Tax Problem Attorney Blog

Last year the IRS announced an alternative to its Offshore Voluntary Compliance Program (OVDP) which was being made available to a limited group of non-resident individuals who failed to file Foreign Bank Account Reports (FBARs) on Form TDF 90-22.1. Our tax lawyers blogged about the Streamlined Program previously, taking a look at some of the pros and cons. Now the IRS has issued six Frequently Asked Questions about the Streamlined Compliance Program.

The most important FAQ is the first one. It makes clear that taxpayers who have a tax liability greater than $1,500 may apply to the Streamlined Program. It cautions that if a taxpayer exceeds the $1,500 threshold he or she may be classified as higher risk, and under FAQ No. 2 may be subject to higher penalties. It appears that the Streamlined Program may be a good bet for those individuals whose liability exceeds the threshold by a relatively small amount, perhaps $1,000 or $2,000, or even as much as $3,500. In the judgment of our tax attorneys going over that amount could be problematic, although as with tax problems in general and FBAR problems in particular, there is no substitute for a review of all of the facts. Simply put, a case by case determination is necessary before making the decision.

FAQ No. 3 provides that an individual who is already in the 2011 Offshore Voluntary Disclosure initiative (OVDI) or the earlier or later OVDP, who qualifies under the
Streamlined Procedure may move over from those programs into the Streamlined Procedure. Like everything else about the IRS' OVDP it is not possible to do so without risk. Specifically, the FAQs require one to opt-out of the OVDP by way of an irrevocable election. Only then will the examiner determine whether the taxpayer meets all of the qualifications of the Streamlined Procedure. So it is possible, especially in cases where the taxpayer is over the $1,500 per year threshold , to opt out, and wind up in a situation with the IRS asserting either a non-willful FBAR penalty, or even a willful FBAR penalty.

This is just another example of the IRS making FBAR compliance more difficult than necessary. There is no good reason why the IRS could simply combine the OVDP and the Streamlined Procedure into one coordinated system. A taxpayer wishing to come clean, and who believes she qualifies, could apply under the Streamlined Procedure, and then if the IRS disagreed that person would automatically be phased into the standard OVDP.

The reverse should also be the case. If a taxpayer is already in OVDP she should be able to get a determination as to whether she qualifies under the Streamlined Procedure without having to opt out, and possibly incur disastrous consequences.

As in all FBAR cases involving substantial dollars a knowledgeable tax lawyer should be consulted before anything is done.

Continue reading "Streamlined Foreign Bank Account Report (FBAR) Filing Compliance Procedure FAQs Issued by IRS for Non-Resident Taxpayers " »

The Fifth Circuit Court of Appeals ruled that offshore bank account records sought in a criminal tax investigation (related to a suspected failure to file Foreign Bank Account Report, TDF 90-22.1, i.e. FBAR) must be turned over to the IRS despite the fact that turning over those records would have incriminated the witness. The grand jury subpoena issued to the witness required him to produce any records required to be maintained pursuant to the Bank Secrecy Act including records reflecting the names on the offshore bank accounts, and the maximum value of the account. The witness was an individual in Texas who was the target of a grand jury investigation seeking evidence he had used secret Swiss Bank accounts to engage in tax evasion. The IRS already knew based upon records it received from UBS that the witness held offshore bank accounts.

To lay people, and even to most tax attorneys this was a startling result. Actually it would have been more startling, but for the fact that the Fifth Circuit Court of Appeals was the third Circuit Court of Appeals to hold that the Bank Secrecy Act which requires the filing of FBARs trumps the 5th Amendment of the U.S. Constitution. The Fifth Circuit, thus joined the 9th Circuit and the 7th Circuit which issued similar rulings in the last year.

The rulings rely on the "Required Records Doctrine." This is a rather arcane concept which I suspect even some criminal tax attorneys were not familiar with. To vastly oversimplify, the argument goes like this. The 5th Amendment only prohibits compelled testimony; therefore compelling someone to produce records that are voluntarily kept does not violate the 5th Amendment. The witness argued that the mere act of turning over the records was tantamount to compelled "testimony" since by turning over the records the witness was "testifying" as their existence, and also admitting that he knew about the foreign accounts. In addition, maintaining the documents in question are not voluntary since the Bank Secrecy Act "compels" one to keep certain records. Indeed it is a crime not to keep the records.

