Tax Problem Attorney Blog

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?" »

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.

Continue reading "IRS Fact Sheet 2011-13 (FS -2011-13) Much Less FBAR Relief Than Reported" »

Until recently even some well-informed tax attorneys assumed that short of disclosure under the Foreign Account Tax Compliance Act (FATCA) in 2013, the IRS would have a difficult time getting information from Swiss banks without litigation. As a result some owners of Swiss financial accounts assumed that they could avoid disclosure to the IRS by closing their offshore account prior to 2013. While there are various treaties which require Swiss banks to turn over account information with regard to individuals who have committed tax fraud or tax evasion, in the past this has been interpreted as requiring the IRS to provide among other things the name of the taxpayer it was investigating. Apparently not any more!

In what appears to be the final nail in the coffin of alleged Swiss Bank secrecy, a committee of the upper house of the Swiss Parliament recommended that the upper house approve a proposed addendum to the June 2010 ratification resolution on the 2009 protocol to "clarify" that so called nameless, behavioral-pattern based requests are allowed under the 1996 double taxation treaty with the U.S.

In a related development on November 16th the Swiss Federal Council approved an amendment to the ordinance implementing the Swiss-U.S. double taxation treaty to provide notice to U.S. clients of Swiss banks who are the subject of so-called behavioral-pattern based administrative assistance requests from the U.S. Notice will be provided by publishing the U.S. administrative request in the Federal Gazette. Unfortunately the Federal Gazette is not published in English, and the Swiss Federal Tax Authority (SFTA) has been tasked with the job of alerting the U.S. media.

So what are the requirements of a nameless behavioral-pattern based request?

1. It must indicate why the requested information is necessary and relevant;
2. It must give a detailed description of the alleged behavioral pattern;
3. It must explain why it can be assumed that the person fitting the alleged behavioral pattern has not fulfilled his legal obligation; and
4. It must show a credible act of active, fraudulent behavior by the bank, or its employees.

It is not difficult to see the IRS putting together a number of these requests to find the names of previously unknown taxpayers, and it may well explain the recent announcement by Credit Suisse (we wrote about this tax problem here) that it has been required by the SFTA to turn over the names of some of its clients to the IRS.

Continue reading "Swiss Bank Account Holders of Exposure for Tax Fraud and Failure to File FBARs Is Greater Than Ever" »

The Swiss Federal Tax Authority (SFTA) has ordered Credit Suisse to submit offshore bank account information in response to an IRS request for assistance, according to a New York Times article. Credit Suisse has notified some of its offshore account holders by letter about the order. Apparently the order is not directly related to the IRS negotiations going on with approximately 11 Swiss banks to turnover the names of all of their U.S. clients. Instead, it appears from the New York Times article that these requests relate to individuals who the IRS already has reason to believe have foreign bank accounts. If that is the case then it may be too late for these individuals to file a voluntary disclosure with the IRS to attempt to escape criminal penalties. Still in some cases a late voluntary disclosure is better than no disclosure. Without a detailed examination of all of the facts and circumstances there is no way of advising someone as to the best path to take.

Although account holders may appeal the SFTA decision, the act of doing so requires that they notify the U.S. government that an appeal has been filed. Failure to do so could result in separate penalties. Sort of a catch twenty two.

The SFTA order to Credit Suisse highlights the noose that the IRS is attempting to tighten around the neck of offshore account holders who failed to file their Foreign Bank Account Reports (FBAR) on TDF 90-22.1. The civil penalty for willfully failing to file the FBAR can be up to 50% of the account balance so even if no jail time ensues it is still a very expensive proposition.

