CRIMINAL TAX: WHAT S NEXT ON THE FBAR FRONT?

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1 CRIMINAL TAX: WHAT S NEXT ON THE FBAR FRONT? LARRY ALAN CAMPAGNA, Houston Chamberlain Hrdlicka White Williams & Martin ELIZABETH COPELAND, San Antonio Oppenheimer, Blend, Harrison and Tate, Inc. JOHN ( JACK ) A. TOWNSEND, Houston Townsend & Jones LLP State Bar of Texas 29 th ANNUAL ADVANCED TAX LAW COURSE August 18-19, 2011 Houston CHAPTER 5

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3 LARRY A. CAMPAGNA. Texas Monthly magazine repeatedly has named Larry one of its "Texas Superlawyers," and his practice has been commended in The Best Lawyers in America, Chambers USA, and The Legal 500. Larry is a shareholder with Chamberlain, Hrdlicka, White, Williams and Martin, in Houston, Texas. His practice concentrates on federal, state and local tax controversies, both civil and criminal. He also teaches a course in the law of tax crimes and money laundering as an Adjunct Professor at the University of Houston Law Center. Larry is a co-author of the casebook Tax Crimes published by Lexis- Nexis. He also serves on the Advisory Board of Editors of the Journal of Tax Practice and Procedure. Larry received his B.A. (with High Honors and Special Honors in Plan II) and J.D. degrees from the University of Texas at Austin. Larry has served the American Bar Association Section of Taxation as Chair of the Committee on Civil and Criminal Tax Penalties, as Chair of a Task Force on Offshore Credit Card Cases, and as a member of the Committee on Appointments to the Tax Court; he formerly served as Chair of the Committee on Employment Taxes and as a subcommittee chair for IRS Investigations and Procedures. His major cases include: representing the first taxpayer to be awarded attorney's fees by the Fifth Circuit Court of Appeals; serving as lead counsel in one of the largest project cases in the history of the United States Tax Court; and successfully defending a "Final Four" accounting firm in a large tax malpractice case. In 1995, Larry was unanimously inducted as a Fellow of the American College of Tax Counsel. He is the proud father of a seventeen year old son who long ago learned to stuff his father's jump shot.

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5 ATTORNEY BIOGRAPHY + South Texas IRS/Practitioners Council, Former San Antonio representative FIRM RANKINGS Oppenheimer, Blend, Harrison and Tate, Inc. has been ranked as San Antonio's leading Tax Law Firm by Woodward/White, Inc. (2009) Elizabeth A. Copeland Shareholder ecopeland@obht.com AREAS OF EXPERIENCE + Federal Income Taxation Planning and Controversy + Texas Margin Tax and Sales Tax Planning and Controversy + Board Certified in Tax Law by the Texas Board of Legal Specialization EDUCATION + J.D., The University of Texas School of Law, B.B.A., with honors, Accounting, The University of Texas at Austin, 1986 PROFESSIONAL AFFILIATIONS Recipient of The Janet Spragens Pro Bono Award as presented by The American Bar Association, Section of Taxation + Honored by the American Society of Women Accountants as regional winner of the 2007 Balance Award + Recognized as one of the Best Lawyers in America 2010, as published by Woodward/White, Inc. ( ) + Recognized by Law & Politics and Texas Monthly magazine as a Texas Super Lawyer in the area of Tax Law ( ) + Listed by Scene in SA magazine as one of San Antonio s Best Tax Law Attorneys ( ) + American Bar Association, Tax Section Committee on Appointments to the Tax Court, Chair Court Procedure and Practice Committee, Member Pro Bono Committee, Vice Chair Nominating Committee, Member + State Bar of Texas Treasurer Advanced Tax Law Course, Planning Committee Member Tax Controversy College, Planning Committee Member + Former Adjunct Professor, Our Lady of the Lake University School of Business + San Antonio Bar Association + American Bar Association Peer Mediation Project + Bexar County Women s Bar Association Member Former Vice President, Treasurer and Director ADMITTED + To the practice of law in Texas + U. S. Tax Court + Western District of Texas + Certified Public Accountant Texas, 1988 ADDITIONAL INFORMATION Elizabeth works on all matters pertaining to Federal and State income taxation, both planning and tax controversies. She has expertise in dealing with the Internal Revenue Service at the administrative appeals level and in litigation. Recent United States Tax Court cases she has tried include: Sunbelt Clothing Company, Inc. v. Commissioner (taxpayer victory) AnnMarie Washington v. Commissioner (government concession after trial) Union Ganadera Regional de Chihuahua, Inc. v. Commissioner (taxpayer victory). Elizabeth focuses on assisting businesses in determining the types of entities that best suit their needs, from the perspectives of tax savings and operational efficiency. She also assists taxpayers with foreign account disclosures and with criminal tax matters. Her previous experiences include: United States Tax Court, Washington, D.C.: Attorney Advisor, Judge Mary Ann Cohen, August 1992-August 1993 Texas Supreme Court, Austin, Texas: Intern, Justice Eugene A. Cook, 1992 Ernst & Young, Dallas, Texas, , and San Antonio, Texas, Elizabeth helped the State Bar of Texas form the Nation s first statewide Tax Court Pro Bono program serving taxpayers in Dallas, El Paso, Houston, Lubbock, and San Antonio. The program has been used as a model for similar Bar-based programs throughout the United States. 711 NAVARRO, SIXTH FLOOR SAN ANTONIO, TEXAS PHONE FAX SIDNEY BAKER SOUTH, SUITE 222 KERRVILLE, TEXAS PHONE FAX

