Navigating Foreign Waters: Discussion on the US Laws for Foreign Accounts Compliance Presented by: Parag P. Patel, Esq., Tax Attorney Managing Director Patel Law Offices 33 Wood Ave. South Suite #250 P.O. Box 81 Iselin, NJ 08830-0081 USA 732-623-9800 mail@patellawoffices.com www.patellawoffices.com
Foreign Bank Account Compliance The Basics US taxpayer must report and pay tax on worldwide income Who is US taxpayer? Citizen Green card holder Anyone who meets the Substantial Presence test Generally >183 days (Mostly) independent of immigration status 2
Foreign Asset Reporting Requirements: Setting the Stage A 2005 study of high-net-worth individuals worldwide estimated that their offshore assets now total $11.5 trillion. The IRS has estimated that more than half a million US taxpayers have offshore bank accounts This is not a political issue of how low or high taxes ought to be. This is a basic issue of fairness and integrity those who disregard the law will be identified and adequately punished. Senator Obama, 2007
The IRS Crackdown on Offshore Tax Evasion "Pursuing international tax evasion is a priority area for IRS Criminal Investigation, and we will continue to follow the money here in the United States and around the world. I want to commend the special agents in IRS-Criminal Investigation for all of their hard work in this area and the close cooperation with the Department of Justice. Today s guilty plea is another important milestone in ongoing law enforcement efforts to investigate the use of offshore accounts to evade taxes. People should no longer feel comfortable hiding their assets and income from the IRS. (May 19, 2014) Our focus on offshore tax evasion continues to produce strong, substantial results for the nation s taxpayers.... As we ve said all along, people need to come in and get right with us before we find you.... We are following more leads and the risk for people who do not come in continues to increase. (January 9, 2012) 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. (February 8, 2011)
US Department of Justice 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 US taxpayers using secret offshore bank accounts a problem that a 2008 Senate report concluded costs the US Treasury at least $100 billion annually. US Department of Justice website As this jury verdict shows, the cost of not coming forward and fully disclosing a secret offshore bank account to the IRS can be quite high. Those who still think they can hide their assets offshore need to rethink their strategy. - US Asst Attorney General Kathryn Keneally
Enforcement Efforts to Date UBS/HSBC/Credit Suisse Prosecution Agreements Over 200 investigations of offshore account holders are underway since 2009 Over 70 account holders have been criminally charged; 65 guilty pleas have been entered; 7 convictions after trial. A number of facilitators who helped clients hide assets offshore have been indicted, including dozens of cooperating banking professionals
Enforcement Efforts To Date (continued) Other banks under criminal investigation in Switzerland, Israel, and India US-Switzerland amnesty program for banks: 106 banks applied for admission as of July 1, 2014 We expect to get from the Swiss banks a wealth of information that will lead us to the rest of the world, and that information will be fueling our investigations for some time into the future. The ultimate goal is to make this a crime that is foolish to commit. It s going to be harder and harder to engage in this conduct. There s going to be fewer and fewer places in the world where a taxpayer can attempt this crime. - Asst US Attorney General Kathryn Keneally
Status of IRS Enforcement Activity Example: Dr. Ahuja was recently convicted for tax fraud involving more than $8.7 million hidden in HSBC India. From 2006 through 2009, Ahuja failed to report to the IRS more than $1.2 million in interest income, as well as to disclose the account s existence on FBARs.
Bad Facts=Bad Results Dr. Ahuja took steps to hide his offshore accounts: Dr. Ahuja requested that he does not want any kind of mail at his US or India address Dr. Ahuja transferred funds abroad from his US bank account in small increments Dr. Ahuja used a relative s address in India
Many Indians Americans Prosecuted: All Found Guilty
All Immigrants (and former immigrants) Are Getting Caught
FBAR Reporting Requirements
Foreign Bank Accounting Reporting Required as part of Bank Secrecy Act since 1970s US taxpayers with foreign accounts have two obligations Answer question yes on Form 1040, Schedule B, Part III (due April 15 or due date of extended return) or other applicable tax return Electronically File FinCEN 114, Report of Foreign Bank and Financial Accounts ( FBAR ) (due June 30)
Foreign Bank Account Reporting Form 1040, Schedule B
FinCEN 114 (FBAR) New form and instructions issued July 2013 Required to be filed annually by June 30 All forms are required to be filed electronically No extensions of deadline are available If filing on behalf of client, retain a FinCEN authorization form (Form 114a) Form TD F 90-22.1 is now obsolete.
