American Bar Association Section of Family Law 2014 Spring CLE Conference PLENARY: How to Find Your Spouse s Secret Offshore Bank Account: Using U.S. Tax Reporting Requirements as a Discovery Tool for Locating Foreign Assets Saturday, May 10, 2014 Moderator: Speakers: Gerald Shoemaker, Jr., Esq. G. Daniel Jones, CPA Matthew Lee, Esq.
How to Find Your Spouse s Secret Offshore Bank Account: Using U.S. Tax Reporting Requirements as a Discovery Tool for Locating Foreign Assets Presented by: Matthew D. Lee, Blank Rome LLP G. Daniel Jones, CBIZ 1
Introduction Internal Revenue Service now requires more disclosure than ever of the offshore assets and offshore activities of U.S. taxpayers Harsh financial penalties, and even criminal prosecution, can result from the failure to make such disclosures Significant amount of information regarding offshore activities can be gleaned from U.S. tax reporting forms Discovery requests should be specifically tailored to request this type of information 4
The Case of Dr. Michael Brandner: A Cautionary Tale 5
United States v. Michael Brandner, M.D. Dr. Brandner is a plastic surgeon in Anchorage, Alaska In 2007, Dr. Brandner s wife of 28 years files for divorce in Alaska Superior Court Dr. Brandner devises scheme to defraud his wife and hide millions of dollars of assets from his wife and the Court Shortly after his wife files for divorce, Dr. Brandner converts $3 million into five cashier s checks and drives south to Central America 6
Dr. Brandner s 6,891 mile journey from Alaska to Panama 7
Dr. Brandner s banking activity Opens account at Capital Bank in Panama, and deposits five cashier s checks worth over $3 million. Government alleges that this account was opened to conceal assets from wife. It turns out that the banker in Panama assisting Dr. Brandner was cooperating with the U.S. government in a separate fraud investigation. Banker advises Dr. Brandner of the requirement to file the FBAR form with the Internal Revenue Service. Dr. Brandner later transfers another $1.5 million (primarily from an IRA account at Pensco Trust Company) to the Panama account, again to conceal assets from his wife. 8
Dr. Brandner s banking activity (continued) Alaska court enters a divorce decree on April 19, 2011, and awards wife the funds in the Pensco IRA account. On May 10, 2011, the banker records a phone call to Dr. Brandner, who states that respect to the funds awarded to his wife, my intention is to not hand it over to the court. Banker advises Dr. Brandner of a new U.S.-Panama tax treaty that could be problematic, and Dr. Brandner asks banker to assist in further concealing assets from wife. Dr. Brandner creates Evergreen Capital LLC, which is structured to disguise Brandner s identity as beneficial owner. 9
Dr. Brandner s banking activity (continued) In August 2011, Dr. Brandner opens account in name of Evergreen Capital at Bank of America in Seattle. $4.65 million wire transferred from Panama to Bank of America account. U.S. Department of Homeland Security seizes all funds from the Bank of America account on September 12, 2011. 10
Federal Charges Filed 1. February 9, 2012: U.S. Department of Justice files federal forfeiture lawsuit in California alleging that Dr. Brandner engaged in wire fraud and money laundering to conceal assets from his wife. 2. September 18, 2013: federal grand jury in Alaska returns indictment charging Dr. Brandner with seven counts of wire fraud and seeking forfeiture of $4.6 million in funds concealed from wife and divorce court. 11
Why is tax reporting regarding offshore activities more important today than in the past? 12
Offshore Assets The world is more globally integrated Easier to invest assets offshore Easier to access jurisdictions with strict privacy/secrecy rules; very strong asset protection rules. Easier to hide assets from the IRS (and from a spouse) The IRS has responded with force 13
IRS Offshore Focus IRS Commissioner Douglas H. Shulman: 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. (February 8, 2011) 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) 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) 14
Justice Department 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 15
Key Enforcement Milestones End to historic Swiss bank secrecy laws Believed to be 52,000 U.S. accounts at UBS alone UBS agreement with U.S. government and turnover of names Numerous criminal cases filed against accountholders, advisors, and bankers Global crackdown on use of secret bank accounts (Israel, India, and many other countries) Over 100 Swiss banks seeking amnesty as of February 2014 16
Key Enforcement Milestones (continued) IRS Offshore Voluntary Disclosure Programs (2009 to the present) Nearly 40,000 individuals have enrolled Over $5.5 billion in additional revenue to U.S. Treasury Passage and implementation of Foreign Account Tax Compliance Act in 2013 will end bank secrecy worldwide and impose global transparency and information sharing 17
Foreign Bank Account (FBAR) Reporting Requirements 18
Foreign Bank Accounting Reporting Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ( FBAR ), now known as FinCEN Form 114 Primary weapon in the IRS arsenal for enforcing information reporting Severe penalties for noncompliance: criminal and civil Required as part of Bank Secrecy Act, not Internal Revenue Code; hence, penalties more stringent than Internal Revenue Code penalties Obligation to file introduced in 1970s but enforcement was lax prior to 2009 19
Who is required to file an FBAR? An FBAR must be filed if all of the following requirements are satisfied: Filer is a U.S. Person; U.S. Person has a financial account; U.S. Person has a direct or indirect financial interest in, or signature or other authority over, the financial account; Financial account is in a foreign country, including the foreign branch of a U.S. bank; and Aggregate account balances exceed $10,000 (USD) at any point during calendar year 20
What is reported on the FBAR? A U.S. Person must report all their financial interests in, or signature or other authorities over, foreign financial accounts. Financial accounts include: Bank accounts with offshore banks; Securities and brokerage accounts with offshore financial institutions; Commodity futures and options account; Insurance policy with a cash value and an annuity policy; and Shares in a mutual fund 21