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7 JOHN A. ( JACK ) TOWNSEND Partner, Townsend & Jones, L.L.P Kirby Dr., Suite 830, Houston, Texas Tel: (713) Fax: (713) jack@tjtaxlaw.com Web: Focus of Practice Experience Civil and Criminal federal income tax controversy matters. Federal Tax Matters, including Tax litigation in the U.S. Tax Court, U.S. District Courts, U.S. Court of Federal Claims, most of the U.S. Courts of Appeals, and United States Supreme Court and before the IRS, involving: Criminal cases (representing a defendant in the KPMG criminal tax case United States v. Stein in the Southern District of New York touted by DOJ as the largest criminal tax case ever, and certainly one of the most controversial; the Second Circuit Court of Appeals affirmed the dismissal of this defendant and 12 others based upon prosecutorial misconduct in forcing KPMG to withdraw payment of their fees under DOJ s Thompson Memorandum. United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006) and United States v. Stein, 495 F. Supp. 2d 390 (S.D.N.Y. 2007), aff'd United States v. Stein, 541 F.3d 130 (2d Cir. 2008). Civil cases (including transfer pricing ( 482) and related competent authority issues), foreign tax credit and outbound transfer issues). Expert testimony with respect to federal tax matters. Past Employment U. S. Dept. of Justice, Tax Division (Trial ; Appeals ) Activities University of Houston-Adjunct Professor of Law in the Tax Program, and 1993 through present (teaching Tax Procedure (each Fall Semester) and Tax Fraud and Money Laundering (every other Spring Semester)). Participant for programs by the ABA Tax Section's Court Procedure Committee; Tax Executives Institute, the Texas State Bar (partnerships and oil and gas), Houston Bar Association (partnerships), New York University Federal Tax Institute (tax procedure); University of Houston School of Law (criminal tax), and Southern Methodist University School of Law (partnerships and oil and gas taxation). Mr. Townsend has authored the following books (downloadable from the firm website) for his courses at the University of Houston Law School: Federal Tax Crimes (2011); and Federal Tax Procedure (2010).

8 Mr. Townsend has co-authored a book on Tax Crimes in the Lexis-Nexis graduate tax series. Co-authors are Professors Steven Johnson and Scott Schumacher and Larry Campagna, a practitioner and adjunct at University of Houston Law School where he and Mr. Townsend jointly teach the Tax Fraud and Money Laundering course. Mr. Townsend has authored many articles, including the following: C Tax Obstruction Crimes: Is Making the IRS s Job Harder Enough? (In 2009 in Houston Business and Tax Journal (on line article at C Judge Posner's Opinion in Kikalos, 108 Tax Notes 593 (2005). C Analysis of the Fastow Plea Bargains, 102 Tax Notes 1425 (2004). C Tax Treaty Interpretation, 55 Tax Lawyer 219 (Fall 2001). C Burden of Proof in Tax Cases: Valuations and Ranges, 2001 TNT (2001). C Taxpayer Rights in Criminal Investigations, 90 Tax Notes 1842 (2001). C Reconciling Section 482 and the Nonrecognition Provisions, 50 Tax Lawyer 701 (1997). C Audits and Appeals: Developments, 54 N.Y.U. Inst. on Fed. Taxation, ch. 26 (1996). Member Admitted American Bar Association, Tax Section Texas State Bar Association, Tax Section. Houston Bar Association (Past President and Director of Tax Section) Houston Tax Roundtable (Past Chair) The Tax Procedure Group (Past Chair) Texas Education University of South Carolina, A.B., University of Virginia, LL.B., New York University LL.M. (Taxation), Certification Honors Tax Law Specialist, Texas Board of Legal Specialization. Special Commendation Award at Attorney General's Awards Ceremony, Department of Justice; and Tax Division Meritorious Service Award. Listed since 1997 among America s top tax lawyers in The Best Lawyers in America, the premier national peer group lawyer ratings. Listed in Texas Lawyer s Go-to-Guide as being among Texas top 5 tax lawyers (October 15, 2002). Listed in Chambers USA Guide to America s Leading Lawyers for Business Listed in Who s Who Legal (Texas 2008) -2-