FinCEN 114 (FBAR) (continued) Must register with BSA to access online filing system. To register, go to: http://bsaefiling.fincen.treas.gov/enroll.html New FinCEN Form 114 is almost identical to old Form TD F 90-22.1
FinCEN 114
FinCEN 114
FinCEN 114
FinCEN 114
Who is Required to File an FBAR? An FBAR must be filed if all of the following requirements are satisfied: The filer is a US Person; The US Person has a financial account; The financial account is in a foreign country; The US 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 US dollars) at any time during the calendar year
Who is a US Person? A US Person includes: A citizen of the US, A resident alien of the US, and A US corporation, partnership, trust, limited liability company, or other type of business entity Generally includes: expatriates, US citizens and residents residing abroad, certain foreign citizens who are working and paying taxes in the US, and individuals that are required to file FBARs annually even if they maintain joint accounts with a non- US spouse
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)
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 US 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 US Person; A corporation in which the US Person owns more than 50% of the voting power or the total value of the shares; A partnership in which the US Person owns directly or indirectly more than 50% of the interest in profits or capital;
What is a Financial Interest? (continued) Any other entity in which the US 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 US Person is the trust grantor and has an ownership interest in the trust for US tax purposes; and A trust in which the US 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. HUF Karta probably has filing requirement.
What is Signature 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.
FBAR Penalties for Non-Compliance Criminal penalties for willful violations: Up to 5 years imprisonment and $250,000 fine Civil penalties Non-willful violation: Up to $10,000 for each violation Willful violation: Greater of $100,000 or 50 percent of the balance in the account at the time of the violation Both civil and criminal penalties can be imposed together. Remember United States v. Zwerner (150% penalty)
Increasing Rates of Foreign Bank Account Reporting
The Foreign Account Tax Compliance Act (FATCA)
What is FATCA? The Foreign Account Tax Compliance Act (FATCA) is an important development in US efforts to improve tax compliance involving foreign financial assets and offshore accounts. (www.irs.gov) FATCA was enacted in 2010 by Congress to target noncompliance by US taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. (www.treasury.gov)
Two Primary FATCA Requirements Foreign financial institutions are annually required to report directly to the US government information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest. US taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS annually on an information return.
FATCA Part One: Obligations of Foreign Financial Institutions (FFIs)
What Does FATCA Require of FFIs? FATCA requires Foreign Financial Institutions (FFIs) to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI must: Identify US accounts, Report certain information (account value, income, dividends, interest) to the IRS, Withhold a 30 percent tax on certain US-connected payments to nonparticipating FFIs and recalcitrant account holders who are unwilling to provide the required information. If FFIs do not register, they will suffer a 30% withholding tax on payments of US source income or capital into their institution, irrespective of whether payments are made to the institution itself or on behalf of its clients.