Form TD F 90-22.1/FinCEN Form 114 22
Form TD F 90-22.1/FinCEN Form 114 23
Foreign Bank Account Reporting on Income Tax Returns Must report income from foreign account on Schedule B (interest/dividends) and Schedule D (capital gain/loss) Must also check the box on Form 1040, Schedule B, Part III Also, Forms 1120, 1120-S, 1065, 706, and 990 24
Form 1040, Schedule B 25
Foreign Account Tax Compliance Act (FATCA) Foreign Asset Reporting 26
What is FATCA? The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts. (www.irs.gov) FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting with the 2011 tax filing season. In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. 27
FATCA Asset Reporting Regime New Internal Revenue Code provision enacted as part of 2010 HIRE Act Requires reporting of specified foreign financial assets if aggregate value exceeds certain thresholds Applies to tax years beginning with 2011 Requires that new information return be attached to a taxpayer s U.S. income tax return entitled Form 8938, Statement of Foreign Financial Assets 28
Form 8938 29
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 30
Form 8938 Part I 31
What is a SFFA? (continued) Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely: Stock or securities issued by someone other than a U.S. person Any interest in a foreign entity Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person Foreign pensions and deferred compensation plans Foreign trusts and estates (if specified individual is aware of its existence) 32
Form 8938 Part II 33
Form 8938 Part II (continued) 34
Other U.S. Tax Information Returns Addressing Offshore Activities 35
U.S. Tax Information Returns Requiring Disclosure of Foreign Assets and Activities Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520-A Annual Information Return of Foreign Trust With a U.S. Owner Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations Form 8621 Information Return by a Shareholder of a PFIC or Qualified Electing Fund Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships 36
Form 3520 Foreign Trusts & Foreign Gifts Purpose of the form Information reporting Distributions from foreign trusts US owner of a foreign trust Gifts and bequests from foreign persons Filed with the US taxpayer s income tax return Mandatory filing obligation with penalties of $10,000 or up to 35% of the fair value of property transferred to or received from the trust or 5% of the gross value of the trust 37
Form 3520-A Foreign Trust with U.S. Owner Purpose of the form Separate filing by the foreign trust not part of the U.S. owner s tax return Provides details about: Foreign trust and its P&L and balance sheet Fair market value of the distributions (if any) US Owner(s), income attributable to each US owner and the value of US owner s interest in trust Mandatory US owner subject to penalty of $10,000 or 5% of gross value of assets 38
Form 5471 Controlled Foreign Corporations Purpose of the form Controlled foreign corporation ( CFC ) More than 50% of vote or value held by US Shareholders (each with a 10% or greater voting interest) Different filing obligations Category 2 US director or officer Category 3 Investment into a foreign corporation Category 4 Controlling US shareholder Category 5 Non-controlling US shareholder 39
Form 5471 Controlled Foreign Corporations Form 5471 can be filed on behalf of other taxpayers but such taxpayers must attached a statement to their tax returns indicating such. Penalties for non-compliance - $10,000 per Form 5471 and return remains open for audit 40
Form 5471 Controlled Foreign Corporations Schedule Details Categories 2 3 4 5 General Identification information Sch. A Shares on issue by class Sch. B U.S. Shareholders in foreign corp. Sch. C,E,F Profit & loss, balance sheet & foreign taxes paid Sch. G Other investment information Sch. H Earnings & Profits Sch. I Shareholder s income from foreign corporation Sch. J Accumulated Earnings & Profits Sch. M Transactions between controlled entities Sch. O, Pt I Investing/selling shareholder information Sch. O, Pt II Transaction details of buying/selling stock 41
Form 5471 Controlled Foreign Corporations 42
Form 8621 Passive Foreign Investment Companies Purpose of the form Passive foreign investment company foreign corporation with 75% or more passive income or 50% or more passive income generating assets. Excludes CFCs. No dollar threshold or 10% threshold Elections for recognizing income Draconian regime for taxing income and gains from PFICs unless elections made to recognize income over term of investment Report income and gains on sales 43
Form 8865: Foreign Partnerships Purpose of form Requires disclosure of Identity of partners Affiliates of partnership Income statement of partnership Balance sheet of partnership Transactions between partnership and partners Financial penalties and possibility of criminal prosecution for failure to file form 44
Obtaining Information Directly From the Internal Revenue Service 45
Other Options for Obtaining Tax Information Internal Revenue Code 6103(e)(1)(B) authorizes either individual to request return information from IRS regarding a jointly filed return return information includes the tax return and supporting schedules/information returns Divorced/separated spouses may also request, in writing, that the IRS disclose details regarding collection activities undertaken with respect to jointly filed returns (IRC 6103(e)(8) Use IRS Forms 4506 or 4506-T, or Freedom of Information Act, to request this information 46
Discovery Checklist Form 1040 (tax return) and all schedules/attachments FBAR forms TD F 90-22.1 (prior to 2014) FinCEN Form 114 (starting in 2014) Form 8938 (FATCA asset disclosure form) Form 3520 Form 3520-A Form 5471 Form 8621 Form 8865 47
Questions? Matthew D. Lee Blank Rome LLP One Logan Square Philadelphia, PA 19103 (215) 569-5352 (215) 832-5352 (facsimile) Lee-M@BlankRome.com G. Daniel Jones CBIZ MHM, LLC 401 Plymouth Road, Suite 200 Plymouth Meeting, PA 19462 (610) 862-2210 (215) 432-6309 (cell) Gdjones@cbiz.com 48
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 penalties 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. 49