Offshore#Banking#and#Foreign#Bank#Accounts: Keeping#your#Clients#out#of#Trouble#with#the#IRS

Transcription

1 Moving#Your#Practice#in#the#Right#Direction# TM Offshore#Banking#and#Foreign#Bank#Accounts: Keeping#your#Clients#out#of#Trouble#with#the#IRS A"Practice"Essentials"Presentation #2011#OnePath#Practice#Management#Advisors,#LLC.#All#Rights#Reserved. 1

2 Disclaimer! This is a Continuing Legal Education (CLE) presentation, and it is not legal advice. This presentation was prepared for information purposes only for other lawyers only and deals with hypothetical or historical situations. The information is certainly not intended and should not in any way be construed as legal advice.! Your receipt of this information does not in any way create an attorneyclient relationship and cannot substitute for obtaining legal advice from an attorney. The presenter makes no claim about the correct interpretation of any law discussed in this presentation. The presenter does not make any claim about what the correct course of action might be in a particular matter. The presenter also does not make any claim that the information contained in this article is complete or correct. 1

3 About the Presenter! Benjamin Stolz, Esq. is trainer, speaker, educator, writer and attorney with over 20 years experience practicing consumer bankruptcy and business law, managing and advising small businesses. Ben received his BA from the University of South Florida, with Departmental Honors, and a JD from Southern Methodist University. He has been admitted to practice in Texas both before the Supreme Court of Texas, all lesser Texas courts, as well as the United States District Courts for the Northern and Eastern Districts of Texas and the U,S. Tax Court.! Ben is a member of the National Association of Consumer Bankruptcy Attorneys (NACBA), the American Bankruptcy Institute (ABI), Association of Litigation Support Professionals (ALSP), the American Bar Association (ABA), a proud graduate of the Max Gardner Bankruptcy Boot camp,! and a frequent guest panelist at Consumer Bankruptcy CLE events. As a result of his ongoing commitment to continuing legal education, Ben was also admitted in 2009 to the College of the State Bar of Texas, an Honorary Society chartered by the State Bar of Texas. 2

4 Offshore Banking: Background! What is an Offshore Bank?! An!offshore bank!is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include some or all of strong privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)! less restrictive legal regulation;! low or no taxation (i.e. tax havens);! easy access to deposits (at least in terms of regulation);! protection against local political or financial instability. 3

5 Offshore Banking: Background! What is an Offshore Bank?! While the term originates from the Channel Islands "offshore" from Britain, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location (Switzerland, Luxembourg and Andorra in particular are landlocked).! Major offshore havens include:! Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Channel Islands (Jersey and Guernsey), Cook Islands, Cyprus, Dominica, Gibraltar, Hong Kong, Isle of Man, Labuan, Malaysia, Liechtenstein, Luxembourg, Macau, Mauritius, Monaco, Montserrat, Nauru, Panama, Saint Kitts and Nevis, Seychelles, Singapore, Switzerland, Turks and Caicos Islands. 4

6 Offshore Banking: Background! What is an Offshore Bank?! Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. This, of course, being the subject of today s presentation.! Except for certain persons who meet fairly complex requirements, the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad.! Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts which may or may not be numbered bank accounts they may have. 5

7 Offshore Banking: Background! What is an Offshore Bank?! Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal.! Following September 11, 2001, there were many calls for more regulation on international finance, in particular concerning offshore banks, tax havens and clearing houses such as Clearstream, based in Luxembourg, being accused of being a crossroads for major illegal money flows. 6

8 Offshore Banking: Background! Just how much money are we talking about?! Experts believe that as much as half the world's capital flows through offshore centers.! Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals.! According to Merrill Lynch and Gemini Consulting's World Wealth Report for 2000, one third of the wealth of the world's high networth individuals nearly $6 trillion out of $17.5 trillion may now be held offshore. Note this report is 10 years old!! Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts. 7

9 Offshore Banking: Background! Just how much money are we talking about?! The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output.! Today, offshore is where most of the world's drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world's poorest 20%. 8

