6/2011 Page 1. Foreign Bank Account Reporting and Enforcement Update:

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1 Foreign Bank Account Reporting and Enforcement Update: The New FBAR Regulations and the Internal Revenue Service s 2011 Offshore Voluntary Disclosure Initiative Presented by Matthew D. Lee, Jennifer Bell, and Ryan Dudley June 2011 Housekeeping Please set your cell phones to vibrate For CLE credit, complete the request form in your packet and return completed forms to the front desk For CPE credit, sign sheet at registration desk after the seminar Please complete the evaluation forms in your packets and return them to the registration desk 1 Speakers Matthew D. Lee, Partner, White Collar Defense and Investigations practice group, Blank Rome LLP Jennifer Bell, Associate, Business Tax practice group, Blank Rome LLP Ryan Dudley, Director of International Tax Services, Friedman LLP 2 6/2011 Page 1

2 Matthew D. Lee Matthew D. Lee Partner Blank Rome LLP Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his practice on all aspects of white collar criminal defense and federal tax controversies. He has extensive experience in advising clients on issues regarding foreign bank account reporting (FBAR) obligations and the Internal Revenue Service s 2009 Offshore Voluntary Disclosure Program and 2011 Offshore Voluntary Disclosure Initiative. Mr. Lee has published numerous articles regarding the IRS voluntary disclosure programs and FBAR reporting obligations. He has also represented clients in all stages of proceedings before the Internal Revenue Service, including audits, appeals, and collections, and Tax Court litigation. Mr. Lee also has experience in conducting corporate internal investigations and advising clients as to corporate compliance issues involving the Bank Secrecy Act, the USA Patriot Act, and anti-money laundering laws and regulations. Mr. Lee has represented both corporations and individuals in criminal investigations involving tax, money laundering, health care, securities, public corruption, and fraud offenses, and has significant experience in handling all stages of federal litigation including trials and appeals. Mr. Lee also serves as a Lecturer of Law at the Villanova University School of Law. 3 Jennifer Bell Jennifer Bell Associate Blank Rome LLP JBell@BlankRome.com Jennifer Bell concentrates her practice in the area of business tax law. She counsels corporate clients and individuals regarding undeclared foreign bank accounts, including FBAR reporting obligations, and has represented numerous clients in the Internal Revenue Service s Voluntary Disclosure Program. She also counsels public and private corporations, partnerships, tax-exempt organizations, and individuals in aspects of United States and international tax law, including: mergers and acquisitions bankruptcy reorganizations, workouts, and restructurings financing arrangements real estate transactions tax-free reorganizations joint ventures formation, operation and acquisition of Subchapter S Corporations and limited liability companies federal, state, and local criminal and civil tax controversies, including audits, administrative appeals, and litigation tax consequences regarding matrimonial matters tax issues related to maritime matters Ms. Bell graduated from Columbia Law School, where she was a Harlan Fiske Stone scholar. While attending law school, she was a member of the Columbia Business Law Review. Ms. Bell is currently enrolled in the Tax LLM program at New York University School of Law. 4 Ryan Dudley Ryan Dudley CPA, CA, MIT Director of Int l Tax Services Friedman LLP RDudley@friedmanllp.com Ryan Dudley is the Director of the International Tax Services group at Friedman LLP. As the practice leader, Ryan specializes in developing cross border commercial structures and financing strategies to optimize international operations and transactions. With nearly 20 years of public accounting and investment advisory experience, Ryan's clients have ranged from Fortune 50 multi-national corporations, to private equity and hedge funds, through to small businesses and start-ups. He has advised clients in industries as diverse as banking and finance, technology, real estate, infrastructure, manufacturing and pharmaceuticals. Ryan's experience includes: Advising on the U.S. tax implications of inbound and outbound transactions Planning for inbound and outbound acquisitions, dispositions and reorganizations Developing offshore holding, financing and operating structures Structuring corporate and partnership arrangements Managing intellectual property used in international businesses Creating financial instruments and structures Tax treaty analysis A solid understanding of numerous significant tax regimes around the world, including income tax and VAT/GST regimes Coordinating offshore advisors and experts in delivering advice in relation to relevant multijurisdictional investments and transactions Ryan is a regular speaker at conferences and is a contributor to a number of publications, including Accounting and Financial Planning for Law Firms and Tax Advisor. 5 6/2011 Page 2