The Supreme Court has said however that the privilege against self-incrimination does not bar the government from imposing record-keeping and inspection requirements as part of a valid regulatory scheme. The doctrine first arose in the context of a wholesaler of fruit who was required to turn over certain records he was obligated to keep pursuant the Emergency Price Control Act. The Supreme Court explained in a later case that there are three prongs of the Required Records Doctrine. The records must be:

1. Essentially regulatory


2. Customarily kept; and


3. Have public aspects.

The witness argued that the true purpose of the Bank Secrecy Act was to combat criminal activity, and not simply to regulate the use of foreign bank accounts. That argument was rejected. The 5th Circuit also held that the records were of a type "customarily kept," and that they had acquired public aspects by virtue of the fact that the Treasury Department shares information it collects with other agencies. In the words of the Fifth Circuit: "That this data sharing is designed to serve an important public purpose sufficient to imbue otherwise private foreign bank account records with public aspects is not difficult to imagine."

What is difficult to imagine is why the Courts are willing to throw away an important Constitutional safeguard for the sake of catching of few criminal tax cheats.

Continue reading "Foreign Bank Accounts and the Failure to File Foreign Bank Account Reports (FBARS) May Be the Death Knell of the 5th Amendment " »

Relief from penalties for failure to file Foreign Bank Account Reports (FBAR), TD F 90-22.1 for non-resident U.S. persons with offshore bank accounts was first announced by the IRS on June 26, 2012 with further guidance promised before the procedure's September 1st effective date. On Friday Aug. 31, 2012 with minutes to spare, the IRS announced the new "Streamlined" Filing Compliance Procedures for Non-Resident, Non-Filer U.S. persons. Those who qualify will only have to file tax returns for three years (rather than eight under the Offshore Voluntary Disclosure Program (OVDP)), and no FBAR penalties, or other penalties will be imposed. They will have to fill out a questionnaire, and answer such loaded questions as "Did you know you had a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, filing requirement when you failed to file an FBAR?" and "If you used a tax professional, did you disclose the existence of the accounts/entities you hold outside your country of residence to your tax professional?"

Who Is Eligible?
To qualify the taxpayer:

• Must have lived outside the United States since Jan. 1, 2009;


• Cannot have filed a U.S. tax return during the same period; and


• Must present a "low level compliance risk.

How is Compliance Risk Determined?
The tax due for 2009, 2010, and 2011 must be less than $1,500 in each year. However, even if the tax due meets this low level if any of the following factors are present then the compliance risk rises, and the taxpayer may not be eligible to participate. The factors are:

• If any of the returns submitted through this program claim a refund;


• If there is material economic activity in the United States;


• If the taxpayer has not declared all of his/her income in his/her country of residence;


• If the taxpayer is under audit or investigation by the IRS;


• If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;


• If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;


• If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;


• If there is U.S. source income; or


• If there are indications of "sophisticated tax planning or avoidance."

Taxpayers who meet all of these requirements will be few and far between. For example, consider a U.S. citizen who has emigrated to Israel. Generally new Israeli residents are granted a 10 year exemption from taxes for any income including interest or dividends generated outside of Israel. It would therefore not be surprising if such an individual invested outside of Israel. Yet that person would be excluded from the new IRS streamlined program since they have accounts outside their country of residence.

The requirement that excludes someone from participation if they are claiming a refund seems punitive. Why should someone have to forego a legitimate refund just to be free of FBAR penalties?

Why should persons with offshore bank accounts who filed tax returns be treated worse than those who didn't file any tax returns at all? For that matter why should someone with U.S. source income (perhaps social security or pension income) not be able to obtain relief?

Note that a person who became aware of the FBAR requirements for offshore bank account owners, and filed a timely and accurate return for 2010 or 2011 may be barred from participating in the program based upon the literal requirements.

Do You Need A Reason Not to Participate in the Streamlined Compliance Procedure?