Continue reading "Swiss Bank Account Information To Be Turned Over by Credit Suisse" »

William H. Nurick, age 76, was convicted of tax evasion based on evidence he evaded a tax liability for one year of $157,000. In 2000 Nurick filed an amended 1995 income tax return admitting a $106,542 tax liability. He then attempted to conceal his offshore financial assets from the IRS by transferring $133,000 from an offshore bank account to a third party's offshore bank account, and then "borrowing" the funds back from the same party, and having that person file a trust deed against his real estate with the apparent purpose of making it appear that it had no equity. He then proceeded to file a false Form 433 with the IRS in support of an offer in compromise (OIC) which among other things failed to list his vehicle, or his offshore Costa Rican bank account with a balance of $200,000.

The IRS financial statement also underreported his income. The case is interesting for several reasons. One there is a perception that the IRS does not prosecute seniors. It does. There is also a belief that if you file an accurate tax return that's the end of it. Not necessarily. There is a separate tax crime known as the evasion of payment. It too is a felony. Nurick faces up to 5 years in prison and a $250,000 fine.

Continue reading "California Man Convicted of Tax Evasion Based in Part on a False Offer in Compromise (OIC)" »

According to a report in the Swiss newspaper Tages-Anzeiger the Swiss are poised to send the names of thousands of potential tax evaders who have Swiss Bank accounts over to the IRS, and/or the Department of Justice. The data files are, according to the unconfirmed report, due to begin coming over later in October. The report goes on to speculate that the banks on the list include Credit Suisse, Julius Bär, Zürich Cantonal Bank, Basel Cantonal Bank and Wegelin. These names shouldn't come as any great surprise because it appears that the IRS has been actively investigating them for some time.

Whether or not the report turns out to be true is unknown. However, if it is, it leaves very little time for U.S. persons who have offshore bank accounts at these Swiss banks to make a voluntary disclosure to avoid a criminal tax prosecution for FBAR violations, tax fraud, or other crimes.

U.S. persons who have offshore financial accounts are required to file report to the IRS on Form TD F 90-22.1, Report of Foreign Bank Account (FBAR) on an annual basis. Failure to do so can result in jail time, or ruinous civil penalties.

Continue reading "Swiss Banks to Turn Over Possible Tax Evaders to IRS" »

The IRS issued a news release on Sept. 15th headlined "IRS Shows Progress on International Tax Evasion." IRS Commissioner Shulman was quoted as saying: "We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion." Shulman noted that the IRS has increased its efforts to prosecute criminal tax cases involving international tax fraud. The release goes on to state that the IRS' Offshore Voluntary Disclosure Program (OVDP), and its recently closed Offshore Voluntary Disclosure Initiative (OVDI) has provided the IRS with "a wealth of information on various banks and advisors assisting people with offshore tax evasion..."

The key thing here for anyone who has an unreported offshore bank account is that last quote about the information the IRS has gathered about advisors assisting people with offshore tax evasion. It is getting more and more dangerous to own an undisclosed foreign bank account. While the IRS will never be able to find more than a small percentage of the folks who have an unreported income from offshore bank accounts it is clear that for those that do get caught the stakes are very high. Jail time for criminal tax violations, or failure to file Foreign Bank Account Reports, TDF 90-22.1 (FBARs), and ruinous civil penalties including a penalty equal to the greater of $100,000 or of 50% of the balance in the offshore account per year.

While the time for making a voluntary disclosure under the OVDI program has expired it is still possible to make voluntary disclosure and avoid criminal prosecution; it may also be possible to cut a better deal with the IRS on any civil penalties, by coming forward voluntarily. Penalties for non-willful violations may cap out at $10,000 per year, and it is easier to argue that a violation is non-willful if a taxpayer comes forward voluntarily then if he is caught as the result of a foreign bank turning him in to the IRS.

Continue reading "IRS Touts Progress on International Tax Evasion" »

The Supervisor of Banks at the Bank of Israel and the supervisory authorities in the US--signed a Statement of Cooperation. The Statement of Cooperation establishes a mechanism for the transfer of information between the authorities in the context of the authorization process of establishing cross-border banking activity in the U.S. or Israel, and in the context of their ongoing function as regulators of banking activity.

