Tax Problem Attorney Blog

Should I Wait to Disclose My Offshore Accounts?

November 6, 2017 | by Dennis N. Brager

If you aware that you have unreported foreign financial accounts that expose you to liability for Foreign Bank Account Report (FBAR) or Foreign Account Tax Compliance Act (FATCA) violations, you should carefully consider the risks of waiting to disclose your offshore accounts, including the following:

The IRS does not have to continue to offer offshore disclosure programs, and can change the terms of these programs whenever they wish. The Offshore Voluntary Disclosure Program (OVDP) or Streamlined Filing Procedures can be ended at any time. If the terms of the programs are changed, they could be less favorable to taxpayers, resulting in higher fines or stricter eligibility requirements.
You are not eligible for offshore disclosure programs if you are currently under IRS examination. This is true even if the examination is for issues completely unrelated to your undisclosed offshore accounts. Once the IRS begins to ask questions and request information from you, you may be put into a very difficult situation if you have foreign accounts that you haven’t disclosed, and you won’t be able to receive any type of amnesty from these programs.

What is an IRS Summons?

November 2, 2017 | by Dennis N. Brager

An IRS summons is an official order to produce information or provide testimony to aid in an IRS investigation. Summonses may be issued to the taxpayer being investigated or to third parties who may have information that the IRS wants to use in the investigation. If you receive a summons, you should immediately consult with a tax litigation attorney to determine what information you are required to produce, what arguments you have for refusing to disclose certain information, and whether you may incriminate yourself by producing certain information.

Before you receive a summons, you should receive several other notices from the IRS, beginning with an Information Document Request (IDR). An IDR is a more informal notice, but will often be requesting the same information as the summons. The IRS would prefer that you respond and give them the information they want without requiring the issuance of an official summons, which can be enforced by a federal district court.

The IRS will have to prove to the court that the summons is necessary to obtain information that may be relevant to a legitimate investigation. The taxpayer will be asked to show why the summons is not proper, and a failure to respond to the summons after a district court orders it enforced will usually result in a citation for contempt which can include time in jail.

What is IRS Tax Lien Subordination?

October 30, 2017 | by Dennis N. Brager

Once the IRS files a federal tax lien, all other creditors or potential buyers have notice of the lien. If someone buys your home, they will be buying the home subject to the lien unless you are able to negotiate a lien discharge. If you attempt to refinance your home, you will run into difficulties because the lender will not want their lien to be in a junior position to the IRS tax lien.

The general rule for lien priority is “first in time, first in right”, so if your first mortgage was recorded prior to the recording of the IRS tax lien, the first mortgage lender retains their priority. However, if the loan were refinanced, the lender would lose priority and fall behind the IRS if the home was foreclosed upon and the funds were disbursed to lienholders.

The IRS could give up its priority—which is known as tax lien subordination—which would allow the new lender to take a senior position to the IRS lien. Unfortunately, the IRS is not going to make such a gesture out of goodwill alone. They are only going to subordinate their lien interest if you have something to offer them, which usually takes one of two forms.

Can I Sell My Home Subject to a Federal Tax Lien?

October 26, 2017 | by Dennis N. Brager

Shortly after you fail to comply with an official demand for payment of your tax debt from the IRS, a secret lien attaches to all of your real property and personal property. However, the IRS can also file an official notice of federal tax lien on your home, and other property at the county recorder’s office, which puts the public on notice of the tax lien. This can seriously interfere with your ability to sell your home because any buyer would have to take the home subject to the lien.

However, the IRS will remove the lien—known as a lien discharge—in certain situations. By removing the lien, the IRS is giving up its right to this specific piece of property, which can be assigned a specific monetary value. The IRS will generally only give up this right if it receives something of equal value, or if there is sufficient equity in your other assets to convince the IRS that it will be able to get the money from your other assets.

For example, if you want to sell your home for $400,000, and you owe $300,000 on the first mortgage, the IRS has a lien interest of $100,000 on your home. If you want the IRS to give up this interest, you will have to either give $100,000 in value or show that you have other assets satisfactory to the IRS that will satisfy their claim.

What Happens After I Receive an IRS Notice?

October 24, 2017 | by Dennis N. Brager

The IRS sends taxpayers millions of notices per year. Whenever you receive correspondence from the IRS you should read it carefully and attempt to understand what the IRS is trying to tell you. This can be difficult because some notices are unclear to those who do are not familiar with tax laws or IRS procedures.

IRS notices can be informational, such as when you are notified that your tax return is going to be adjusted. However, you may still disagree with this notice, and you can attempt to take action to dispute the mistake by the IRS.