According to the IRS:

• The new procedure provides no protection from the risk of criminal prosecution


• Once a submission is made if the IRS determines that the Streamlined Compliance Procedure is not appropriate, the taxpayer may not participate in the Offshore Voluntary Disclosure Program (OVDP)

For these reasons the Streamlined Compliance Procedure is extremely risky for taxpayers who meet the guidelines for the 2009 through 2011 period, but have substantial offshore compliance issues in prior years.

Once again tax attorneys will be working full time to guide their clients through another thicket of IRS rules which seem only to reinforce the notion that the IRS is not serious about providing FBAR relief to those taxpayers who legitimately lost their way.

Continue reading "IRS Foreign Bank Account Report (FBAR), TD F 90-22.1 FBAR Relief for Non-Residents With Offshore Bank Accounts--Too Little Too Late " »

When American billionaire Igor Olenicoff opened his offshore bank account with Swiss bank UBS, AG he was allegedly told he did not have to file Form TD F 90-22.1, or Foreign Bank and Financial Accounts Report, more commonly known as an FBAR, or pay taxes on the $180 million he held at the institution. In December 2007 Mr. Olenicoff pled guilty to willfully and knowingly filing a false tax return, yet sued the bank for $2.7 billion in damages less than a year later blaming it for his troubles. The case was dismissed last April because of his plea agreement, in which he took responsibility for his tax fraud in exchange for a reduced sentence.

Currently, UBS is suing Mr. Olenicoff for malicious prosecution. The bank argues that he was attempting to shift blame for not paying taxes on the money in his foreign bank account even though the billionaire swore in his criminal tax case that he willfully deceived the Internal Revenue Service. Mr. Olenicoff maintained in his suit against UBS that the bank misled him, and in doing so let him down the road to where he was forced to plead guilty to the criminal tax charges against him. Olenicoff also claimed that UBS mismanaged his offshore account assets. The financial institution is suing for special damages, including attorney's fees and harm to the bank's reputation, of more than $3 million, as well as other damages in an unspecified amount. Given UBS' own settlement with the IRS for $780 million, its suit against Olenicoff is an interesting spectacle, but as a practical matter may not have much to do with the "average" foreign bank account holder.

Some people, who have failed to file FBARs reporting their foreign bank accounts did so as part of a plan to commit tax evasion by concealing their offshore bank account holdings. Others failed to file FBARs out of ignorance about the legal requirements. If you have a foreign bank account and are not currently in compliance you may be eligible for a reduced penalty under the Offshore Voluntary Disclosure Initiative (OVDI). OVDI offers participants the opportunity to gain tax compliance. Most taxpayers with an undisclosed offshore bank account who are currently not undergoing investigation can take participate.

Continue reading "Criminal Tax Case Involving Offshore Bank Accounts Leads to Lawsuit Against U.S. Billionaire " »

Former Swiss banker Bradley Birkenfeld has been released from prison where he had served 30 months of his 40-month sentence for his work at UBS, AG helping clients hide their offshore bank accounts. Mr. Birkenfeld exposed the Swiss bank as a facilitator for U.S. taxpayers who wished to commit tax fraud, and hide their income from the IRS in part by failing to file Form TD F 90-22.1, the Foreign Bank and Financial Accounts Report, commonly called the FBAR. Birkenfeld was linked to billionaire developer Igor Olenicoff who pled guilty to felony tax charges.

Mr. Birkenfeld was arrested and charged with conspiracy to defraud the U.S. Government in 2008. Some tax attorneys believe that Birkenfeld got a raw deal at sentencing given his high level of cooperation with the IRS. Mr. Birkenfeld told the Department of Justice and Senate investigators about the illegal practices that the Swiss bank encouraged. For example, he claimed that UBS instructed him to solicit the business of affluent Americans by telling them about the tax advantages of having an offshore bank account. He began working for the bank in 2001.

UBS paid a $780 million fine in 2009. The bank agreed to release the names of more than 4,000 U.S. account holders. Since then, the Internal Revenue Service has offered limited amnesty to offshore bank account holders through its Offshore Voluntary Disclosure Program. Its 2012 incarnation, the Offshore Voluntary Disclosure Initiative, gives any taxpayer who failed to file an FBAR the chance to regain tax compliance. The program has raised over $5 billion in additional taxes so far.

