Hot Topics in Federal Tax Controversy
September 22, 2015
Matthew D. Lee
Jed M. Silversmith
Blank Rome LLP
Philadelphia, PA
Title
• All audio is streamed through your computer speakers.
• There will be several attendance verification questions
during the LIVE webinar that must be answered via the
online quiz at the conclusion to qualify for CPE.
• Today’s webinar will begin at 2:00pm EDT
• Please note: You will not hear any sound until the webinar
begins.
Learning Objectives
• Upon completion of this webinar you will be able to:
• Understand and define current IRS enforcement
priorities.
• Define foreign asset & FBAR reporting requirements.
• Define the Foreign Account Tax Compliance Act FATCA
and the Obligations of Foreign Financial Institutions
and of U.S. Taxpayers to Report Foreign Assets.
• Specify IRS audit rates and trends in audit procedures
• Determine current IRS criminal enforcement trends
• Understand IRS collection trends
• Specify collection alternatives available to taxpayers
Matthew D. Lee
Matthew D. Lee
Partner
Blank Rome LLP
215.569.5352
Lee-M@BlankRome.com
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, the Foreign Account
Tax Compliance Act (FATCA), and the Internal Revenue Service’s 2009 Offshore
Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and
2012 Offshore Voluntary Disclosure Program. He has represented hundreds of U.S.
taxpayers with undisclosed foreign bank accounts. Mr. Lee has published numerous
articles regarding the IRS voluntary disclosure programs and FBAR and FATCA
reporting obligations and speaks frequently on these topics.
He has also represented clients in all stages of proceedings before the Internal
Revenue Service, including audits, appeals, and collections, and Tax Court and
district 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, FATCA, 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 is the author of Foreign Account Tax Compliance Act Answer Book 2015
(Practising Law Institute) and publishes a blog devoted to addressing the latest
developments in the tax controversy field at www.taxcontroversywatch.com.
Jed M. Silversmith
Jed M. Silversmith
Blank Rome LLP
215.569.5789
jsilversmith@BlankRome
.com
Jed M. Silversmith concentrates his practice in white collar litigation,
with a particular focus on civil and criminal tax controversy matters.
Prior to joining Blank Rome this April, he worked at the U.S.
Department of Justice, Tax Division, where he served as a trial
attorney for the Southern Criminal Enforcement Section from 2006
to 2014. At the Tax Division, he prosecuted a wide range of criminal
tax cases in federal courts. The matters involved tax evasion, failure
to pay employment taxes, money laundering, and bank fraud. Mr.
Silversmith has tried over twenty cases including ten jury trials in
federal district court.
As part of his work at the Tax Division, Mr. Silversmith handled
investigations of taxpayers with undisclosed foreign bank accounts
and other offshore matters. He garnered significant experience
working with the Tax Division’s Civil regional sections. He regularly
counseled IRS agents and attorneys on collection matters including
levies, foreclosure actions, jeopardy assessments, penalty litigation,
and other issues. Mr. Silversmith received three outstanding
attorney awards from the Tax Division during his tenure.
Setting the Stage:
The Tax Gap
Background: The Tax Gap
Components of the Tax Gap
Criminal Tax Update
IRS Investigations
IRS Staffing Levels
Key data
• Over 1,000 Identity Theft prosecutions
• Over 1,000 “questionable refund program” (i.e., refund
fraud)
• Over 1,300 money laundering cases
• Over 300 return preparers
• Over 225 international investigations
• Not too many garden variety tax cases
• 23 people killed by
lightning in 2013 in the
United States
• 400 personal tax evasion
cases in 2014
How does this impact Taxpayer?
• Not many investigations per taxpayer
• High likelihood of criminal case developing once subject
investigation is initiated
• 93.4% conviction rate
Extensive Review Process by IRS
• Cases initiated by IRS Criminal Investigation Division
• All cases must undergo extensive review process by the
IRS. I.R.M. § 9.5.12.2
• IRS Special Agents write Special Agent Reports (“SARs”)
– Document is 20+ pages
– Attached is a copy of each piece of evidence, organized by witness
Extensive Review Process by DOJ
• The Assistant Attorney General, Tax Division, has
responsibility for all criminal proceedings arising under
the internal revenue laws, …. The Tax Division must
approve any and all criminal charges that a United States
Attorney intends to bring against a defendant in
connection with conduct arising under the internal
revenue laws. U.S.A.M. § 6-4.200
• Within 90 days of receiving a designated non-complex
matter, a United States Attorney must either initiate
proceedings or request that the Tax Division decline the
matter or handle it. U.S.A.M. § 6-4.244
Complete Review Process
Personal Tax Evasion
• The General Tax Fraud investigations are the backbone
of Criminal Investigation's enforcement program and has
a direct influence on the taxpaying public’s compliance
with the Internal Revenue Code. Compliance with the tax
laws in the United States depends heavily on taxpayer
self-assessment of the amount of tax, voluntary filing of
tax returns and remittance of any tax owed. This is
frequently termed “voluntary compliance.”