10 Offshore Banking: Background! Just how much money are we talking about?! Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands are the fifth largest banking center globally in terms of deposits.! So, as you can see Offshore Banking is big and your universe of clients is quite large. However, as you will also see many people may have reporting requirements to the IRS who did not even know it and, still others may know it but are too afraid to come forward. We will also discuss that problem today as well. 9

11 Offshore Banking: Secrecy! The Bank Secrecy Act of 1970 (BSA)! The BSA provides that the Secretary of the Treasury shall require a U.S. resident or citizen, or a person in and doing business in the United States, to keep records and/or file reports when that person makes a transaction or maintains a relation for any person with a foreign financial agency. See 31 U.S.C. Section 5314(a).! These requirements were designed to gather information that could be useful in carrying out criminal, tax, or regulatory investigations and to allow enforcement officials to identify and track illicit funds and unreported income in an effort to prevent money laundering, terrorism, and other crimes. See 31 U.S.C Section 5311; IRS FBAR Workbook available at:! 10

12 Offshore Banking: Secrecy! The Bank Secrecy Act of 1970 (BSA)! The regulations implementing the BSA generally require each person subject to the jurisdiction of the United States that has a financial interest in, or signature or other authority over, bank, securities, or other financial accounts in a foreign country to file an FBAR for each calendar year if the aggregate value of the accounts exceeds $10,000. See 31 C.F.R ! NOTE: FBARs must be filed on or before June 30 of each calendar year for accounts held in the previous year. 11

13 Offshore Banking: Secrecy! The Bank Secrecy Act of 1970 (BSA)! FBAR filers must generally maintain a record of:! (i) the name maintained on each reportable account;! (ii) the number or other designation of the account;! (iii) the name and address of the foreign bank or other person with whom the account is maintained;! (iv) the type of account, and! (v) the maximum value of the account during the reporting period, for five years.! See 31 U.S.C. section 5311; 31 C.F.R

14 Offshore Banking: Secrecy! The Bank Secrecy Act of 1970 (BSA)! What if my client has inadvertently failed to file?! Non-willful failure to file an FBAR is subject to a penalty of up to $10,000. See 31 U.S.C. section 5321(5)(B)(i). The penalty may be waived if the violation was due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported. See 31 U.S.C. section 5321(5)(B)(ii).! Note: Reasonable cause is unlikely to exist for most inadvertent failures to file an FBAR. 13

15 Offshore Banking: Secrecy! The Bank Secrecy Act of 1970 (BSA)! What if my client willfully failed to file?! Willful failure to file an FBAR is subject to a penalty equal to the greater of $100,000 or 50% of the amount of the transaction or of the balance of the account at the time of the offense. See 31 U.S.C. section 5321(5)(C).! Criminal Prosecution: Willful failure to file an FBAR is also potentially subject to criminal penalties of up to $250,000 and five years imprisonment. See 31 U.S.C. section 5322(A). 14

16 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative! On February 8, 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI) following on the success of the 2009 Offshore Voluntary Disclosure Program (OVDP), which was announced many years after the 2003 Offshore Voluntary Compliance Initiative (OVCI) and the 2003 Offshore Credit Card Program (OCCP).! Initiatives such as these generally offer reduced penalties in exchange for taxpayers voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions. 15

17 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! In 2003, following significant publicity regarding the use of foreign accounts and credit card arrangements by U.S taxpayers, the IRS offered significant penalty relief for taxpayers participating in the OVCI which coincided with strong tax enforcement efforts under the OCCP.! Eligible OVCI taxpayers were required to file amended or delinquent returns for three tax years ( ) but could choose to bring tax years into the OVCI (and would not be examined for any earlier years). 16

18 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! The 2009 OVDP brought in at least 14,700 U.S. taxpayers (disclosing accounts in more than 60 countries) through the front door of IRS Criminal Investigation and untold thousands through a process of quietly amending returns and filing delinquent FBARs with the government.! For eligible taxpayers who ventured through the front door, the OVDP provided the certainty of no criminal prosecution and civil penalty relief they were required to pay back-taxes from 2003 to 2008, interest and a 20-25% penalty on the delinquent taxes.! The IRS also imposed a 20% FBAR-related penalty equal to the highest aggregate value of the financial account between 2003 and In limited situations, the FBAR-related penalty could be reduced to 5% of the account value or $10,000 per tax year. 17