In 2009, Mr. Birkenfeld filed a claim under a law awarding whistleblowers up to 30 percent of revenues recovered because of their efforts. According to his lawyer, Mr. Birkenfeld has a claim for the taxes paid by UBS as part of its $780 million settlement.

Continue reading "Offshore Bank Account Whistleblower Released from Prison " »

Willful failure to file a Form TD F 90-22.1, or Foreign Bank and Financial Accounts Report, more commonly known as an FBAR is a criminal violation of the Bank Secrecy Act. Luis A. Quintero, a former UBS Client, found that out first hand when he was sentenced recently to four months imprisonment.

In 2004, Quintero formed two corporations, each with an offshore bank account opened at UBS AG of Switzerland. By the end of 2006, the total aggregate balance in the two accounts was over $4 million. He then transferred approximately $2.4 million from the accounts to the accounts of U.S. corporations he controlled. Although Quintero knew he had to file an FBAR and had previously filed the Form TD F 90-22.1 relating to bank accounts in Mexico in the name of one of his U.S. companies, he decided against filing it.

As part of an agreement and in order to avoid prosecution for helping taxpayers commit tax fraud, UBS provided the American government with the identities of certain U.S. customers. It is not clear from the Department of Justice press release whether Quintero was one of the UBS customers whose names was turned over to the IRS.

The IRS requires a U.S. citizen with an offshore bank account containing an aggregate value of more than $ 10,000 to file the FBAR. Those who have not filed the Form TD F 90-22.1 in the past, but wish to do so to comply with tax laws may be eligible to participate in the Offshore Voluntary Disclosure Program (OVDP). By voluntarily disclosing Swiss or other foreign bank accounts, participants may be subject to lower penalties rather than all possible penalties were imposed after a tax audit by the IRS. On the other hand depending upon the situation many taxpayers may wish to take the risk of an IRS audit because the penalties could, with proper representation by a tax attorney, turn out to be lower than under OVDI.

In addition to the four months in prison, the court sentenced Quintero to three years of probation with 250 hours of community service and a $20,000 criminal fine. Quintero also paid $2 million in civil penalties for failing to file the FBAR. The penalty appears to be equal to 50% of the balance in his offshore accounts.

Continue reading "Former UBS Client Charged with Failure to File FBAR " »

Denise Rich, former wife of commodities trader Marc Rich who was indicted in the 1983 on charges of tax fraud, gave up her U.S. citizenship, avoiding potential future tax problems. The 68 year-old woman is a Grammy-nominated songwriter whose songs have been recorded by Aretha Franklin, Mary J. Blige and Jessica Simpson. Rich (under her maiden name, Eisenberg) appeared on the Federal Register in the April quarterly edition of people who renounce their citizenship. By giving up her U.S. passport, she will likely save millions of dollars in taxes. She will also not have to go through the expense and aggravation of filing foreign bank account reports (FBARs) with the IRS.

The songwriter joins the growing number of individuals renouncing their U.S. citizenship in order to avoid taxes. According to government figures, nearly 1,800 citizens and permanent residents expatriated last year, a record since the data was first collected in 1998.

Rich has Austrian citizenship through her father. Although both Austria and the United States tax individuals on their worldwide income, Austria provides tax breaks for citizens who spend six months or more abroad per year.

Controversy recently surrounded Rich's offshore bank account in the Cook Islands. Lee Goldberg, the former protector of the trust, alleged that Rich and Richard Kilstock, her son-in-law, moved or transferred trust assets without his permission, violating the terms of the trust. The case, filed in February, was dismissed in April.

U.S. citizens must pay taxes on their worldwide income. An intentional failure to do so could lead to criminal tax charges of tax evasion. Although Rich will no longer have to pay U.S. taxes, she is subject to an expatriation or "exit" tax. The "exit tax" calculation is based on the fair market value of an individual's worldwide property holdings the day before that person leaves the United States. However, these taxes can sometimes be reduced or avoided through careful planning.