9 TABLE OF COTENTS INTRODUCTION... 1 BANK SECRECY ACT... 2 FBAR AUTHORITY... 3 FBAR IN GENERAL... 3 DEFINITION OF A UNITED STATES PERSON... 5 DEFINITION OF FINANCIAL ACCOUNTS... 6 DEFINITION OF FINANCIAL INTEREST... 7 DEFINITION OF SIGNATURE OR OTHER AUTHORITY... 7 REPORTING FOR JOINT ACCOUNTS... 8 FBAR PENALTIES... 8 STATUTE OF LIMITATIONS TO ASSESS PENALTIES... 9 PENALTY SUMMARY HISTORICAL IRS VOLUNTARY DISCLOSURE PRACTICE IRM DEPARTMENT OF JUSTICE VOLUNTARY DISCLOSURE POLICY PRIOR VOLUNTARY DISCLOSURE PROGRAMS DOUGLAS H. SHULMAN, IRS COMMISSIONER FEBRUARY 8, OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE POTENTIAL CIVIL PENALTIES THAT COULD APPLY HIRE ACT OF 2010 AND FACTA DEPARTMENT OF THE TREASURY - OPT OUT AND REMOVAL GUIDE DRAFT FORM OF STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS i

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11 Criminal Tax: What s Next on the FBAR Front? Section of Taxation State Bar of Texas August 18, 2011 Larry Alan Campagna, Chamberlain Hrdlicka White Williams & Martin Houston TX Elizabeth Copeland, Oppenheimer, Blend, Harrison and Tate, Inc. San Antonio TX John ( Jack ) A. Townsend, Townsend & Jones LLP Houston TX Introduction Some topics we ll cover: Overview of FBAR reporting requirements Overview of potential FBAR penalties IRS Voluntary Disclosure Practice Treatment of Taxpayers in the 2009 Offshore Voluntary Disclosure Program (OVDP) IRS Voluntary Disclosures Post-OVDP 2011 Offshore Voluntary Disclosure Initiative (OVDI) Considerations in opting-out of the OVDP or the OVDI Due diligence requirements by representatives of OVDI taxpayers Overview of Foreign Account Reporting Compliance (FATCA) And more! Objectives: Develop a practical understanding of the FBAR foreign account reporting requirements Gain awareness of recent developments surrounding the 2011 new Offshore Voluntary Disclosure Program and the pending Offshore Voluntary Disclosure Initiative Develop a practical and strategic approach to delinquent FBARs, voluntary disclosures and current IRS examination procedures 1

12 Bank Secrecy Act Foreign Bank and Financial Accounts Report (FBAR) reporting requirements founded in the Bank Secrecy Act (BSA) of 1970 Authorizes the Secretary of the Treasury (Secretary) to require residents or citizens of the United States to keep records and/or file reports concerning transactions with any foreign agency Financial Crimes and Enforcement Network (FinCEN) delegated enforcement to IRS Bank Secrecy Act U.S. citizens, residents or a person in and doing business in the U.S. must file a report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year Taxpayers comply py by noting the account on their income tax return and by filing Form , the FBAR Due date is June 30 th each year 2

13 31 U.S.C FBAR Authority 31 U.S.C. 5321(a)(5) Instructions to the FBAR Internal Revenue Manual (IRM) Internal Revenue Manual (IRM) FBAR in General FBAR is not a tax return, but an information report filed with the Treasury Indicated on Form 1040, Schedule B, Part III Deadline for filing FBAR is on or before June 30 th the following year No extensions granted FBAR is not attached to taxpayer s individual income tax return Not subject to IRC Section 6103 confidentiality and nondisclosure protections 3

14 FBAR in General (cont.) Report of Foreign Bank and Financial Accounts TD F (FBAR) is available at FBAR is filed by mailing to: U.S. Department of Treasury P.O. Box Detroit, MI FBAR is considered filed when received in Detroit - NOT when postmarked Who Must File the FBAR? AUnited States person must file an FBAR report if that person has: A financial interest in; Asignature authority; Or any other authority over any financial account(s) in aforeign country and the aggregate value of these account(s) exceeds $10, at any time during the calendar year 4

15 Definition of a United States Person A United States Person is a citizen or resident of the United States Citizen: look for U.S. birth naturalization papers certificate or Resident: not defined in FBAR instructions, statute or regulations. Look to: Green Card test Substantial presence test Persons file afirst year election on his income tax return to be treated as a resident alien Definition of a United States Person (cont.) Aperson doing business in the United States The term person includes individuals and all forms of business entities, trusts, and estates A certificate of incorporation from a U.S. state establishes that the corporation is au.s. Person Aforeign subsidiary of au.s. Person is not subject to the FBAR filing requirements A corporation that owns directly or indirectly more than 50 percent interest in one or more other entities is permitted to file aconsolidated FBAR 5

16 Definition of Financial Accounts Financial accounts are: Bank accounts Savings accounts Checking accounts Time deposits Securities accounts Mutual funds Brokerage accounts Securities derivatives accounts Definition of Financial Accounts (cont.) Accounts where the assets are held in a commingled fund Owner holds an equity interest in the fund Any other account maintained in a foreign financial institution or with a person doing business as a financial institution An insurance policy having a cash surrender value NOT individual bonds, notes, or stock certifications held by the filer 6

