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Taxpayer Advocate's 2013 Report to Congress Again Critical of Offshore Voluntary Disclosure Program (OVDP) for Unreported Foreign Bank Accounts (Part I)

January 24, 2014,

The Offshore Voluntary Disclosure Program (OVDP) for taxpayers who have failed to file Foreign Bank Account Reports (FBARS), FINCEN Form 114, (this form was previously designated as TDF 90-22.1), has again been roundly criticized by the Taxpayer Advocate for its draconian penalties, and its one size fits all solution. The 2013 report demonstrates through statistics that were previously unavailable to the public what tax litigation attorneys have known for years: that the OVDP is unfair in both design and application.

In lieu of the OVDP, the Taxpayer Advocate has recommended a disclosure system which divides FBAR non-filers into three categories.

Category 1. Full relief from FBAR and information reporting penalties.

This would be available to those who underreported income by a de minimis amount, defined at least as high as the IRC Section 6662(d) threshold which is the greater of $5,000 in tax or 10% of the tax required to be shown.

Category 2. Taxpayers who have reasonable cause or who acted non-willfully.

Taxpayers who underreported more than the de minimus amount, but who believe they have reasonable cause or who acted non-willfully would be required to file delinquent returns, pay any applicable tax, interest and penalties under Title 26 (unless asserting reasonable cause). Depending on the circumstances and the taxpayer's explanation, these taxpayers should be required to pay either the non-willful FBAR penalty or no penalty under the reasonable cause exception. The IRS would audit some, but not all of these submissions.

Category 3. Taxpayers not included in Category 1 or 2. Taxpayers who do not fall into categories one or two would be penalized under the current OVDP structure which generally provides for a 27.5 percent penalty.

In the opinion of our tax lawyers, while the recommendation is a vast improvement over the current OVDP, it is still problematic. The biggest advance is the addition of Category 1 for taxpayers who only have minimal tax amounts due. Our tax attorneys have met with many taxpayers since 2009 who were not good candidates for the existing OVDP, because after the application of foreign tax credits or expenses from the rental of real estate, the tax due was a few hundred dollars or even a few thousand dollars. Yet, these taxpayers are exposed to penalties ranging from $100,000 to several million dollars if they were to enter the OVDP and not opt-out.

The problem with Category 2 is that it provides for tax audits of some percentage that elect this category. What will happen to those who file under Category 2, but are determined by the IRS to have acted willfully? Will they be able to fall back into Category 3 or will they be subjected to possible multiple 50 percent willfulness penalties? Also for those taxpayers who are non-willful, but who have made many accounts, will they be subjected to a $10,000 non-willful penalty for each year and each account? That is the IRS' current position for OVDP opt-outs.

There is no indication that the IRS is ready to adopt the Taxpayer Advocate's recommendation, so in the meantime, if you have an unreported foreign bank account, contact the tax controversy attorneys at Brager Tax Law Group, A P.C. for a confidential consultation about all of your options.

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The Family That Commits Tax Evasion Together May Go to Prison Together

October 4, 2013,

While tax fraud is often perpetrated by a single person, a recent case shows that offshore tax evasion can sometimes be a family affair as well. U.S. Attorney Preet Bharara recently announced a prosecution of an offshore tax evasion case involving multiple family members. This case illustrates the dangers involved when an older family member passes on without cleaning up his tax problems; this is especially true where there has been a failure to file Form TDF 90-22.1, Report of Foreign Bank Account (FBAR). Henry Seggerman, of New York and Los Angeles, pled guilty this summer to one count of conspiracy to defraud the U.S., as well as two counts of filing false tax returns in connection with his family's criminal tax evasion scheme.
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Along with four other siblings, Seggerman inherited a substantial estate from his father Harry Seggerman, a wealthy New York businessman who passed away in 2001. According to the Department of Justice ("DOJ"), the senior Seggerman's fortune totaled $24 million, over half of which was held in undeclared Swiss bank accounts. While the DOJ did not say that either Henry Seggerman or any of his siblings actively assisted the late Harry Seggerman with his offshore tax fraud during his lifetime, Henry Seggerman allegedly filed false tax returns after his father's death that grossly underreported the value of his father's estate. Furthermore, the tax return that Henry filed on behalf of his father's estate failed to disclose the over $12 million hidden in Swiss bank accounts.

According to the DOJ, Henry Seggerman and his family continued this offshore tax fraud scheme for over a decade after their father's death. Seggerman was accused of taking further steps to set up new Swiss bank accounts to conceal the funds inherited by himself and his siblings. Aside from controlling his own offshore bank account, Seggerman was accused of helping his brother repatriate funds from a Swiss bank account to the U.S. under the guise of loans from a foundation that he controlled.