Overview of Tax Crimes
• All tax crimes require proof of “willfulness”
• “Willfulness” means violation of a known legal duty
• Subjective intent of the taxpayer
• Highest legal standard
• Cheek v. United States, 498 U.S. 192, 201 (1991)
Dr. Mark Hopkins, Carlsbad, NM
• Failed to file tax returns
since 1996
• Wrote many letters to the
IRS asking the Agency to
show him the duty to file
• Picture taken outside Post
Office on April 15
Willfulness examples
• A consistent pattern of underreporting large amounts of
income
• Providing accountant or return preparer with inaccurate
and incomplete information
• False statements to IRS agents
Willfulness examples
• Making or using false documents
• Use of Nominees
• Extensive use of currency or cashier’s checks.
• Background and experience of defendant.
• Undisclosed overseas bank accounts
• Inconsistent statements about income (e.g., loan
applications)
Defense of Good Faith
• Most courts have pattern instructions that mandate a
good faith defense
• Defense applies to truthful disclosures to licensed
professionals
Tax Evasion (26 U.S.C. § 7201)
• “Cadillac” charge
• Maximum 5 year term of incarceration and $250,000 fine
per count of conviction
• Charged as evasion of assessment
– Charged by year
– Automatic waiver of statute of limitations for civil collection and 75%
fraud penalty
• Charged as evasion of payment
– Brought after taxes are assessed for failing to pay tax debts
Tax Evasion (26 U.S.C. § 7201)
• Defendant had a substantial income tax deficiency;
• Defendant made an affirmative attempt to evade or
defeat the assessment or payment of the income tax;
and
• Defendant acted willfully.
Evasion of Assessment examples
• Filing a false tax return
• Failing to file tax return and depositing business receipts
into account in relative’s name
• Failing to file tax return and working extensively in cash
Evasion of Payment examples
• After IRS sends 90 day letter, transferring house to a
relative
• Asking an employer to pay Taxpayer in cash to avoid an
IRS levy
• Failing to report assets on a Form 433-A
Willful Failure to File (26 U.S.C. § 7203)
• Maximum one-year term of incarceration and $100,000
fine per count of conviction
• Misdemeanor
• No collateral civil consequence
Willful Failure to File(26 U.S.C. § 7203)
• Defendant was required to file an income tax return
• Defendant did not file a tax return at or before the time
required by law or regulation
• Defendant’s failure to file was willful
Who Must File?
Self-employed
26 U.S.C. § 6017
Recent cases
• Steven Siff (S.D. Fla.)(plea)
–
–
–
–
Partner at AM100 law firm
Non-filer since 1997.
Tax Loss of $2,000,000
13 months incarceration
• Jimmie Ross (E.D. Tenn.)(trial)
– $530,000 tax loss
– 51 months
• Eric Platenberg (D. Or.)(plea)
– $360,000 tax loss
– 12 months and 1 day
Filing a false income tax return
(26 U.S.C. § 7206(1))
• Defendant made and subscribed and filed an income tax
return
• The tax return contained a written declaration that it was
made under the penalties of perjury
• That the return was false regarding a material matter
• That Defendant did not believe the return was true and
correct as to that material matter; and
• Defendant acted willfully.
Filing a false income tax return
(26 U.S.C. § 7206(1))
• Maximum term of incarceration is three years and
$250,000 fine
• Materiality ≠ tax due and owing
– Failure to report a business
– Failure to identify a foreign bank account on a Schedule B
• Conviction carries minimal collateral civil consequences
Employment Taxes
(26 U.S.C. § 7202)
• Criminalizes the Responsible Person Penalty (26 U.S.C. §
6672)
– Harvey G. Bitler, Sr. (E.D. Pa.)
• $5,078,897
• 46 months
– Larry Kimes/Charles Pircher (W.D. Tex.)
• $130 million PEO
• 144 months/132 months
– Stephen Gregoryn (D. Or.)
• $481,517
• 19 months
What makes a “good” tax case?