If you or someone you know is considering expatriation, you should speak with an experienced tax attorney to reduce the exit tax. Advanced planning is necessary. It may be helpful to get a professional appraisal done before calculating the difference between your basis (what you initially paid) and what your holdings are worth now.

Continue reading "Denise Rich, Ex-wife of Marc Rich, Expatriates " »

Some FBAR (Foreign Bank Account Report) relief was announced on June 26th for offshore account holders who currently live outside of the U.S. The program will not take effect until September 1st, and the details have not yet been finalized. Taxpayers who qualify will file delinquent returns for the past three years, and FBARs for six years. Payment of any tax due, plus interest must be submitted at the same time.

Our tax attorneys see a big problem in this program because the IRS has stated that filing under this program provides no protection from possible criminal tax prosecution! All submissions will be reviewed by the IRS, but the degree of review will depend upon "level of compliance risk" as determined by the IRS. Those who are deemed to present low compliance risk will not have FBAR, tax fraud or other penalties asserted against them. However, those that are deemed to have a higher compliance risk will be subject to more thorough review, and possibly a full audit extended beyond the three year of tax returns that are filed. Of course with that tax audit may come full blown FBAR penalties, and no resort to the 27.5% ceiling available for 2012 Offshore Voluntary Disclosure Program(OVDP) filers. As regular readers of our tax problem attorney blog know maximum penalties can include willfulness penalties of up to 50% of the account balance, and civil fraud penalties of 75% of any tax due.

Compliance risk will be determined assessed based upon information provided on the returns filed, and "certain additional information" that will be required as part of the submission. According to the IRS website if there are no "high risk factors" and there is less than $1,500 in tax due in each of the three years then the taxpayer will be treated as low risk, and qualify for the non-assertion of penalties. Risk level will according to the IRS rise with the taxpayers ' income and assets, indications of "sophisticated tax planning" or tax avoidance, or if there is "material economic activity" in the U.S.

Interestingly the procedure appears to apply only to persons who did not file a tax return. Thus a person who at least filed a U.S. tax return, but failed to file FBARs, and who also did not report all offshore income would not be able to take advantage of this program.

There is no indication that the program will be retroactive. Therefore taxpayers who entered an earlier disclosure program and paid penalties of up to 25% on their offshore accounts are not entitled to a refund even though they would have qualified under the new program.

It may be that the IRS cures some of the apparent flaws before the program goes live. In any event, it means that a sophisticated analysis will need to be done to determine if one should wait until September 1, 2012 to enter the new program, or enter the 2012 Offshore Voluntary Disclosure Program immediately, or take some other action such as filing a quiet voluntary disclosure. What is increasingly clear is that no action is not an option.

Continue reading "IRS Provides Half-Baked Foreign Bank Account Report (FBAR) Relief for Some Offshore Account Holders Who Live Overseas " »

FBARs (Foreign Bank and Financial Accounts Report Form TD F 90-22.1) are due June 30th. If you or your clients have $10,000 or more in offshore financial accounts and are U.S. citizens, residents and/or U.S. based entities, use this form to report a financial interest in or signatory authority over foreign accounts. In recent years, the IRS has increased enforcement of this required disclosure, and penalties for failure to file the FBAR include hefty fines and in some cases jail time.

To ensure compliance, it is critical you complete the TDF 90-22.1 as soon as possible since, unlike other IRS documents, the FBAR form must be received (not just postmarked) by the Saturday, June 30th deadline. Normally under the tax law if documents are due on a weekend the due date rolls over until the following business day; however, those rules don't apply to FBARs so it appears that it will be necessary to mail the FBAR via overnight delivery service on the 28th so it arrives by the 29th. That being said the IRS FBAR hotline has informally advised our tax attorneys that FBARs postmarked by the 29th will be considered as timely. Failure to file on time could mean large penalties, and no extensions can be requested.