19 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Approximately 1,321 taxpayers from 48 countries participated in the OVCI identifying approximately 400 offshore promoters.! The IRS agreed to not assert any 75% civil fraud penalties and the Financial Crimes Enforcement Network (FinCEN) agreed to not assert any civil penalties for the failure to timely file a Report of Foreign Bank and Financial Accounts (FBAR). 18

20 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Under the OVDI, eligible taxpayers have until August 31, 2011 to file all original and amended tax returns and include payment (or good faith arrangements to pay) for taxes, interest and accuracy-related penalties.! The new penalty framework requires a 25% FBAR-related penalty equal to the highest value of the financial account between 2003 and

21 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Only one 25 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account.! The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose. The penalties are identified in a series of Frequently Asked Questions available at irs.gov.! Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Subject to certain limitations, financial transactions occurring before 2003 are generally irrelevant for those participating in the OVDI. 20

22 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Taxpayers who are foreign residents and who were unaware they were U.S. citizens may qualify for a reduced 5% FBAR-related penalty. Others will also qualify for the 5% penalty if they:! (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);! (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or address; 21

23 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Taxpayers who are foreign residents and who were unaware they were U.S. citizens may qualify for a reduced 5% FBAR-related penalty. Others will also qualify for the 5% penalty if they:! (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and! (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). 22

24 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Taxpayers whose highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000 will qualify for a 12.5% FBAR-related penalty.! NOTE: IRS examiners will have no authority to negotiate a different FBAR-related penalty. 23

25 Offshore Banking: Coming Clean! Offshore Voluntary Disclosure Initiative (OVDI)! Under the 2011 OVDI, taxpayers will not be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes.! A similar provision in the OVDP has caused considerable frustration among taxpayers and their representatives.! The understanding of potentially applicable penalties may differ greatly in the eyes of a taxpayer as compared to an examiner. Anyone considering an OVDI submission must carefully examine all potential civil penalties and evaluate the risk of criminal prosecution. 24

26 No More Secrets! Offshore Banking: No More Secrets! The ability of a U.S. taxpayer to maintain an undisclosed, secret foreign financial account is fast becoming nonexistent.! Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, from others who participated in the OVDP and those who will participate in the OVDI who are required to identify their bankers and advisors.! Additional information will become available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC 6038D) become effective in the next few years. 25

27 No More Secrets! Offshore Banking: No More Secrets! Taxpayers having undisclosed interests in foreign financial accounts have until August 31, 2011 to participate in the 2011 OVDI.! Others may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. 26

28 Offshore Banking: FBARs Revised! Offshore Banking: FBARs Revised! On February 24, 2011, the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury issued final regulations under 31 CFR Part 1010 addressing the reporting of foreign financial accounts and the form used to file these reports (Form TD-F , Report of Foreign Bank and Financial Accounts, which is commonly referred to as the "FBAR" form). 27

29 Offshore Banking: FBARs Revised! Offshore Banking: FBARs Revised! While the language in the final regulations is substantially consistent with the proposed FBAR rules that were published one year ago, the FinCEN clarifies and revises certain provisions regarding which persons will be required to report accounts and which accounts will be reportable, as well as any specific exceptions to the filing requirements.! The Final Regulations continue to reserve on whether equity interests in foreign hedge funds, private equity funds, and other non-mutual company investment funds are treated as financial accounts subject to FBAR reporting. 28

30 Offshore Banking: FBARs Revised! Offshore Banking: FBARs Revised! The final rules are effective March 28, 2011, and apply to FBARs required to be filed by June 30, 2011, for foreign financial accounts maintained in 2010 and for reports required to be filed for all subsequent years.! Filers who properly deferred their filing obligations under IRS Notice (which extended the FBAR filing due date from June 30, 2010 to June 30, 2011 for certain groups) may, but are not required to, apply the provisions of the final rule in determining their FBAR filing requirements for reports due June 30, 2011, for foreign financial accounts maintained in years beginning before