How to Identify US Accounts If any one of the below indicators is identified, account may be US account: US citizenship or US residence US place of birth US address including US PO boxes US telephone number Repeating payment instructions to pay amounts to a US address or an account maintained in the US Current Power of Attorney or signatory authority granted to a person with a US address If Care of or Hold mail address which is the sole address for the account holder
International Coordination and Model Intergovernmental Agreements US Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. Model 1 IGA: FFIs in jurisdictions that have signed Model 1 IGAs report the information about US accounts required by FACTA to their respective governments who then exchange this information with the IRS. Model 2 IGA: A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about US accounts required by FATCA directly to the IRS. All FFIs in IGA jurisdictions (regardless of Model 1 or 2) must register with the IRS and obtain a GIIN. See latest FFI list go to IRS FATCA Foreign Financial Institution (FFI) List Search and Download Tool: http://apps.irs.gov/app/fatcaffilist/flu.jsf
International Coordination (continued) To date, over 70 countries: United Kingdom, Cayman Islands, Costa Rica, France, Germany, Mexico, Denmark, Ireland, Switzerland, Spain, Norway, Japan, Bermuda, Guernsey, Isle of Man, Jersey, Malta, and the Netherlands have signed or initialed model agreements. To date, over 100 countries in waiting: US Treasury is engaged with more than 70 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.
FATCA and India India reached a Model 1 IGA in substance with US on April 11, 2014. Details are pending. SEBIand RBI are expected to issue guidelines. Reserve Bank of India (RBI) has notified banks that India and US have reached an agreement in substance on the terms of a Model 1 IGA to implement FATCA and that India is now treated as having an IGA in effect from 11 April 2014. Therefore, banks had to register with the IRS by 31 December 2014. India has 698 registered FFIs as of February 2, 2015. HSBC India sent out thousands of letters last month. Indian mutual funds have reportedly stopped accepting fresh investments from US investors. Under the Model 1 of IGA agreed to be signed by the India (after cabinet approval), Indian FFIs will be required to report information on US account holders to India s Central Board of Direct Taxes (CBDT), which would then collate and share the information with the IRS.
Jurisdictions that have signed agreements: Model 1 IGA Australia (4-28-2014) Bahamas (11-3-2014) Barbados (11-17-2014) Belgium (4-23-2014) Brazil (9-23-2014) British Virgin Islands (6-30-2014) Bulgaria (12-5-2014) Canada (2-5-2014) Cayman Islands (11-29-2013) Costa Rica (11-26-2013) Curaçao (12-16-2014) Cyprus (12-2-2014) Czech Republic (8-4-2014) Denmark (11-19-2012) Estonia (4-11-2014) Finland (3-5-2014) France (11-14-2013) Germany (5-31-2013) Gibraltar (5-8-2014) Guernsey (12-13-2013) Hungary (2-4-2014) Honduras (3-31-2014) Ireland (1-23-2013) Isle of Man (12-13-2013) Israel (6-30-2014) Italy (1-10-2014) Jamaica (5-1-2014) Jersey (12-13-2013) Latvia (6-27-2014) Liechtenstein (5-19-2014) Lithuania (8-26-2014) Luxembourg (3-28-2014) Malta (12-16-2013) Mauritius (12-27-2013) Mexico (4-9-2014) Netherlands (12-18-2013) New Zealand (6-12-2014) Norway (4-15-2013) Poland (10-7-2014) Qatar (1-7-2015) Singapore (12-9-2014) South Africa (6-9-2014) Spain (5-14-2013) Slovenia (6-2-2014) Sweden (8-8-2014) United Kingdom (9-12-2012) Turks and Caicos Islands (12-1-2014) Model 2 IGA Austria (4-29-2014) Bermuda (12-19-2013) Chile (3-5-2014) Hong Kong (11-13-2014) Japan (6-11-2013) Moldova (11-26-2014) Switzerland (2-14-2013)
Jurisdictions that have reached agreements in substance and have consented to public announcement Model 1 IGA Algeria (6-30-2014) Anguilla (6-30-2014) Antigua and Barbuda (6-3-2014) Azerbaijan (5-16-2014) Bahrain (6-30-2014) Belarus (6-6-2014) Cabo Verde (6-30-2014) China (6-26-2014) Colombia (4-23-2014) Croatia (4-2-2014) Dominica (6-19-2014) Dominican Republic (6-30-2014) Georgia (6-12-201) Greenland (6-29-2014) Grenada (6-16-2014) Guyana (6-24-2014) Haiti (6-30-2014) India (4-11-2014) Indonesia (5-4-2014) Kosovo (4-2-2014) Kuwait (5-1-2014) Malaysia (6-30-2014) Montenegro (6-30-2014) Panama (5-1-2014) Peru (5-1-2014) Portugal (4-2-2014) Romania (4-2-2014) St. Kitts and Nevis (6-4-2014) St. Lucia (6-12-2014) St. Vincent and the Grenadines (6-2-2014) Saudi Arabia (6-24-2014) Serbia (6-30-2014) Seychelles (5-28-2014) Slovak Republic (4-11-2014) South Korea (4-2-2014) Thailand (6-24-2014) Turkey (6-3-2014) Turkmenistan (6-3-2014) Ukraine (6-26-2014) United Arab Emirates (5-21-2014) Uzbekistan (6-30-2014) Angola (11-30-2014) Cambodia (11-30-2014) Greece (11-30-2014) Holy See (11-30-2014) Iceland (11-30-2014) Kazakhstan (11-30-2014) Montserrat (11-30-2014) Philippines (11-30-2014) Trinidad and Tobago (11-30-2014) Tunisia (11-30-2014) Model 2 IGA Armenia (5-8-2014) Iraq (6-30-2014) Nicaragua (6-30-2014) Paraguay (6-6-2014) San Marino (6-30-2014) Taiwan (6-23-2014) Macao (11-30-2014)