Some individuals with foreign bank accounts might have skipped filing FBAR forms in the past. If that includes you or your clients, you may wish to consider the Offshore Voluntary Disclosure Initiative (OVDI), which was created to gain compliance from taxpayers, who wish to comply with tax laws regarding their offshore accounts. The IRS declared its offshore voluntary program a big success in 2009 and 2011. In 2009 alone, the IRS collected $3.4 billion.Those who willfully fail to file an FBAR are subject to penalties as high as 50 percent of the total balance of the account. Each year of non-compliance results in a separate violation and penalty, i.e. multiple 50% penalties are possible. Under that scenario penalties can actually equal 300% of the offshore account balances.

Through OVDI, some taxpayers may be eligible for penalties as low as five percent, although most will be stuck with a 27.5% penalty. In order to participate in the program, taxpayers must file all original and amended returns (including payment of back taxes and interest) for up to eight tax years. For more details see our article here.

If someone wants to obtain the benefits of the Offshore Voluntary Disclosure Initiative, he or she cannot simply make a "quiet disclosure," meaning they cannot simply file the FBAR and amend other tax returns. Those individuals who make "quiet disclosures" risk being investigated, and subject to large civil FBAR penalties, but may be protected from criminal tax exposure.

However, every case is different, and only a complete investigation of all the facts by a qualified tax lawyer can help a taxpayer make the right choice.

Continue reading "2011 FBAR Filing Date Reminder " »

Lichtenstein tax authorities have notified Liechtensteinische Landesbank AG (LLB)'s U.S. clients with offshore accounts of at least $500,000 that their information is subject to being turned over to the IRS according to a report in Bloomberg.com. Apparently the IRS has made a so-called group request to LLB for these accounts to obtain the names of individuals it suspects of tax evasion, and FBAR (Foreign Bank Account Report) related crimes.

According to a spokesman for LLB quoted in the article, changes in Lichtenstein law allow the IRS to make group requests without providing the names of the specific individuals that the IRS is seeking. The spokesman also stated that in the Liechtenstein group request, U.S. authorities are also targeting lawyers, accountants, financial advisers, asset managers and those responsible for professional asset protection, who "conspired "with U.S. taxpayers to commit tax evasion, or other crimes. Apparently the IRS may be seeking information all the way back to 2001.

LLB is Lichtenstein's second largest bank. Tax problems for offshore bank account holders in Lichtenstein date back to 2008 when information stolen from LGT Group was used by German authorities to prosecute tax fraud. The fallout extended to U.S. depositors at LGT who were investigated by the IRS. Since then the IRS has promoted several voluntary disclosure initiatives to attempt to convince U.S. persons who failed to file FBARs to settle up with the IRS. To date those programs have resulted in over 30,000 individuals making voluntary disclosures of the offshore bank accounts to the IRS. These programs have been accused by some tax lawyers as being too much stick, and not enough carrot.

U.S. owners of these offshore accounts have difficult choices to make in a short period of time. Should they enter the IRS' Offshore Voluntary Disclosure Program (OVDP), before it's not too late? Should they appeal the turnover of information by LLB through the Lichtenstein court system? Perhaps they should wait and do nothing?

Each of these solutions has its own set of risks and rewards. Entering the OVDP will be expensive. Penalties of 27.5% of the offshore account balances can be expected. In addition, other non-financial assets may also be subject to the 27.5% penalty. In addition, back taxes must be paid, generally going back to 2004. On top of that expect additional penalties, and interest.

On the other hand not entering the OVDP can lead to FBAR penalties equaling 300% of the foreign bank account balances, as well as possible criminal tax evasion charges. The bottom line is that everyone's situation is different, and only consultation with a tax lawyer experienced in these offshore issues will begin to help in coming to the right personal decision.

Continue reading "Offshore Bank Account Owners at Liechtensteinische Landesbank AG (LLB) May be In Trouble " »

The failure to file a Foreign Bank Account Report TD F 90-22.1 (FBAR) for an offshore bank account has led to the seizure of an Alaska plastic surgeon's $4.6 million dollar account at a Seattle branch of Bank of America. According to the complaint filed in District Court Alaska plastic surgeon Michael Brandner was involved in a contested divorce proceeding with his wife, and decided to hide around $4.6 million from her by depositing the funds in a foreign bank account in Panama held in the name of a nominee offshore company. The complaint alleges that he drove the money from Alaska to Panama in the form of several cashier's checks. He was assisted in the transaction by an individual he met in Panama.