17 Definition of Financial Interest Financial Interest includes accounts for which the U.S. Person is the owner of record or has legal title, whether the account is maintained on his or her own benefit or for the benefit of others including non-united States persons Also includes: Accounts where the owner of record or holder of legal title is a person acting as an agent, nominee, or in some other capacity on behalf of a U.S. Person A corporation in which a U.S. Person directly or indirectly owns more than 50% of the total value of the shares of stock An account where the owner of record or holder of legal title is: A partnership in with the U.S. person owns interest in more than 50% of the profits A trust in which the U.S. person either has a present beneficial interest in more than 50% of the current income Definition of Signature or Other Authority A U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank or other person with whom the account is maintained A person with other authority over an account is one who can exercise power that is comparable to signature authority over an account by direct communication, either orally or by some other means, to the bank or other person with whom the account is maintained 7

18 Reporting for Joint Accounts Each U.S. person jointly maintaining an account (or if several persons each own a partial interest in an account) must file an FBAR IRS will accept a single FBAR only for an account jointly held by a husband and wife FBAR Penalties The two primary penalties applicable to FBARs are Non-Willful and Willful: Non-Willful Penalty may be waived if there is reasonable cause. LMSB (Oct. 31, 2008) Examiners must weight facts and circumstances and determine whether: A warning letter is sufficient, i Penalties less than the mitigation guidelines are appropriate, or Penalties set forth in the mitigation guidelines are appropriate. Id. 8

19 FBAR Penalties (cont.) Willful Applies to any person who has willfully violated the FBAR reporting or recordkeeping provisions Test for willfulness is whether there was a voluntary, intentional violation of a known legal duty Burden to establish willfulness is on the IRS by clear and convincing evidence. ILM Compare and contrast United States v. Williams, 2010 U.S. Dist. LEXIS (ED VA 2010). If it is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted Willfulness may be demonstrated by the conscious choice to not comply with FBAR requirements Statute of Limitations to Assess Penalties The statute of limitations to assess a FBAR civil penalty is six years [31 USC Section 5321(b)(1)] even if the FBAR has not been timely filed, and once assessed, the government must bring an action to recover the assessed FBAR penalty within two years from the date of assessment. The statute of limitations for criminal BSA violations is five years 9

20 Penalty Summary The following chart highlights the civil and criminal penalties that may be asserted for not complying with the FBAR reporting and record keeping requirements for violations occurring after October 22, 2004: VIOLATION CIVIL PENALTIES CRIMINAL PENALTIES COMMENTS Non-Willful Violation Willful - Failure to file FBAR or retain records of account Willful - Failure to file FBAR or retain records of account while violating certain other laws Up to $10,000 for each negligent violation Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation Up to the greater of $100,000, or 50percent of the amount in the account at the time of the violation N/A Up to $250,000 or 5 years or both Up to $500,000 or 10 years or both Civil and Criminal Penalties may be imposed together. 31 U.S.C. 5321(d). 31 U.S.C. 5321(a)(5)(B) 31 U.S.C. 5321(a)(5)(C) 31 U.S.C. 5322(a) and 31 C.F.R (b) for criminal. The penalty applies to all U.S. persons. 31 U.S.C. 5322(b) and 31 C.F.R (c) for criminal. The penalty applies to all U.S. persons. Historical IRS Voluntary Disclosure Practice IRM ( ) 2009) Informal IRS practice since 1954 voluntary disclosure is an issue to be considered in the IRS decision re criminal prosecution referral Truthful, complete and timely disclosure before IRS has info re taxpayer Legal source income Taxpayer must: Fully cooperate with IRS Make good faith arrangements interest, and penalties to Disclose every aspect of noncompliance pay any tax, 10

21 Historical IRS Voluntary Disclosure Practice IRM (06 IRM ( ) 2009) Example (6) a. of IRS Voluntary Practice (IRM ( ) Disclosure (6) Examples of voluntary disclosures include: a. aletter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above. This is a voluntary disclosure because all elements...above are met Since 1952, the IRS has not referred a timely, truthful voluntary disclosure for criminal prosecution Department of Justice Voluntary Disclosure Policy Section 4.01, Criminal Tax Department of Justice ( ) Manual, U.S. Whenever a person voluntarily discloses that he or she committed a crime before any investigation of the person s conduct begins, that factor is considered by the Tax Division along with all other factors in the case in determining whether to pursue criminal prosecution If aputative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service s voluntary disclosure practice, the Tax Division may consider that factor in its exercise of prosecutorial discretion. It will consider, inter alia, the timeliness of the voluntary disclosure, what prompted the person to make the disclosure, and whether the person fully and truthfully cooperated with the government by paying past tax liabilities, complying with subsequent tax obligations, and assisting in the prosecution of other persons involved in the crime. 11