Globalization of FATCA ( GATCA ) By Common Reporting Standards ( CRS ) All 34 OECD member countries, as well as Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa endorsed the Declaration on Automatic Exchange of Information in Tax Matters released at the May 2014 OECD Meeting. The Declaration commits countries to implement a new single global standard on automatic exchange of information ( CRS or GATCA ) by 2017. Under GATCA jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
FATCA Part Two: Obligations of US Taxpayers to Report Foreign Assets
FATCA Also Requires MORE Reporting of Foreign Assets by US Taxpayers US taxpayers with specified foreign financial assets that exceed certain thresholds must now report those assets to the IRS. A specified foreign financial asset includes (1) financial accounts maintained by foreign financial institutions and (2) other foreign financial assets held for investment such as foreign stocks or securities, interests in a foreign entity, any financial instrument or contract that has as an issuer or counterparty that is other than a US person, foreign pensions and deferred compensation plans, and certain foreign trusts and estates Form 8938, Statement of Foreign Financial Assets, must be filed with the tax return.
Who Is Required to File Form 8938? You must file Form 8938 if: 1. You are a specified individual. AND 2. You have an interest in specified foreign financial assets required to be reported. AND 3. The aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.
Who is a Specified Individual? A specified individual is: A US citizen A resident alien of the United States for any part of the tax year (see Pub. 519 for more information) A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (see Pub. 570 for definition of a bona fide resident)
What is a Specified Foreign Financial Asset? A specified foreign financial asset (SFFA) is: Any financial account maintained by a foreign financial institution Foreign bank accounts Foreign mutual funds Foreign hedge funds Foreign private equity funds Certain foreign insurance products Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: Stock or securities issued by someone other than a US person Any interest in a foreign entity Any financial instrument or contract that has as an issuer or counterparty that is other than a US person Foreign pensions and deferred compensation plans Foreign trusts and estates (if specified individual is aware of its existence)
Form 8938 Part I
Form 8938 Part II
What are the Reporting Thresholds for Domestic Taxpayers? Unmarried taxpayers living in the US: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Married taxpayers filing a joint income tax return and living in the US: The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. Married taxpayers filing separate income tax returns and living in the US: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
What are the reporting thresholds for taxpayers living abroad? Taxpayers living abroad. You are a taxpayer living abroad if: You are a US citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days. A taxpayer living abroad must file if: You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
Penalties for Non-Filing of Form 8938 Failure to file Form 8938 may result in a $10,000 civil penalty as well as an additional $10,000 continuation penalty for each 30 day period after the taxpayer is notified by the IRS of the failure to file (not to exceed $50,000) Exception if failure to file is due to reasonable cause and not due to willful neglect The fact that a foreign jurisdiction would impose a civil or criminal penalty for disclosing the required information is NOT reasonable cause Criminal penalties may also apply Failure to file Form 8938 or certain assets on Form 8938 may keep the statute of limitations open for ALL items on a return until 3 years after Form 8938 is filed.