3 Introduction Topics to be covered Supplemental materials 2011 Report of Foreign Bank and Financial Accounts TD F ( FBAR ) 2011 IRS Offshore Voluntary Disclosure Initiative i i Frequently Asked Questions and Answers (updated June 2, 2011) Final FBAR Regulations issued February 24, 2011 FinCEN Notice issued May 31, 2011 Opt Out and Removal Procedures issued June 1, Foreign Account Reporting in General Required as part of Bank Secrecy Act Form TD F , Report of Foreign Bank and Financial Accounts ( FBAR ) (June 30) Form 1040, Schedule B, Part III (April 15) Penalties: criminal and civil 7 IRS/DOJ Enforcement Efforts The IRS has been steadily increasing the pressure on offshore financial institutions that facilitate concealment of taxable income by US citizens. That pressure will only increase under my watch. Those who are unlawfully hiding assets should come and get right with their government through our voluntary disclosure process. IRS Commissioner Douglas H. Shulman Testimony before Congress, March 17, /2011 Page 3

4 DOJ Tax Offshore Compliance Initiative The Tax Division s top litigation priority is the concerted civil and criminal effort to combat the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually. U.S. Department of Justice website 9 UBS AG Bradley Birkenfeld UBS whistleblower February 2009: UBS and United States enter into Deferred Prosecution Agreement Estimate of 52,000 accounts at UBS held by U.S. citizens Initial round of UBS account holder information turned over to IRS February 2009 Nearly 5,000 accounts are turned over subsequently 10 Criminal Enforcement Efforts to Date 150 grand jury investigations of offshore banking clients 30 cases have been criminally charged 24 guilty pleas have been entered 2 individuals convicted after trial Numerous facilitators have also been criminally charged 10 bankers 2 attorneys 1 advisor 11 6/2011 Page 4

5 Criminal Enforcement Efforts, continued Other foreign banks under investigation DOJ website states that grand jury investigations of eight additional offshore banks have been opened John Doe summons served on HBSC (April 7, 2011) Criminal charges filed against Credit Suisse bankers United States v. Schiavo (D. Mass.) quiet disclosures no longer an option? 12 Criminal Enforcement Efforts, continued We are now mining the information we have received to date and have launched our next wave of investigations on banks, bankers, intermediaries and taxpayers. IRS Commissioner Shulman (May 18, 2011) DOJ/IRS now conducting in person interviews of voluntary disclosure participants as part of that effort Rumors of global resolution to be announced by U.S. this summer Enforcement Concluding Thoughts Our goal in this effort is to fundamentally change the risk calculus of taxpayers we are well on our way to deterring the next generation of taxpayers from using hidden bank accounts to cheat on their taxes. Through our ongoing efforts, we are demonstrating that the world has become a smaller place... that we will eventually find you if you are hiding assets overseas... and that the average American taxpayer can believe the tax system is fair. IRS Commissioner Shulman (May 18, 2011) Put simply, the word is out that placing assets in foreign accounts no longer provides the protection from disclosure it once did. U.S. Department of Justice website 14 6/2011 Page 5

6 New FBAR Rules Announced New, final regulations governing foreign bank account reporting requirements were announced by the Treasury Department on February 24, 2011 Effective for FBARs which are due to be filed by June 30, 2011, and for all subsequent calendar years Many significant changes Expected that Treasury will issue a new FBAR form with instructions to reflect these changes prior to the June 30 filing deadline Changes are incorporated in the remaining slides 15 Who is required to file an FBAR? An FBAR must be filed if all of the following requirements are satisfied: The filer is a U.S. Person; The U.S. Person has a financial account; The financial account is in a foreign country; The U.S. Person has a financial interest in, or signature or other authority over, the financial account; and The aggregate account balance of all such foreign accounts exceed $10,000 (in U.S. dollars) at any time during the calendar year 16 Who is a U.S. Person? A U.S. Person includes: A citizen of the U.S., A resident alien of the U.S., and A U.S. corporation, partnership, trust, limited liability company, or other type of business entity Generally includes: expatriates, U.S. citizens and residents residing abroad, certain foreign citizens who are working and paying taxes in the U.S., and individuals that are required to file FBARs annually even if they maintain joint accounts with a non-u.s. spouse Final regulations exclude the in and doing business in the U.S. terminology 17 6/2011 Page 6

7 What is a reportable financial account? Account is broadly defined to include any foreign bank, securities, or other financial accounts Bank accounts include savings deposits, demand deposits, checking accounts, and any other accounts maintained with a person engaged in the business of banking Securities accounts include accounts maintained with a person in the business of buying, selling, holding, or trading stock or other securities Other financial accounts include: An account with a person that is in the business of accepting deposits as a financial agency; An account that is an insurance policy with a cash value or an annuity policy; An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions (does NOT include hedge funds) 18 What is a financial interest? An individual has a financial interest in a foreign account if he or she is the owner of record of, or has legal title to, the account, regardless of whether the account is maintained for his or her own benefit or for the benefit of others. A U.S. person also has a reportable financial interest in a foreign bank account if the account is held by: An agent, nominee, or attorney on behalf of the U.S. Person; A corporation in which the U.S. Person owns more than 50% of the voting power or the total value of the shares; A partnership in which the U.S. Person owns directly or indirectly more than 50% of the interest in profits or capital; 19 What is a financial interest? Any other entity in which the U.S. Person owns directly or indirectly more than 50% of the voting power, total value of the equity interests or assets, or interest in profits; A trust, if the U.S. Person is the trust grantor and has an ownership interest in the trust for U.S. tax purposes; and A trust in which the U.S. Person either has a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income. Exempts participants/beneficiaries in certain types of retirement plans Requires joint account holders to each file an FBAR 20 6/2011 Page 7