22 Prior Voluntary Disclosure Programs Program in 2003: Rev. Proc : Eligible OVCI taxpayers filed delinquent returns for three tax years ( ) paid all tax and interest, and received accurancy /delinquency penalties, but NO FBAR penalty. Program in 2009: OVDP taxpayers filed Six years amended d returns and FBARs ( ) paid all tax and interest and a20% penalty in lieu of the FBAR (and other) penalties. Douglas H. Shulman, IRS Commissioner February 8, 2011 Announced a new 2011 program through 8/31/11 This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them. Note that the 2009 OVDP closed with approximately 15,000 voluntary disclosures submitted. 12

23 2011 Offshore Voluntary Disclosure Initiative Covers eight tax years ( ) 2010) Requires payment of all taxes and interest 6662(a) 20% accuracy penalty applies 6651(a)(1) failure to file penalty applies, if applicable 6651(a)(2) failure to pay penalty applies, if applicable FBAR and/or other foreign account reporting penalties are covered by a 25% miscellaneous penalty 13

24 2011 Offshore Voluntary Disclosure Initiative (OVDI) - OVDI identified in IR (February 8, 2011) Ends August 31, 2011 IRS Criminal Investigation pre-clearance process remains Only Exceptions to the 25% penalty: A 12.5% FBAR-related penalty if the highest aggregate balance in all foreign accounts is less than $75,000 a5% FBAR-related penalty if Taxpayer did not open the account, had infrequent contact, minimal withdrawals and funds on deposit were previously taxed Taxpayers are foreign residents and were unaware they were U.S. citizens, or Taxpayers are foreign residents and paid tax in the foreign jurisdiction Do Not Use OVDI If No Underreporting But No FBAR If the taxpayer reported all income on his return and merely failed to file an FBAR, OVDI is not necessary and no penalty will apply for failures, as long as the taxpayer: Files the late FBARs with an explanatory statement to: Department of Treasury, Post Office Box 32621, Detroit, MI By August 31, 2011 (see FAQ 17) This savings clause extended from August 31st to November 1, 2011 by Notice The standard is based on fully reporting income not no tax due, so someone who owed no additional tax but failed to report foreign interest would not qualify under this savings clause The penalty protection also applies to failures to file other foreign reporting forms such as 5471s, 3520s, 8865s, 926s, etc. if there is no underreporting of income (see FAQ 18) For 2010 filings, Fin Cen Notice extended the time for filing FBARs to June 30, 2012 if the filing party was an employee or officer of a U.S. owned foreign corporation and such individual had no financial interest in the account, but had signatory or other authority over the foreign account 14

25 How to make a Voluntary Disclosure under the 2011 OVDI Submit pre-clearance request and identifying information (name, date of birth, social security number and address) and Power of Attorney (attached), if represented, by fax to the IRS Criminal Investigation Lead Development Center (LDC) at (215) For call (215) If cleared by CI, within 30 days submit Offshore Voluntary Disclosure Letter to IRS Criminal Investigation, Attn: Offshore Voluntary Disclosure Coordinator,600 Arch Street, Room 6404, Philadelphia, PA If notified that voluntary disclosure has been accepted submit full Voluntary Disclosure Package (see FAQ 25) for applicable years by August 31, 2011 to IRS, 3651 S. IH35 Stop 4301 AUSC, Austin, TX ATTN: 2011 Offshore Voluntary Disclosure Initiative 2011 OVDP Optional Voluntary Disclosure Letter After Preclearance, the taxpayer has 30 days to provide an Optional Voluntary Disclosure Letter that contains information about the foreign accounts including but not limited to: Information on accounts or assets that taxpayer has control or are is beneficial owner of the account or asset. The OVDI requires taxpayers to list any and all financial institutions and the country where the institution is located, dates the accounts were opened and/or closed, and point of contact at each financial institution An explanation of all face to face meetings, and any other communications regarding the accounts or assets with the financial institution(s). Also included are face to face meetings or communications regarding the accounts or assets with independent advisors/investment managers not from the financial institution(s) where the funds are held. Next, an OVDI Package must be submitted by 8/31/

26 2011 OVDI Voluntary Disclosure Package Copies of originally filed tax returns for all years Amended returns with applicable schedules of the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts) FBARs for foreign accounts maintained during calendar years covered by the voluntary disclosure and/or copies of previously filed FBARs Copy of signed Offshore Voluntary Disclosure Letter Payment of the tax, interest, accuracy-related related penalty, and, if applicable, the failure to file and failure to pay penalties (plus Forms 433-A and 433-B if unable to pay in full) 2011 OVDI Voluntary Disclosure Package Foreign Account or Asset Statements (NEW FORM) for each previously undisclosed foreign account or asset Penalty Computation Worksheet (NEW FORM) signed by the applicant and the applicant s representative, if the applicant is represented, setting forth: determination of the aggregate highest account balance of the undisclosed offshore accounts fair market value of foreign assets, and penalty computation Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties 16