Similar to many others who have been accused of committing offshore tax evasion, Seggerman is expected to fully cooperate with U.S. authorities in exchange for the possibility of a reduced sentence. Seggerman is expected to testify on behalf of the U.S. in the trial of Michael Little, an attorney who advised the Seggermans on financial issues. Little, who is accused of operating an 11-year offshore tax fraud conspiracy, has pleaded not guilty and is awaiting trial. Additionally, three of Seggerman's siblings have already pled guilty to conspiracy to defraud the United States and filing fraudulent tax returns. All three siblings are currently awaiting sentencing.

While no sentencing date has been set for Seggerman, he faces a maximum penalty of 11 years in federal prison. Additionally, he has already agreed to make a $600,000 restitution payment at the time of his sentencing; if the case follows past patterns it would not be surprising if the total restitution payments are in the 6 million dollar range.

Continue reading "The Family That Commits Tax Evasion Together May Go to Prison Together " »

Offshore Account Holders Beware. More Swiss Bank Account Information to Be Turned Over to the IRS

July 15, 2013,


In a move which should send shivers through the spines of delinquent FBAR (Foreign Bank Account Report) filers the Swiss Federal Supreme Court has granted the IRS' request for the names of U.S persons holding "secret" Swiss bank accounts. The IRS had originally submitted a so-called group request in September 2011, but an account holder brought an appeal to the Swiss Federal Administrative Court which held that the group request was too vague and amounted to a fishing expedition. The IRS amended its group request, and the Federal Administrative Court ruled the amended request was allowable under the provisions of 1996 Convention between the United States and Switzerland for the Avoidance of Double Taxation with Respect to Taxes on Income (the "Treaty").

Under the Treaty, the Swiss will supply information if the IRS can show a suspicion of "fraud or the like." Since Swiss and U.S. law are very different in terms of defining tax fraud it is sometimes difficult for tax attorneys in the U.S. to understand whether a particular set of factual circumstances will be considered fraud or the like. Indeed, "mere tax evasion" is not a crime in Switzerland. The key issue in the Credit Suisse case, however, was whether a "group request" i.e. one which describes a particular set of persons by their characteristics as opposed to providing a specific name could ever be honored.

According to its press release the Swiss Federal Supreme Court held that:

[R]equests for administrative assistance in relation with fraud and the like are in principle admissible under the 1996 Double Taxation Agreement with the United States, regardless of whether the suspicion falls on one or more persons and whether the said persons are explicitly named in the request.

In another words in the future the IRS can describe a class of individuals, and a Swiss Bank will be required to turn over their bank records. It wouldn't be a bit surprising if the IRS already has group requests in the works at other Swiss banks including those reportedly under investigation such as Julius Baer, Basler Kantonalbank, Zuercher Kantonalbank, HSBC, and Pictet.

It is hard to believe that anyone with a Swiss bank account is still laboring under the belief that their offshore accounts will remain secret from the IRS. The penalties for failure to file FBARS are very severe, and can include criminal convictions, as well as civil penalties which can reach 300% of the offshore account balances. In addition, criminal tax evasion charges could be brought by the IRS. Anyone with an offshore account needs to give serious consideration to whether or not they should enter the IRS' Offshore Voluntary Disclosure Program (OVDP). With the IRS racking up continued success in obtaining the cooperation of foreign banks it could decide to close the OVDP at any time, and therefore waiting may not be an option.

IRS Slams Offshore Account Holder with 200% FBAR penalty for Willful Failure to File Foreign Bank Account Reports

July 10, 2013,

The IRS has assessed FBAR penalties against Carl R. Zwerner for willfuly failing to file an FBAR (Foreign Bank Account Report) on Form TDF 90-22.1. The news here is that the IRS is seeking to impose a willful failure to file an FBAR penalty against Zwerner for multiple years. Specifically the IRS seeks to impose a separate 50% penalty for each of four years that Zwerner failed to file an FBAR. According to the Complaint the IRS assessed four separate penalties totaling over $3 million as follows:

2004 - $723,762, assessed on June 21, 2011
2005 - $745,209, assessed on August 10, 2011
2006 - $772,838, assessed on August 10, 2011
2007 - $845,527 assessed on August 10, 2011

Perhaps not surprisingly Zwerner didn't pay the FBAR penalties and the Department of Justice has filed suit to collect the penalties. These penalties, are civil penalties, and separate and apart from any criminal FBAR penalties that could be imposed, or criminal tax fraud charges that could be brought. As a practical matter though it would be unusual for the IRS to bring criminal tax or FBAR charges after a civil suit has been filed.