31 Offshore Banking: FBARs Revised! What's New?! As noted earlier, the 2011 FBAR Form has no substantive changes from the previous FBAR Form; the main features of the form, including the layout and data entry boxes, remain the same. However, the instructions accompany the the 2011 FBAR Form have undergone substantial changes.! Among the changes:! The form provides definition of a United States person to mean a U.S. citizen or resident; entities, including but not limited to corporations, partnerships, or limited liability companies created or organized in the U.S. or under the laws of the U.S.; and trusts or estates formed under the laws of the U.S.! 30

32 Offshore Banking: FBARs Revised! What's New?! Among the changes:! There is now clarification of what a financial account and FFA are and what constitutes a U.S. person as having a financial interest in a FFA.! It provides definition of signature authority as the authority of an individual to control the disposition of assets held in a FFA by direct communication to the bank or other financial institution that maintains the financial account. 31

33 Offshore Banking: FBARs Revised! What's New?! Among the changes:! It also details additional exceptions for FBAR filing requirements for certain persons including: the spouse of an individual who files an FBAR (certain other conditions need to be met as well); governmental entities; international financial institutions; IRA owners and beneficiaries; participants in and beneficiaries of tax-qualified retirement plans; consolidated FBARs; and correspondent/nostro account. 32

34 Offshore Banking: FBARs Revised! What's New?! Among the changes:! The revised form details the penalties associated with failure to properly file an FBAR. Failure to file may result in a civil penalty not to exceed $10,000.! Again, a person who willfully fails to report a FFA may be subject to a civil penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. 33

35 Offshore Banking: FBARs Revised! What's New?! The foregoing is not an exhaustive list of changes made to the FBAR filing instructions. These are simply starting points to your own research and you may wish to refer to revised IRS instructions for more details.! The IRS has also issued guidance as to how to apply the new regulations and instructions.! All returns filed from March 28, 2011, forward should reference the final FBAR regulations and the revised FBAR form and instructions.! Returns filed before March 28, 2011, should have included either (a) a reference to the existing FBAR regulations, which remain in effect, along with previous FBAR guidance, or (b) the final FBAR regulations and revised FBAR instructions, including the draft instructions 34

36 Offshore Banking: FBARs Revised! Persons who must file! Only United States persons are required to file FBARs. A United States person includes:! A citizen of the United States.! A resident alien of the United States for U.S. federal income tax purposes, except that the term United States includes any state, the District of Columbia, the territories and insular possessions of the United States, and Indian tribe lands.! Note: an individual who is not a citizen of the United States, and lives full-time in Puerto Rico, is a United States person for FBAR purposes, even though the person is not a United States person for U.S. federal income tax purposes. 35

37 Offshore Banking: FBARs Revised! Persons who must file! Only United States persons are required to file FBARs. A United States person includes:! Any entity created, organized, or formed under the laws of the United States, any state, the District of Columbia, any territory or insular possession of the United States, or an Indian tribe. 36

38 Offshore Banking: FBARs Revised! Persons who must file! Only United States persons are required to file FBARs. A United States person includes:! Note: domestic corporations, trusts, partnerships, and limited liability companies are required to file FBARs.! For example, a domestic LLC with a single foreign owner and a financial interest in a foreign financial account would be required to file an FBAR, even though the foreign person would not be required to file an FBAR if it held an interest in the foreign financial account directly.! For example, if a U.S. citizen wholly owns a single-member domestic LLC that, in turn, holds an interest in a foreign financial account, both the LLC and its owner must file separate FBARs. 37

39 Offshore Banking: FBARs Revised! What Qualifies as a Reportable Account?! A foreign financial account subject to FBAR reporting includes any bank account, securities account, or other financial account that is located in a foreign country (which includes all geographical areas located outside of the United States, its territories and possessions). 38

40 Offshore Banking: FBARs Revised! What Qualifies as a Reportable Account?! A bank account subject to FBAR reporting includes any demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution that is physically located in a foreign country. See C.F.R (c)(1).! A securities account subject to FBAR reporting includes any account with a person engaged in the business of buying, selling, holding or trading stock or other securities that is physically located in a foreign country. See 31C.F.R (c)(2).! Note: This definition is intended to include a brokerage account and, presumably, a managed account, but is not intended to include an equity interest in a hedge fund or private equity fund. 39