27 2011 OVDI Voluntary Disclosure Package If highest aggregate account balance exceeds $1 million in any year, submit Foreign Financial Institution Statement (NEW FORM) for each foreign financial institution with which the taxpayer had undisclosed accounts or transactions If highest aggregate account balance exceeds $500, in any year, submit copies of offshore financial account statements reflecting all account activity for each tax year with an explanation of any differences between the amounts reported on the account statements and the tax returns If highest aggregate account balance is less than $500, in any year, copies of offshore financial account statements reflecting all account activity for each tax year must be available upon request 2011 OVDI Voluntary Disclosure Package Entity Issues Statement identifying all offshore entities for the tax years covered by the voluntary disclosure, whether held directly or indirectly, and the share of ownership or control for each entity For accounts or assets held in the name of aforeign entity, complete and accurate amended (or original, if delinquent) information returns required to be filed, including, but not limited to, Forms 3520, 3520-A, 5471, 5472, 926 and 8865 for all tax years covered by the voluntary disclosure If requesting waiver of the information reporting requirement on the basis that the entity had no purpose other than to conceal the taxpayer s ownership of assets, submit a completed and signed Statement on Dissolved Entities (available at IRS website) 17

28 PFICs For disclosures involving Passive Foreign Investment Company (PFIC) issues, provide a statement whether the amended returns involve PFIC issues during the tax years covered by the 2011 OVDI period, and if so, whether the applicant chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark-to-market (MTM) methodology authorized in IRC 1296 but does not require complete reconstruction of historical data (A description of this alternative method is included in FAQ 10) 2011 OVDI Examinations FAQ 26 and 27 Following receipt of the complete Voluntary Disclosure Package, a formal examination is not contemplated; although, the dsclosue disclosure wll will be assigned to a civil examiner to certify the tax returns for accuracy, completeness and correctness The examiner may ask any relevant questions, request any relevant documents, and contact third parties, if necessary, without converting the certification to an examination There are no appeal rights with respect to the OVDI determination 18

29 2011 OVDI Exchange Rate FAQ 31 Convert foreign currency by using the foreign currency exchange rate at the end of the year In valuing currency of a country that uses multiple exchange rates, use the rate that would apply if the currency in the account were converted into United States dollars at the close of the calendar year Each account is to be valued separately 2011 OVDI Calculations No de minimis unreported income exception -No amount of unreported income is considered de minimis for purposes poses of determining whether e there has been tax non-compliance with respect to an account or asset and whether the account or asset should be included in the base for the 25 percent penalty (FAQ 33) Pre-2003 Gains - Gain realized on a foreign transaction occurring before 2003 is not includible in the base for the 25% offshore penalty unless the proceeds remained offshore (FAQ 34) 19

30 2011 OVDI Calculations Biggest Problem Includible Assets (FAQ 35) All assets directly owned by the taxpayer, including financial i accounts holding cash, securities or other custodial assets; tangible assets such as real estate or art; and intangible assets such as patents or stock or other interests in au.s. or foreign business If assets are indirectly held or controlled by the taxpayer through an entity, the penalty may be applied to the taxpayer s interest in the entity or, if the IRS determines that t the entity is an alter ego or nominee of the taxpayer, to the taxpayer s interest in the underlying assets 2011 OVDI Calculations Includible Assets (FAQ 36) If foreign assets were acquired with funds that were subject to U.S. tax but on which h no such tax was paid, the 25% penalty would apply even if the assets are not producing current income If acquired with after-taxtax funds or from funds that were not subject to U.S. taxation and the assets have not yet produced any income, there has been no U.S. taxable event and no reporting obligation to disclose. Because there has not been tax noncompliance, the 25% penalty would not apply to those assets The taxpayer will be required to report any current income derived or gain from its disposition at such time in the future when realized 20

31 2011 OVDI Calculations Signature Authority (FAQ 38) a taxpayer having signature authority over an account will be liable for the 25% penalty if there is unreported income from the account and they are determined to have adirect or indirect beneficial interest in the account, if the account Is held in the name of a related person, such as a family member or a corporation controlled by the taxpayer Is held in the name of a foreign corporation or trust for which the taxpayer had atitle 26 reporting obligation, or Was related in noncompliance some other way to the taxpayer s tax However, if there is no unreported income with respect to the account, no penalty will be imposed 2011 OVDI Calculations Multiple Accountholders (FAQ 40/41 41) Only one 25% penalty will be applied with respect voluntary disclosures relating to the same account Each taxpayer who makes a voluntary disclosure will be liable for the 25% penalty on their percentage of the highest aggregate balance in the account If there are multiple individuals with signature authority over a trust account, the penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose The reporting requirements for filing an FBAR, however, do not change -every individual who is required to file an FBAR must file one to 21

32 2011 OVDI Taxpayer Representatives FAQ 47 If a taxpayer seeks the advice of a tax practitioner, the practitioner must exercise due diligence in determining the correctness of any oral or written representations made to the client about the program and the implications for that taxpayer of going forward If the taxpayer decides to proceed with the disclosure, the practitioner must exercise due diligence in determining the correctness of any oral or written representations that the practitioner makes during the representation A practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, aforeign financial account, may not prepare a current or future income tax return for that taxpayer without being in violation of Circular 230 No Appeals from 2011 OVDI? (FAQ 49) The OVDI penalty framework and the agreement to limit tax exposure to years 2003 through 2010 are ae package age terms under the 2011 OVDI. If any part of the offshore penalty is unacceptable to the taxpayer, the case will be examined and all applicable penalties will be imposed (see also FAQ 51) See also Opt Out discussion below After a full examination, any tax and penalties imposed by an examination may be appealed (but the OVDI civil resolution will not be available in Appeals) 22