Tax litigation attorneys sometimes advised clients who are considering quiet voluntary disclosures that in the past the IRS has only imposed one civil FBAR penalty even in criminal tax cases. Apparently, however, there is no guarantee for a client who decides not to enter the IRS' Offshore Voluntary Program (OVDP) that penalties could total 300%! This is because the statute of limitations on assessing the FBAR penalty is 6 years from the June 30th deadline for filing the FBAR. Whether or not the IRS can impose such a large penalty without running afoul of the prohibition under the 8th Amendment against "excessive fines" is unknown. Perhaps Zwerner's tax litigation lawyers will raise that as one of his defenses.

The question for those individuals with foreign bank accounts who have not yet entered the IRS' Offshore Voluntary Disclosure Program is whether the IRS has raised the stakes for all offshore account holders, or were there particularly bad facts in Zwerner's case which led the IRS to assess multiple FBAR penalties. The complaint, which was filed on June 11th gives Zwerner until August 12th to file an Answer. Perhaps once the Answer is filed we will know more. In any event, this case brings home the point that the decision not to enter the OVDP is not one to be taken lightly. All of the facts and circumstances need to be analyzed to determine what the likely action of the IRS will be if the foreign bank accounts are discovered by the IRS. As our tax lawyers tell anyone who will listen: "There are no cookie cutter answers," and there is no substitute for exercising careful and considered judgment based upon years of experience.

87 Year Old Hawaiian Auto Mogul Acquitted of all Tax Fraud and Conspiracy Charges after District Court for District of Hawaii Finds Lack of Intent and Willfulness

May 2, 2013,

The U.S. District Court for the District of Hawaii recently acquitted an 87-year-old auto dealership mogul of all tax fraud and conspiracy charges that the U.S. Government had brought against him. James Pflueger, who was facing multiple counts of both tax fraud and conspiracy to defraud the government, had been indicted on those charges in 2010 based on his alleged involvement in two separate tax fraud schemes. On March 20th, 2013, however, Pflueger was acquitted of all charges in what his criminal tax attorneys called "the Justice Department's first unsuccessful prosecution relating to the use of foreign bank accounts in the Government's ongoing international enforcement efforts."

Pflueger was initially indicted on tax fraud and conspiracy charges related to two separate incidents, the first of which involved a situation where Pflueger's company allegedly improperly paid for personal expenses of Pflueger's family, and the second of which involved alleged underreporting of gain from Pflueger's sale of one of his properties, known as Hacienda. The government also initially charged Pflueger with the failure to file a Report of Foreign Bank and Financial Accounts (FBAR), but dropped that charge before trial.

Dennis Duban, the accountant who handled Pflueger's financial affairs, had pled guilty in October 2012 to conspiracy and aiding in the filing of a false tax return. According to the government, Duban and Pflueger engineered the Hacienda sale to effect offshore tax evasion by transferring the proceeds from the sale to a Swiss bank account in order to prevent the proceeds from being used to pay civil claims arising from a 2006 accident at another of Pflueger's properties. However, Pflueger's criminal tax attorneys were successful in arguing that Pflueger was not responsible for his IRS tax problems, and that Duban was the sole mastermind of the tax fraud.

Over the course of a bench trial (which was elected by Pflueger's counsel partly due to concerns about jury prejudice resulting from the aforementioned well-publicized accidents at Pflueger's property), Judge Kobayashi of the District Court for the District of Hawaii held that the government failed to prove beyond a reasonable doubt that Pflueger had conspired to obstruct the IRS. Kobayashi also agreed with Pflueger's arguments that he lacked the requisite intent for a conspiracy conviction (as well as a lack of financial wherewithal and knowledge), finding that "Pflueger relied in good faith on his company's accounting staff, and especially on Duban" in all matters related to his company's books. Kobayashi also acquitted Pflueger of the charges of filing false returns for 2004 and 2007, finding again that Pflueger lacked willfulness, and had relied in good faith on others that had committed tax fraud.

While Pflueger was ultimately acquitted it is worth noting that his advanced age, and his claimed reliance on his accountant did not nothing to stop the IRS from putting him through the stress and expense of a trial.

If you have received a tax audit notice, or are under civil or criminal investigation by the IRS you should contact a tax litigation attorney to find out your options.

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

March 6, 2013,

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 " »

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

October 23, 2012,

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 " »

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

September 10, 2012,

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?" 875413_balance.jpg

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 " »

Criminal Tax Case Involving Offshore Bank Accounts Leads to Lawsuit Against U.S. Billionaire

September 4, 2012,

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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.

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Offshore Bank Account Whistleblower Released from Prison

August 30, 2012,

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.
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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 " »

Former UBS Client Charged with Failure to File FBAR

August 17, 2012,

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.

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Denise Rich, Ex-wife of Marc Rich, Expatriates

July 16, 2012,

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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.

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

July 2, 2012,

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.

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2011 FBAR Filing Date Reminder

June 21, 2012,

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.

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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.

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Offshore Bank Account Owners at Liechtensteinische Landesbank AG (LLB) May be In Trouble

June 13, 2012,

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 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.

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