41 Offshore Banking: FBARs Revised! What Qualifies as a Reportable Account?! An account physically located in a foreign country with a person that is in the business of accepting deposits as a financial agency.! An insurance or annuity policy with a cash value.! An account with a person that acts as a broker or dealer for futures or options transaction in any commodity on or subject to the rules of a commodity exchange or association.! A mutual fund or similar pooled fund that issues shares available to the general public, has a regular net asset value determination, and has a regular redemption feature. As indicated earlier, foreign hedge funds, venture capital funds, and private equity funds are largely unaddressed. 40

42 Offshore Banking: FBARs Revised! What Accounts are Excluded?! An account of a U.S. agency or department, an Indian tribe, or any state or political subdivision of a state (or a wholly-owned entity, agency, or instrumentality of any of these).! An account of an entity established under the laws of the United States, an Indian tribe, or any state or political subdivision of a state (or any intergovernmental compact between two or more states or Indian tribes) that exercises the power to tax, the power of eminent domain, or police powers on behalf of the United States, an Indian tribe, or any state or political subdivision of a state. 41

43 Offshore Banking: FBARs Revised! What Accounts are Excluded?! An account of an international financial institution of which the U.S. government is a member.! An account of a United States military banking facility designed to serve U.S. governmental installations abroad.! Correspondent (or nostro ) accounts used solely for bank-to-bank settlements. 42

44 Offshore Banking: FBARs Revised! What's does having a Financial Interest mean?! United States persons are required to file an FBAR if they have a financial interest in a foreign financial account.! A United States person has a financial interest in a foreign financial account under the FBAR rules if:! The United States person is the owner of record or has legal title to the account (whether the account is maintained for its own benefit or for the benefit of others).! The owner of record or holder of legal title is acting as agent, nominee, attorney, or in another capacity on behalf of the United States person. 43

45 Offshore Banking: FBARs Revised! What's does having a Financial Interest mean?! United States persons are required to file an FBAR if they have a financial interest in a foreign financial account.! A United States person has a financial interest in a foreign financial account under the FBAR rules if:! A corporation is the owner of record or holder of legal title, and the United States person owns (directly or indirectly) more than 50% of the corporation s vote or value.! A partnership is the owner of record or holder of legal title, and the United States person owns (directly or indirectly) more than 50% of the interest in profits or capital of the partnership. 44

46 Offshore Banking: FBARs Revised! What's does having a Financial Interest mean?! United States persons are required to file an FBAR if they have a financial interest in a foreign financial account.! A United States person has a financial interest in a foreign financial account under the FBAR rules if:! A trust is the owner of record or holder of legal title, and a United States person (i) is the trust s grantor and has an ownership interest in the trust for U.S. federal income tax purposes, or (ii) either (A) has a present beneficial interest in more than 50% of the trust s assets or (B) receives more than 50% of the trust s current income. 45

47 Offshore Banking: FBARs Revised! What's does Signature authority mean?! Any United States person with signature or other authority over a foreign financial account is generally required to file an FBAR with respect to that account.! Under the FBAR rules, an individual is deemed to have signature or other authority over a foreign financial account if the individual can control the disposition of money or other property in the account by direct communication (whether in writing or otherwise, and whether alone or with the consent of other individuals) to the person with whom the account is maintained. 46

48 Offshore Banking: FBARs Revised! What's does Signature authority mean?! Officers and employees who have signature or other authority over, but no financial interest in, an entity s foreign financial accounts are not required to file an FBAR with respect to the accounts if the entity is:! A bank examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Office of Thrift Supervision, or the National Credit Union Administration.! A financial institution registered with and examined by the Securities Exchange Commission (the SEC ) or the Commodities Futures Trading Commission. 47

49 Offshore Banking: FBARs Revised! What's does Signature authority mean?! Officers and employees who have signature or other authority over, but no financial interest in, an entity s foreign financial accounts are not required to file an FBAR with respect to the accounts if the entity is:! An entity registered with and examined by the SEC that provides services with respect to the account to an investment company registered under the Investment Company Act of 1940 (i.e., the entity is an investment advisor to a mutual fund that owns the account).! An entity with a class of equity securities or American depository receipts listed on a U.S. national securities exchange, or a U.S. subsidiary named in a consolidated FBAR report of a parent entity that has a class of equity securities listed on a U.S. national securities exchange. 48