As luck would have it the person who Brandner sought assistance from got caught up in an investigation into a totally unrelated stock fraud scheme, and began cooperating with the government. Reading between the lines here it seems that the so-called cooperating witness spilled the beans on Brandner in order to try and get some leniency in whatever mess he was involved in. The cooperating witness told the government that he had advised Brandner of the obligation to file an FBAR reporting for the offshore Panamanian account on at least two occasions.

The cooperating witness also advised Brandner that a new tax treaty with Panama might compromise the secrecy of his offshore account. Brandner then inquired if there was any other place he could hide the Panamanian funds. With the assistance of the cooperating witness created an offshore entity which then opened up an account at Bank of America held in the name of the foreign LLC. Homeland Security Investigations (HSI) then promptly seized the account in a civil in rem forfeiture action.

There are a number of lessons to be learned other than don't try and cheat your wife in a divorce action. Clients always ask our tax litigation attorneys variations of the question: "How is the IRS going to find out about my offshore bank account." The truth is that the IRS may not find out, but the consequences can be dire if they do. In Brandner's case he had the bad luck to trust someone who later came to have his own problems (which were not even tax problems) with the authorities. Always keep in mind that if two people know a secret it's not a secret.

The case is also interesting since this is the first time to my knowledge the government has attempted to use the civil forfeiture statute to seize 100% of the proceeds of offshore funds for failure to file an FBAR. It certainly significantly ups the stakes; especially since there is nothing to stop the IRS from criminally prosecuting Brandner for willfully failing to file an FBAR, or criminal tax fraud and that may be the next episode in this drama.

As a technical matter it is not clear to our tax litigation lawyers that the IRS has the right to seize the proceeds of an account simply because no FBAR was filed. For more about the technicalities our tax attorneys plan on posting a separate item next week.

Continue reading "Failure to File FBAR (Foreign Bank Account Report) for Offshore Funds Leads to Seizure of Over 4.6 Million Dollars From Alaska Plastic Surgeon " »

Recently the Supreme Court held in Kawashima v. Holder (Feb. 21, 2012) that filing a false tax return in violation of IRC Section 7206(1) as well as other criminal tax offenses are aggravated felonies which can result in deportation of a resident alien. Just over two years ago we blogged about the 9th Circuit decision in Kawashima which came to the same conclusion. The Supreme Court has now upheld that decision.

To review the background, Mr. and Mrs. Kawashima were legal residents of the United States having moved to Los Angeles from Japan in 1984. According to an article in the Los Angeles Times they opened several sushi restaurants in the West San Fernando Valley area of Southern California. They were accused of violating various criminal tax laws, and in 1997 Mr. Kawashima pled guilty to a single count of violating Internal Revenue Code (IRC) Section 7206(1) (filing a false tax return). Mrs. Kawashima pled guilty to IRC Section 7206(2) (aiding and assisting in the filing of a false tax return). The tax loss was around $245,000. This would have included interest and penalties so the actual tax would have been much lower. It is possible that the Kawashimas pled guilty to charges under IRC Section 7206 to avoid the IRS bringing tax evasion charges under IRC Section 7201. Tax evasion carries a maximum penalty of 5 years, and a $250,000 fine; whereas filing a false tax return "only" has a penalty of $100,000 and 3 years in prison.

Neither the 9th Circuit opinion, nor the Supreme Court opinion stated whether they served any jail time, but according to the Los Angeles Times they repaid the full amount due to the IRS. The Kawashimas probably assumed that their tax problems ended there, but in 2001 the Immigration and Naturalization Service (INS), as it was then known, brought removal proceedings, against the Kawashimas seeking their deportation alleging that they had committed an "aggravated felony." These proceedings were brought pursuant to 8 USC § 1227(a)(2)(A)(iii) (stating that "[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable"). An aggravated felony is defined in 8 USC Section 1101(a)(43)M)(i) as any offense that "involves fraud or deceit in which the loss to the victim or victims exceeds $10,000."