Other notices will warn you that the IRS is about to take a specific action. This could a Notice of Intent to Levy, which means that the IRS is about to seize some of your assets, including the funds in your bank account or a state tax refund. Another common notice is the Notice of Deficiency, which states that the IRS is planning to assess a tax liability against you, and gives you one last chance to dispute the amount in Tax Court before the IRS begins to collect it.

When the 50 Percent Penalty Applies During Offshore Voluntary Disclosure

October 3, 2017 | by Dennis N. Brager

The Offshore Voluntary Disclosure Program (OVDP) normally comes along with an “offshore penalty” equal to 27.5 percent of the highest aggregate account balance of the previously unreported foreign financial assets. However, the penalty is increased to 50 percent for taxpayers who have accounts at foreign financial institutions that are under investigation by the IRS or Department of Justice, or who are cooperating with the U.S. government regarding accounts held by U.S. persons. These foreign financial institutions have been referred to as “bad banks”, and the list of bad banks has continued to grow each year.

How the 50 Percent Penalty Works

Not only does a taxpayer face a 50 percent offshore penalty for any assets held at a bad bank, the taxpayer must pay the 50 percent penalty on all of their unreported foreign assets. For example, a taxpayer with a $10,000 account at a bad bank and $500,000 at a foreign bank that is not under investigation will be subject to the 50 percent penalty on the total of both accounts, despite the fact that the majority of their funds are held at a bank that is not under investigation.

How Does Living Overseas Impact Your FBAR and FATCA Obligations?

September 28, 2017 | by Dennis N. Brager

U.S. taxpayers who live overseas may still have a Foreign Bank Account Report (FBAR) and form 8938 filing report for their foreign financial accounts. In general, your FBAR obligations will not be impacted by the fact that you live overseas. If you are a U.S. person and your aggregate account balance of foreign accounts exceeded $10,000 during the year, you must file an FBAR, regardless of where you live.

Your Foreign Account Tax Compliance Act (FATCA) obligations using form 8938 require a bit more discussion. Whether you need to file a form 8938 could be impacted by country of residency because there are different threshold amounts depending on whether you live in the U.S. or abroad.

Form 8938 Thresholds for Taxpayers Living Abroad

What is the Foreign Account Tax Compliance Act?

September 26, 2017 | by Dennis N. Brager

The Foreign Account Tax Compliance Act (FATCA) sets reporting requirements for both foreign financial insinuations and U.S. taxpayers who hold specified foreign assets. If your foreign financial institution is in a country that has an agreement with the United States, then you will be asked whether or not you are a U.S. person for tax purposes. Answering “yes” to this question will trigger a requirement on behalf of the financial institution to report your account information to the IRS.

Individual Requirements Under FATCA

By requiring foreign financial institutions to report account information for U.S. taxpayers, the government and the IRS have made it easier to track tax evasion by individuals who are hiding money in foreign bank accounts. In addition, taxpayers must file their own report of their foreign accounts, which is done on form 8938.

What Expats Should Know About Their U.S. Tax Obligations

September 25, 2017 | by Dennis N. Brager

Expats may decide to leave the U.S. due to work, retirement, or other reasons. Tax reduction may also be a motivation for moving to a foreign country, but the United States uses citizenship-based taxation. Therefore, the taxpayer still has a continuing obligation to file and pay U.S. taxes (although they may be eligible for some exclusions, such as the Foreign Earned Income Exclusion).

Tax Mistakes Expats Should Avoid

First, expats need to continue to file and pay their taxes. Many other countries use territorial-based taxation, which only taxes income earned inside the country. The United States, on the other hand, taxes citizens on all worldwide income.

Are Dual Citizens Required to File FBARs?

September 21, 2017 | by Dennis N. Brager

Dual citizens, along with all other “United States persons”, must file a Report of Foreign Bank Accounts (FBAR) if the aggregate value of their foreign financial accounts exceeds $10,000 at any time during the year. This requirement applies to U.S. citizens, residents, green card holders, and those who must file taxes because they are substantially present in the United States. It also applies to legal entities, including corporations, partnerships, and trusts.

While other countries only tax their citizens on income earned within the country’s borders, the United States taxes its citizens—and other individuals who have a filing requirement—on all worldwide income from any source. This requirement, along with the FBAR filing requirements, can create problems for expatriates, immigrants, and anyone else with offshore bank accounts.

Expats who move abroad are still responsible for complying with U.S. tax law as long as they remain U.S. citizens. Even if you live abroad for the entire year, and none of your income would be taxable, you may still have to file a tax return. If you open a bank account in a foreign country, and the aggregate value of all of your foreign accounts exceeds $10,000 during the year, you must file an FBAR.