33 No 2011 OVDI Examiner Discretion (FAQ 50) The OVDI examiners do not have discretion to settle cases for amounts less than what is properly due and owing However, under no circumstances will taxpayers be required to pay apenalty greater than what they would otherwise be liable for under the maximum (willful) penalties imposed under existing statutes. No non-willful penalties will be considered unless the taxpayer opts out of the program Reduced 5% OVDI Penalty (FAQ 52) 5% OVDI penalty is available to: Taxpayers who meet all of the following conditions: They did not open or cause the account to be opened (unless the bank required that anew account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); and They have exercized minimal contact with the account and have not withdrawn more than $1,000 in any year covered by the voluntary disclosure except for a withdrawal closing the account and transferring the funds to an account in the United States and only account earning escaped taxation; or Foreign residents and who were unaware they were U.S. citizens (note, in this case, foreign assets are not included in the penalty base); or Foreign residents who paid tax in their home country (note, in this case, foreign assets are not included in the penalty base) 23

34 Reduced 12.5% OVDI Penalty (FAQ 53) Taxpayers whose highest aggregate account balance (including the fair market value of assets in undisclosed offshore o entities t es 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% offshore penalty Examiners have no authority to negotiate a different offshore penalty percentage No 2009 OVDP Taxpayer Left Behind (FAQ 52 and 53) Taxpayers who participated in the 2009 OVDP whose cases have been resolved and closed with a Form 906 closing agreement e who believe eve the facts of their case qualify them for the 5% or the 12.5% reduced penalty criteria of the 2011 OVDI, but paid a higher penalty amount under the 2009 OVDP should provide a statement to this effect including all pertinent contact information (name, address, SSN, home/cell phone numbers), the name of the Revenue Agent assigned to their case, and acopy of their closing agreement to Internal Revenue Service, 3651 S. I H35 Stop 4301 AUSC,Austin, TX Attn: 2009 OVDP Determination 24

35 Opting-Out Out of the 2011 OVDI (FAQ 51) If the offshore penalty is unacceptable to a taxpayer, they must submit an irrevocable written election to withdraw from OVDI The examiner and manager will follow procedures in the Opt Out and Removal Guide for the 2009 OVDP and 2011 OVDI (attached) after notification of a taxpayer s desire to opt out Opting Out of the 2011 OVDI (FAQ 51) An IRS form letter 4728 is sent giving taxpayer 20 days to respond with taxpayer s position IRS examiner provides a summary of the case and recommendation to a centralized review committee in DC The centralized review committee is composed of managers The centralized review committee decides the scope of the audit or other treatment 25

36 General Observations re the 2011 OVDI Overview of the 2011 OVDI: No examiner discretion Emphasizes maximum penalties Includes real estate, foreign entities, etc. in the penalty calculation especially if assets/property acquired with funds subject to US taxation FAQ 36 No de minimus income exceptions All relevant information must be submitted by August 31, 2011 with a limited 90 day extension - See FAQ 25.1 Consider utilizing estimates if actual information is not available and, if using estimates, clearly disclose and identify, in writing, that estimates are being utilized General Observations re the 2011 OVDI For 2009 OVDP participants, FAQ 35 reasonable cause considerations have been eliminated and replaced in current field examinations by FAQ 50 opt out rules Tax year 2010 is included in the 2011 OVDP penalty calculation (both accuracy and miscellaneous) even though taxpayers may not have filed a 2010 return Multiple accounts -The account with no income tax issue is unrelated to the taxpayer s tax noncompliance, so no penalty will be imposed with respect to that account (FAQ 46) PFIC Election Be careful regarding the PFIC election (FAQ 10) 26

37 General Observations re the 2011 OVDI Contents of safe deposit boxes if offshore assets were acquired with funds that were subject to US tax but on which no such tax was paid, the OVDI penalty would apply regardless of whether the assets are producing current income. Assuming that the assets were acquired with after tax funds or from funds that were not subject to US taxation, if the assets have not yet produced any income, there has been no US taxable event and no reporting obligation to disclose (see FAQ 36) What to expect for those opting-out out of the 2009 OVDP or the 2011 OVDI? Full eaminations? examinations? How many tax years? Taxpayer and Preparer interviews? Criminal investigations? Taxpayer will remain within Criminal Investigation s Voluntary Disclosure Practice (FAQ 51) General Observations re the 2011 OVDI Duplication of funds transferred from one account to another should be removed before calculating the 25% OVDI penalty (FAQ 36) Consideration of not using OVDI Quiet filing of amended/delinquent returns a viable option? Compliance going forward only aviable option? FAQ 17 and FAQ 38 each apply to signature authority FBARs but seem somewhat irreconcilable 27