The Kawashimas argued that filing a false tax return was not an aggravated felony. They relied on a related section of the law which specifically states that the commission of tax fraud pursuant to IRC Section 7201 is an offense which may lead to deportation. From that the Kawashimas criminal tax lawyers concluded that Congress intended that the only tax crime which would qualify for deportation is tax fraud, and not any other lesser tax crime.

Unfortunately for the Kawashimas in a divided 6-3 opinion the Supreme Court disagreed, clearing the way for the Kawashimas deportation. In her dissent, Justice Ginsburg pointed out that as a policy matter the majority made a bad choice because it would discourage immigrants from pleading guilty to tax crimes since in addition to any jail time they would be exposed to being deported.

In our view Justice Ginsburg hit the nail on the head, and criminal tax lawyers will need to advise their alien clients of this distinct possibility as one of the many factors to take into account when deciding whether or not to plead guilty to any tax crime. The concern for FBAR (foreign bank account report) non-filers is that without regard to whether or not failure to file an FBAR is a deportable offense individuals who do not file FBARs generally have filed false tax returns by checking the "no box" on Schedule B signifying they don't have a foreign bank account when in fact they do.

Continue reading "FBAR Non-Filers Beware: Either Tax Fraud OR Filing a False Tax Return Can Result in Deportation " »

In January I appeared on a panel with several other tax lawyers at the 2012 University of Southern California Tax Institute. One of the topics was Quick Tips on Offshore Bank and Financial Accounts. The presentation was intended for tax attorneys, CPAs, and other tax professionals. However, anyone who has FBAR issues including the non-filing of the Foreign Bank Account Report, TDF 90-22.1 may find the outline that I distributed at the meeting to be helpful. For that reason I have posted a copy of the outline on our website.

The outline includes a look at the various options open to taxpayers who have failed to file FBARs, and some of the factors that our tax lawyers consider in advising clients on how to proceed.

Continue reading "Quick Tips on Offshore Bank and Financial Accounts " »

In a little noticed development, Switzerland's oldest private bank Clariden Leu has informed some of its U.S. clients that it has been ordered to turn over their names, and offshore bank account information to the IRS. Clariden Leu posted a notice on its website dated Nov. 29, 2011 to that effect. This is bad news for U.S. offshore account owners who have not previously made a voluntary disclosure to the IRS. Such individuals run the risk of the IRS filing criminal tax fraud charges against them, or criminal charges related to willful FBAR violations. Alternatively, only civil tax fraud or other penalties may be involved, but the FBAR penalties alone could far exceed the balances in the offshore accounts.

The notice refers to a U.S. treaty request apparently covering U.S. beneficial owners of beneficial accounts at Credit Suisse AG, Neue Aargauer Bank AG, and Clariden Leu. Also in November Credit Suisse announced that it is in the process of integrating Clariden Leu's operations into Credit Suisse. The treaty request appears to be limited to U.S. account holders who hold their accounts through "domiciliary companies."

The notice also points out that although the account holders have appeal rights to the SFTA (Swiss Federal Tax Authority) attempts to block the turnover of information to the IRS may require compliance with 18 USC Section 3506. That section provides that:

"...any national or resident of the United States who submits, or causes to be submitted, a pleading or other document to a court or other authority in a foreign country in opposition to an official request for evidence of an offense shall serve such pleading or other document on the Attorney General at the time such pleading or other document is submitted."

The notice correctly observes that anyone in this situation should consult with a qualified attorney concerning any obligations under Section 3506.

Obviously serving the Attorney General would defeat the whole purpose of filing an appeal with the SFTA since the owner of the account would then become known to the IRS. Interestingly 18 USC section 3506 does not on its face appear to provide any sanctions for failure to obey its terms. However, at least one federal prosecutor has publicly stated that he would seek to charge anyone violating 18 USC section 3506 with obstruction of justice.

Continue reading "Swiss Bank Clariden Leu to Turn in Its U.S. Clients " »

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.

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.

Continue reading "More Swiss Banks to Turn Over Offshore Bank Account Information to IRS? " »