports Credit Suisse, Basler Kantonalbank, Julius Baer, HSBC Switzerland and seven other Swiss banks are poised to turnover data related to U.S. persons suspected of tax evasion or Foreign Bank Account Reporting (FBAR) violations. The story was published on December 18th in SonntagsZeitung, a Swiss newspaper. Supposedly the banks had until Dec. 20th to accept the offer, and that three of the banks have been given until Dec. 31st to turn over the information. Those Swiss banks who accept the deal would be assured immunity from criminal prosecution, and would pay a fine. According to "one insider" the banks are unlikely to turn down the deal.

Since there has been no confirmation from either the Swiss banks or the IRS it is unclear whether the story is true. The deadlines don't seem realistic, however. In the view of our tax attorneys it would be unlikely that the Swiss banks could comply with turning over documents that quickly, and there would have to be notification of the clients, and an opportunity to appeal if past experience with the UBS settlement is any guide.Thumbnail image for hourglass.jpg

Still it is a reminder that in all likelihood that at least the larger Swiss banks will be turning over the names of their U.S. account holders to the IRS sometime in the not too distant future. Those U.S. persons who still have undisclosed Swiss bank accounts, or for that matter any offshore financial accounts would do well to consider whether to make a voluntary disclosure before the choice is made for them.

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Felony Criminal Tax Charges Filed Against New York CPA for Non-Payment of Trust Fund Taxes

December 21, 2011,

The IRS has filed felony criminal tax charges pursuant to Internal Revenue Code Section 7202 for willful failure to collect, truthfully account for and pay over trust fund taxes. This is yet another in a series of criminal tax charges being brought against responsible officers who haven't paid over corporate trust fund taxes. In most situations the IRS proceeds against responsible officers who willfully fail to pay corporate trust fund taxes, by assessing the tax directly against the individual under Internal Revenue Code Section 6672. This is generally referred to as the trust fund recovery penalty. Sometimes the IRS goes further and brings criminal tax charges. paper_work.jpg

In this case the defendant is a New York CPA who, according to the information filed in U.S. District Court, failed to pay payroll taxes to the IRS for three years running. Our tax lawyers found this case interesting because the amount of unpaid trust fund taxes was not terribly large. The total the IRS alleged as unpaid was approximately $108,000, fairly small potatoes, as payroll tax cases tend to go.

I thought it was important to blog about this case because clients sometimes assume that the relatively small size of their tax problem will insulate them against criminal tax liability. While that is generally accurate, as this case illustrates, not always.

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Felony Criminal Tax Prosecution Goes Forward

December 20, 2011,

United States v. Quinn (D. KS 2011) is one of several recent felony tax prosecutions, not for tax evasion, but for violation of Internal Revenue Code Section 7202. IRC Section 7202 makes it a felony to willfully fail to collect, account for, or pay over any tax due. In this case Ms. Quinn failed to pay payroll taxes for 7 quarters between 2003 and 2005. She finally got around to paying them in 2010, apparently after the IRS had filed criminal tax charges against her. Ms. Quinn challenged the finding that she failed to pay employment and individual tax and argued that since she had subsequently paid the tax due the charges should be dismissed.old_ball_and_chain.jpg

The court wrote in its opinion that a person has failed to pay taxes if they have not paid the amount due as of the due date, regardless of whether the taxpayer has subsequently paid. In Ms. Quinn's case, she had recently paid the amounts due but this was not sufficient for the court to find her not guilty.

This does not mean that late payment of taxes will never prevent a criminal tax prosecution, and those who have not paid their taxes should seriously consider taking care of a tax problem before it turns into a criminal tax problem. Had Ms. Quinn gotten around to making full payment, or indeed even made good faith installment payments much earlier there is a chance that the case would never have gotten as far as it did.

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IRS Fact Sheet 2011-13 (FS -2011-13) Much Less FBAR Relief Than Reported

December 14, 2011,

IRS Fact Sheet 2011-13 (FS -2011-13) has been heavily touted (mostly in the Canadian Press) as providing FBAR (Foreign Bank Account Report) relief for dual U.S. citizens abroad. However, in the view of our tax attorneys it simply reiterates existing law. As readers of the Tax Problem Attorney Blog are aware, U.S. persons with offshore bank accounts with a balance of greater than $10,000 are required to file a Foreign Bank Account Report (aka FBAR) with the Internal Revenue Service annually. Penalties for failure to file the FBAR can be draconian. In addition U.S. citizens living in foreign countries are required to file U.S. tax returns reporting their worldwide income. Penalties for failure to file a tax return may also be imposed.

FS-2011-13 states that no penalties will be imposed for failure to file a tax return or failure to pay tax if no tax is owed. Well big deal! If you don't owe taxes then there is no failure to pay penalty. Since both the failure to pay tax penalty, and the failure to file penalty are based upon a percentage of the taxes owed this is not a concession by the IRS. FS-2011-13 does not state that if no taxes are owed no FBAR penalty will be applied!

Instead FS-2011-13 points out that if "reasonable cause" is determined to exist by the IRS then there will be no penalty. Again this is no change from the IRS' current position. The devil is of course is in the details. The IRS lists various factors that might go into to the determination. Here we quote:

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer's background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.


Let's break this down a bit. In virtually all cases the tax preparer was not informed of the existence of the offshore bank account. As to a small tax deficiency, in the context of the Offshore Voluntary Disclosure Program (OVDP), the IRS routinely took the position that even a zero tax deficiency did not mean it would impose no penalty. If the IRS is changing its tune that is good news, but what does it mean for those persons who signed binding closing agreements with the IRS because they were threatened with penalties in excess of the balance in the account?

Example 4 is interesting. Here it is:

Taxpayer is a United States citizen who lives and works in Country B as a computer programmer. Taxpayer has checking and savings accounts with a bank that is located in the city where he lives. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. Taxpayer complied with Country B's tax laws and properly reported all his income on Country B tax returns. Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR. Taxpayer also filed federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Taxpayer's explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

First this Taxpayer has no tax liability. This will not generally be the case unless the foreign jurisdiction tax rates are higher than the U.S., or the Taxpayer has no income for which the foreign earned income exclusion is not available. Also this Taxpayer had a relatively small account balance. What about the more successful taxpayer who had $200,000 or $1,000,000 in his account? This Taxpayer had his accounts in the "same city" as the city where he lived. What about the UK citizen who has an account in the Isle of Mann to legally avoid income tax in the UK? Will she fare as well, or will that be seen by the IRS as an indication of intent to conceal the existence of the account? What about the occupation of computer programmer? What if the Taxpayer were an attorney, but not a tax attorney? Will that person be assumed to have an education and background so that he "should have known" about the FBAR filing requirements?

Only time will tell, but the point is that news reports stating that the IRS is providing FBAR relief for dual citizens is premature.

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