50 Offshore Banking: FBARs Revised! What's does Signature authority mean?! Officers and employees who have signature or other authority over, but no financial interest in, an entity s foreign financial accounts are not required to file an FBAR with respect to the accounts if the entity is:! A U. S. entity that has a class of equity securities, or foreign entity with American depository receipts in respect of equity securities, registered under section 12(g) of the Securities Exchange Act (i.e., the entity has $10 million of assets and 500 or more shareholders of record). 49

51 Offshore Banking: FBARs Revised! Exceptions to Every Rule: Special Persons! Are there any special situations I need to know about?! A United States person that has a financial interest in 25 or more foreign financial accounts may file an FBAR form that indicates only the number of financial accounts and certain other basic information on the FBAR report, if the United States person agrees to provide detailed information regarding each account to the IRS upon request.! In addition, an entity that is a United States person and owns (directly or indirectly) more than a 50% interest in an entity that is required to file an FBAR may file a consolidated report on behalf of itself and the other entity. 50

52 Offshore Banking: FBARs Revised! Exceptions to Every Rule: Special Persons! Are there any special situations I need to know about?! Participants and beneficiaries in retirement plans under sections 401 (a), 403(a), or 403(b) of the Internal Revenue Code, as well as owners and beneficiaries of IRAs under section 408 or Roth IRAs under section 408A of the Internal Revenue Code, are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA. The retirement plan/ira still must file an FBAR. 51

53 2012 Update! This year the Internal Revenue Service (IRS) reopened the offshore voluntary disclosure program. The IRS did so because the prior program was very, very successful. In fact, the two prior programs combined collected more than $4.4 billion!! The IRS also reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.! The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. Because of prior successes, this new program will be open for an indefinite period until otherwise announced.

54 2012 Update! The program is similar to the 2011 program in many ways, but with a few key differences.! Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward.! For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers or decide to end the program entirely at any point.! The third offshore effort also comes as the IRS announced that it has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program.! On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. These numbers are expected to grow as the IRS processes the 2011 cases.

55 2012 Update! In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives.! Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.! Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.! The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

56 2012 Update! For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure.! That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.! Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

57 2012 Update! Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.! Smaller offshore accounts will face a 12.5 percent penalty.! People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate.! As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

58 Offshore Banking: FBARs Revised! A Final Word about Trusts! Are there any special situations I need to know about?! Finally, a United States person that either has a present beneficial interest in more than 50% of a trust s assets or receives more than 50% of a trust s current income, and would be required to file an FBAR, is not required to report the trust s foreign financial accounts if the trust, a trustee of the trust, or agent of the trust is a United States person that files an FBAR disclosing the trust s foreign financial accounts. 52

59 Offshore Banking: Caution! Caution: Curve Ahead.! Your clients may not even be aware of the common pitfalls:! Client a U.S. Citizen decides to buy a flat in London so that he will have a place to stay while on vacation, and he might retire there. Opens an account in England and wires $500k to an account at the Bank of Scotland to use as a down payment. Two weeks later he turns that money over to his solicitor to close the purchase. The client is required to file an FBAR.! Client was born in India; he has lived in this country for 20 years, but still maintains accounts in India in order to provide for family members there, and to invest a portion of his assets in the growing Indian economy. 53

60 Offshore Banking: Caution! Caution: Curve Ahead.! Your clients may not even be aware of the common pitfalls:! Client is the vice president of a company with a division in France. The vice president is a signer on the corporate accounts in France. The VP must file his own FBAR, in addition to any corporate FBARs.! Client has a Canadian Retirement Account. 54

61 Questions?! Q&A! A question and answer session will follow this presentation; however, if you prefer you may submit questions to questions@onepathlpm.com.! Your instructor will reply to all questions following the conclusion of the presentation. In some cases, responses may be briefly delayed due to the volume of questions received. 55