38 General Observations re the 2011 OVDI Asset/property inclusions - tax noncompliance includes failure to report income from the assets, as well as failure to pay US tax that was due with respect to the funds used to acquire the asset (FAQ 35) If there are questions re how to make a2011 OVDI voluntary disclosure or what penalties apply? FBAR Hotline at (Select option 2) You can also submit written questions about the FBAR rules by addressed to FBARQuestions@irs.gov 2011 OVDI HOTLINE for practitioners or contact the nearest IRS Criminal Investigation office Post August 31, 2011 What to expect? Potential Civil Penalties That Could Apply FBAR -the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100, or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. 5321(a)( (a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a$10, penalty per violation Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRC 6048 and 6039F -the penalty for failing to file each one of these information returns, or for filing an incomplete return, rn is 35% of the gross reportable amount, eceptfor except returns reporting gifts, where the penalty is 5% percent of the gift per month, up to amaximum penalty of 25% of the gift 28

39 Potential Civil Penalties That Could Apply Form 3520-A, Information Return of Foreign Trust With a U.S. Owner -Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC 6048(b) (b).the penalty for failing to file each one of these information returns or for filing an incomplete return, is 5% of the gross value of trust assets determined to be owned by the United States person Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations -Under IRC 6035, 6038 and 6046.The penalty for failing to file each one of these information returns is $10,000, with an additional $10, added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50, per return Potential Civil Penalties That Could Apply Form 5472, Information Return of a25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business -IRC 6038A and 6038C -the penalty for failing to file these information returns, or to keep certain records regarding reportable transactions, is $10, plus an additional $10, for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50, per return Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation -IRC 6038B -the penalty for failing to file each one of these information returns rns is ten percent of the value of the property transferred, up to amaximum of $100, per return, with no limit if the failure to report the transfer was intentional 29

40 Potential Civil Penalties That Could Apply Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships - IRC 6038, 6038B, and 6046A - Penalties include $10, for failure to file each return, with an additional $10 10, added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to amaximum of $50, per return, and ten percent of the value of any transferred property that is not reported, subject to a$100, limit Fraud penalties - IRC 6651(f) or Where an underpayment of tax, or a failure to file atax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75% of the unpaid tax Potential Civil Penalties That Could Apply Failure-to-file atax return -IRC 6651(a)( (a)(1) -apenalty of 5% of the balance due, plus an additional 5% for each month or fraction thereof during which the failure continues may be imposed, up to a maximum of 25% Failure-to-pay the tax shown on the return - IRC 6651(a)( (a)(2) -apenalty of 0.5% of the amount of tax shown on the return, plus an additional 0.5% for each additional month or fraction thereof that the amount remains unpaid, up to a maximum of 25% Accuracy-related related penalty on underpayments of tax -IRC depending upon which component of the accuracy- related penalty is applicable, ataxpayer may be liable for a 20% or 40% of the tax underpayment 30

41 HIRE Act of 2010 and FACTA President Obama signed the Hiring Incentives to Restore Employment Act (Pub. L. No ) ( HIRE Act ) HIRE modified provision of the Foreign Account Tax Compliance Act ( FATCA ) FACTA provisions of the HIRE Act affect 3 areas: Increased reporting for individuals with foreign assets Substantive changes in U.S. federal income tax law Disclosure and compliance issues for foreign financial institutions FATCA Now Foreign Banks must gather information on their customers for the United States or Face a 30% withholding on any payment from a U.S. source. The 30% withholding applies to all of the foreign banks clients whether U.S. citizens or not. For Example, a German bank with 90% of its deposits held by German citizens and 10% held by U.S. citizens/residents that does not elect to disclose its accountholder information. 30% withholding on transactions with U.S. banks or U.S. securities firms would be required on any funds transfer to the German Bank. So the German citizen would have to file U.S. returns to get their money back 31

42 FATCA Requires Foreign Banks to Disclose US Taxpayer Information Name & Address of U.S. Account Holder; The Foreign Account Number; The Foreign Account Balance; The Yearly Gross Deposits and Yearly Gross Withdrawals from the Foreign Account. FATCA Requires US Taxpayers to Disclose Foreign Assets U.S. Taxpayers with Foreign Financial Assets with values > $50, Now have reporting requirements on their 1040 for the following: Depository Accounts; Securities issued by Foreign Entities (or Persons); Financial Instruments Issued by Foreign Entities or Persons; Any Interest in a Foreign Entity. Penalty is 40% for the understatement derived from an unreported foreign financial asset. 32

43 More on FACTA The reporting is on a new foreign asset disclosure form that will attach to an individual s yearly 1040 filing (See attached draft form 8938) Does not eliminate the need to also file FBAR or other foreign reporting forms Includes foreign accounts and foreign assets such as real estate There is now a six-year statute of limitations for omission of income relating to foreign assets Thank You for Coming 33

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