Options for US Taxpayers with Undisclosed Foreign Bank Accounts
IRS Offshore Voluntary Disclosure Program (OVDP) Overall, the three voluntary programs in 2009, 2011, and 2012 have collectively resulted in more than 50,000 voluntary disclosures from individuals who have paid over $6.5 billion in back taxes, interest and penalties. New revised program effective July 1, 2014: Open for an indefinite period of time until otherwise announced; Pay income taxes and file info returns (FBARS, etc.) for 8 year rolling look-back period with exclusion of compliant years; and Requires individuals to pay a penalty of 27.5% (may be increased to 50% in certain circumstances).
OVDP (continued) More stringent eligibility requirements: US government receipt of taxpayer information from John Doe summons, treaty request, or similar action is disqualifying event IRS may in its discretion designate certain classes of taxpayers ineligible Continuation of penalty relief for taxpayers who have reported all foreign-source income
OVDP Offshore Penalty: 27.5 percent Values of foreign accounts and other foreign assets are aggregated for each year and the penalty is calculated based upon highest year s aggregate value during the OVDP period. Penalty applies to all of the taxpayer s offshore holdings that are related in any way to tax non-compliance, including bank accounts, tangible assets such as real estate, and intangible assets such as patents or stock or other interests in a US or foreign business
New Streamlined Compliance Procedures for US Residents and US Persons Residing Abroad
New Streamlined Filing Compliance Procedures: Streamline Domestic Offshore Procedure (SDOP) for US Residents In summary, if taxpayer can certify that failure to file and pay tax was non-willful, then: Amend prior 3 years of income tax returns File prior 6 years of FBARs Pay 5% of penalty (based on accounts only) on highest year end balance for applicable 3 or 6 year period. No IRS closing letter. Return is subject to audit like any other return.
New Streamlined Filing Compliance Procedures: Streamline Foreign Offshore Procedure (SFOP) for NON US Residents IF satisfy non-residency requirement: In any one or more of the most recent 3 years for which the US tax return due date (or properly applied for extended due date) has passed, the individual did not have a US abode and the individual was physically outside the US for at least 330 full days. THEN : Amend prior 3 years of income tax returns File prior 6 years of FBARs NO Penalty No IRS closing letter. Return is subject to audit like any other return.
Streamlined Compliance Procedures: Requires Non-willful Proof Requires specific reasons for Non-willful conduct: Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. Requires dissection of definition with legal/factual analysis Reliance on professional advisor requires: disclosure of professional advisor, name, address, and telephone number of the advisor and a summary of the advice provided. Expect possible interview of professional advisor
Risks of Quiet Disclosure OVDP FAQ 15: Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making quiet disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years. OVDP FAQ 16: The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice. Note: United States v. Michael A. Schiavo (D. Mass. 2011)
Closing Thoughts The New Transparent World Information exchange between governments and transparency is becoming more the norm More Voluntary Disclosures, many with 6-8 years of filings Foreign governments will emulate FATCA. Smaller Indian financial institutions without a large U.S. client base may decide that the cost, administrative burden of compliance, and potential penalties are not worth doing business in the U.S. or with U.S. owned accounts. For Indian financial institutions this is as much an operational and business issue as it is a tax issue. New process and procedures will be needed for identifying accounts, withholding, paying, reporting and reconciling. Wealth Planning to US persons has many traps: consider a discretionary foreign trust for US persons.
Questions? Parag P. Patel, Esq. Managing Director Patel Law Offices 33 Wood Ave. South Suite #250 P.O. Box 81 Iselin, NJ 08830-0081 USA 732-623-9800 mail@patellawoffices.com www.patellawoffices.com