The announcement didn't specifically mention FBARs, or foreign bank accounts, however, it appears that this will be just one more avenue for the Internal Revenue Service to pursue in locating U.S. citizens who have unreported bank accounts in Israel. According to the press release the Statement of Cooperation establishes a mechanism for the transfer of information between the authorities in the context of the authorization process of establishing cross-border banking activity in the US or Israel, and in the context of their ongoing function as regulators of banking activity.

When added to the ongoing grand jury investigations of Israeli banks, and the implementation of FATCA in 2013 it demonstrates the danger of continued non-reporting of foreign bank accounts-especially for dual Israeli citizens.

Continue reading "More Tax Problems for U.S. Citizens with Foreign Bank Accounts in Israel" »

The IRS has extended the deadline for filing documents under the Offshore Voluntary Disclosure Initiative (OVDI) until September 9, 2011 from the original Aug. 31st deadline. This is a welcome relief for those tax attorneys , and CPAs who have been trying to crank out OVDI disclosures documents by Wednesday. The IRS has also severely limited the tasks that need to be completed by the new Sept. 9th OVDI deadline. The only two actions required by September 9th appear to be:

1. Submit identifying information to the Criminal Investigation office in Philadelphia. Specifically this means name, address, date of birth, and social security number and as much of the other information requested in the Offshore Voluntary Disclosures Letter as possible.

2. Send a request for a 90-day extension for submitting the complete voluntary disclosure package of information to the Austin campus.

The reason for the OVDI extension is ostensibly the potential impact of Hurricane Irene. One has to wonder though, whether the IRS finally got the message that the Aug. 31st deadline for submitting everything was unreasonable.

Continue reading "Breaking OVDI FBAR News" »

The last day for disclosing unfiled foreign bank account reports (FBARs) under the Offshore Voluntary Disclosure Initiative (OVDI) is August 31, 2011. Here is the countdown:

OVDI FAQ No. 25 provides that the entire OVDI package must be submitted on or before August 31, 2011 to:

Internal Revenue Service

3651 S. I H 35 Stop 4301 AUSC

Austin, TX 78741

ATTN: 2011 Offshore Voluntary Disclosure Initiative

The FAQ doesn't state that the OVDI package must be received by Aug. 31st, simply that it must be "submitted" by that date, so presumably if it is mailed by Aug. 31st that will be sufficient. The countdown is based upon the last Fedex drop off time near the offices of Brager Tax Law Group, A P.C. in Los Angeles, California of 6:45 PM.

The other problem is that FAQ No. 25, presupposes that a taxpayer has received a preliminary clearance pursuant to FAQ No. 24 from the IRS Criminal Investigation Division (CI). According to the IRS OVDI Hotline at (267) 941-0020, however, if an offshore account holder is in a time crunch he should obtain a pre-clearance from CI, and then send the document package to Austin, Texas once the pre-clearance has been received. Our tax attorneys have been receiving pre-clearances in 24 to 48 hours, but your mileage may vary.

Keep in mind that the oral advice from the OVDI Hotline is not binding on the IRS, and it is important to keep updated on a regular basis with the IRS' changing directives, and whims.

Continue reading "FBAR Offshore Voluntary Disclosure Initiative (OVDI) Tax Amnesty Countdown" »

Some articles, but not any tax attorneys we know, have suggested that the IRS has extended the 2011 Offshore Voluntary Disclosure Initiative (OVDI) for unfiled foreign bank account reports (FBARs) by 90 days. That's not quite the case. The IRS has published FAQ 25.1 which provides that if an offshore bank account holder is unable to submit the complete required package of documents by the August 31st they may REQUEST a 90 day extension of the OVDI deadline. To quote the IRS OVDI FAQ:

A taxpayer may request an extension of the deadline to complete his or her submission if the taxpayer can demonstrate a good faith attempt to fully comply with FAQ 25.1 on or before August 31, 2011.