8 When is an account foreign? An account is foreign if it is maintained in a foreign country. An account is NOT foreign if it is maintained with a financial institution located in the U.S. Custodial arrangements that do not permit the U.S. person to directly access their foreign holdings maintained by a U.S. global custodian bank are not foreign. 21 What is signature or other authority? Broadly defined as the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication to the person with whom the financial account is maintained The test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account. The final regulations also exempt certain individuals with signature or other authority over, but no financial interest in, foreign accounts. 22 Other New FBAR Rules Anti-Avoidance provision Streamlined reporting for 25 or more foreign accounts Consolidated reports Filing deadline extended until June 30, 2012 for certain employees or officers who have filing authority over, and no financial interest in, a foreign financial account (FinCEN Notice ) 23 6/2011 Page 8

9 2009 Offshore Voluntary Disclosure Program ( OVDP ) IRS Commissioner Douglas H. Shulman (March 26, 2009): My goal has always been clear to get those taxpayers hiding assets offshore back into the system. In the guidance to our people, we draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement. For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government. 24 OVDP Overview Designed to encourage taxpayers with undisclosed foreign bank accounts to come into compliance with U.S. tax laws and avoid possible criminal prosecution Uses a carrot Provides certainty about penalties Provides comfort from criminal prosecution and a stick FBAR penalties Criminal implications OVDP Overview 2009 OVDP ended on October 15, 2009 Participants were required to amend returns and submit FBARs for a six-year period ( ), other reporting requirements (e.g., Forms 3520, 5471, etc.) Penalties: 20% accuracy-related penalty 20% offshore penalty, may be reduced to 5% Approximately 15,000 taxpayers made voluntary disclosures involving bank accounts in more than 60 countries Since the 2009 program closed, more than 3,000 additional individuals have made voluntary disclosures to the IRS regarding foreign bank accounts 26 6/2011 Page 9

10 Lessons Learned From the 2009 OVDP Participation largely driven by UBS Deferred Prosecution Agreement and threat of turnover of account information through Swiss-U.S. treaty process Perception that many individuals choose not to come forward Exceedingly slow process through civil IRS Generally, one size fits all penalty structure Unforeseen extent of PFIC investments Special regime IRS Offshore Voluntary Disclosure Initiative ( OVDI ) IRS Commissioner Douglas H. Shulman (Feb. 8, 2011): Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system. Tax secrecy continues to erode.... We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase OVDI Overview OVDI was announced on February 8, 2011 and will only be available through August 31, The framework for the 2011 amnesty program includes the following: Penalty of 25% of the highest aggregate balance in their foreign bank accounts from 2003 to (Under limited circumstances, this penalty may be reduced d to either 12.5 or 5%.) Back taxes and interest 2003 through Accuracy-related and/or delinquency penalties of 20% of the taxes due. File all original and amended tax returns, and pay all taxes, interest, and penalties by the August 31 deadline. New procedure to request 90 day extension (where a good reason can be shown) 29 6/2011 Page 10

11 2011 OVDI Overview (Cont.) Includible assets (e.g., tangible assets such as real estate or art; intangible assets such as patents or stock or interests in a business; FAQ 35) Possibility of opting out FAQ 51 IRS accepts that taxpayers may have legitimate reasons to opt out IRS intends taxpayers to be treated no less fairly than if they had not entered the program, but will likely initiate separate recovery action Other options FAQs 17, 18, 38 FAQ 47 provides [a] practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account, may not prepare a current or future income tax return for that taxpayer without being in violation of Circular What about individuals who choose not to come forward under 2011 OVDI? Subject to possible criminal prosecution Civil penalties, including for years prior to 2003 (FAQ 11) Voluntary disclosure practice remains available New opt out and removal procedures 31 Questions? Matthew D. Lee, Blank Rome LLP Lee-M@blankrome.com, (215) Jennifer Bell, Blank Rome LLP JBell@blankrome.com, (212) Ryan Dudley, Friedman LLP RDudley@friedmanllp.com, (212) /2011 Page 11

12 Circular 230 Notice To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this presentation is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding gpenalties that may be imposed on them under the Code, and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Service. 33 6/2011 Page 12