Note nothing says that the IRS will GRANT the extension for requesting tax amnesty relief. In order to receive an extension the taxpayer must demonstrate that he has made a "good faith attempt" to comply. The conditions for requesting an extension requires that the foreign bank account owner include in his extension request:

1. A statement of those items that are missing,
2. The reasons why they are not included,
3. The steps taken to secure them, and
4. Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

This leaves open the very real possibility that a faulty request for an extension may result in the OVDI deadline not be extended, and the taxpayer exposed to the full set of civil FBAR penalties.

Continue reading "Foreign Bank Account Report (FBAR) OVDI Deadline Extended--Sort of" »

The Department of Justice (DOJ) and Internal Revenue Service (IRS) announced last week the indictment of an HSBC India client on four counts of filing false tax returns and four counts of failure to file a Foreign Bank Account Report, form TD F 90-22.1 (FBAR). According to the press release each false tax return charge can result in a penalty of three years in prison and a $250,000 fine, and each failure to file an FBAR can result in 10 years in prison and a $500,000 fine. The press release is further evidence of the hardline positions that the IRS continues to take in FBAR cases. The maximum criminal penalty for willful failure to file an FBAR is "only" $250,000 and a five year jail term, under 31 USC 5322(a). However, under 31 USC 5322(b) if the willful failure to file an FBAR occurs "while violating another law of the United States or as part of a pattern of any illegal activity involving more than $ 100,000 in a 12-month period" that ups the ante to 10 years and $500,0000. By referencing the 10 year jail term the IRS is sending a message that it will seek maximum prison time.

The indictment alleges Dr. Arvind Ahuja, a US citizen living in Wisconsin, transferred and maintained millions of dollars in accounts in India and the Bailiwick of Jersey (Jersey) through HSBC. Jersey is considered to be a tax haven jurisdiction, meaning its laws are intended to conceal financial information from authorities in other countries. The indictment further alleges the balances of Dr. Ahuja's accounts ranged from $5 to $9 million and generated interest income that was unreported on his US tax returns.

The FBAR reporting requirement applies to individuals with a financial interest in or signature authority over foreign bank accounts if the aggregate value of those accounts exceeded $10,000 on any one day. The failure to file an FBAR is a charge independent of the failure to report taxable income. Foreign account holders with past unreported taxable income or undisclosed foreign accounts may make a voluntary disclosure under the IRS's Offshore Voluntary Disclosure Initiative (OVDI) and avoid or decrease penalties. The OVDI is open until August 31, 2011 and certain individuals may be entitled to an extension.

Continue reading "HSBC India Foreign Bank Account Client Indicted on FBAR (Foreign Bank Account) and False Tax Return Charges" »

Holders of foreign bank accounts had until today June 30th, 2011, to file a foreign bank account report TDF 90-22.1 (FBAR) with the Internal Revenue Service (IRS). The IRS recently issued a press release reminding foreign bank account holders of FBAR reporting requirements and deadlines.

The June 30th, 2011 FBAR deadline refers to the 2010 calendar year. The reporting requirement applies only to individuals with a financial interest in or signature authority over foreign bank accounts if the aggregate value of those accounts exceeded $10,000 on any one day in 2010. The FBAR is not a tax return and foreign bank holders may be required to file even if their foreign bank account does not generate taxable income. Requests for extensions will not be granted. The FBAR must be received by June 30th (not just mailed by that date) to be considered timely.

Certain individuals may be subject to later deadlines, including foreign bank account holders eligible for extension under IRS Notice 2009-62 or 2010-23 and certain financial professionals.

Willful failure to file an FBAR may result in criminal and civil penalties, including fines that can exceed 6 times the balance of the foreign account. Foreign account holders who file late FBARs may attach a showing of reasonable cause to avoid penalties. Foreign account holders with past unreported taxable income may make a voluntary disclosure under the IRS's Offshore Voluntary Disclosure Initiative (OVDI) and avoid or decrease penalties.

Continue reading "Foreign Bank Account Reporting Deadline Today" »