• Multi-year case
• Tax loss above $30,000/$80,000
• Strong willfulness evidence (i.e., multiple badges of fraud)
• Significant personal expenditures
• Jury appeal of defendant
• Venue considerations
Investigative Techniques
The most common technique:
Subject Interview
• “In most administrative investigations, the subject should
be contacted for an initial interview to confront him/her
with the allegations and to identify potential defenses or
other weaknesses in the case before making further
investigative contacts.”
• Contact with the subject should be made within the first
30 days of numbering a subject criminal investigation.
• I.R.M. § 9.5.1.2.1.1
How to handle the subject interview
Other IRS CI Investigative Tools
• Credit reports
• Financial databases
• Undercover operations
• Search warrants
• Trash runs
• Mail covers (39 C.F.R. § 233.3)
• Search warrants of ISPs (Electronic Communication
Privacy Act)
IRS Fraud Technical Advisor
• Revenue agents and revenue officers must work with
fraud technical advisors
• IRM sets forth timelines, specific actions to be taken by
IRS-CI and SB/SE
Subject interview
• Taxpayer does not know what the IRS knows
• Powerful admissions that can be used against Taxpayer
• Taxpayer does not get copy of the IRS agent’s notes until
after indictment
• Conversation are not recorded
Fifth Amendment Privilege
• Applies in both summons and grand jury investigations
• Act of production immunity
• Does not apply to custodians of corporate records
– Generally solely owned corporate owners do not have to admit that
the documents are business records
Direct evidence
• Government calls witnesses who testify about income
• Examples
– Employer who issued Form W-2
– Insurance company issued Form 1099-Int
– Employees testified that they were paid cash
Indirect Methods of Proof
• Significant issues
– Taxpayer must have had income generating activity
– IRS needs to establish cash on hand at beginning of time period
– IRS must investigate all reasonable leads
• Bank Deposit Analysis
– Reconstructs all deposits
• Net Worth/Expenditures
– Measures a change in taxpayers’ net worth or unexplained
expenditures
What can I do?
• Voluntary Disclosure Program
– Must be before an audit
• Shadow investigation
– Track summons sent to third-party record keepers
• FOIA requests
– IRS offers a number of records that a representative can request
• Retain Kovel accountant
Request a Conference
Taxpayer
Conference
Expedited plea program
• Available in administrative investigations
• Advantageous for non-filers
• Early resolution limits the number of stakeholders
• Brings closure
• May be optimal if the IRS has only uncovered a small
portion of the tax loss
Should client pay the tax?
• Amended tax returns can be used as an admissions
• Lessens the jury appeal and likelihood of prosecution
• Mitigating factor at sentencing
International Tax Enforcement
Obligation to Report Worldwide Income
• United States law has always obligated U.S. citizens
(including dual citizens) and U.S. residents to declare and
pay taxes on all of their worldwide income, regardless of
where those earnings have been derived.
• Historically, some U.S. taxpayers have attempted to
avoid or evade reporting income earned outside of the
U.S. because of the U.S. government’s inability to identify
those earnings from overseas banks and other financial
institutions.
Why the Focus on
International Tax Compliance?
•IRS/DOJ have intense focus on curtailing
offshore tax avoidance
–U.S. Tax Gap: $450 billion
–U.S. Senate PSI Report (2/26/14):
Offshore tax schemes cause $150 billion
in lost tax revenue per year
•How?
–using “carrot and stick” approach
The Carrot: Voluntary Disclosure Programs
• 2014 Offshore Voluntary Disclosure Program (OVDP)
which follows highly successful 2009, 2011, and 2012
amnesty programs
– Provides participating taxpayers with amnesty from criminal
prosecution by filing of amended tax returns and payment of taxes,
interest, and penalties
– 50,000 voluntary disclosures since 2009 (versus 100 annually under
traditional voluntary disclosure program)
– Over $7 billion in additional revenue collected to date
• Also “Expanded Streamlined Filing Compliance
Procedures” for non-willful taxpayers
The Stick: Unprecedented Enforcement
• “Today’s agreements reflect the Tax Division’s continued
progress towards reaching appropriate resolutions with the
banks that self-reported and voluntarily entered the Swiss
Bank Program. The department is currently investigating
accountholders, bank employees, and other facilitators and
institutions based on information supplied by various sources,
including the banks participating in this Program. Our
message is clear – there is no safe haven.” (DOJ Tax May
29, 2015)
• “These four additional bank agreements signal a change in
terrain for offshore banking. No longer is it safe to hide money
offshore and expect that it will not be discovered. IRS CI
Special Agents will continue to follow the money to find those
who circumvent the offshore disclosure laws and hold them
accountable.” (IRS-CI May 29, 2015)
Enforcement Efforts to Date
(through May 29, 2015)
• UBS Deferred Prosecution Agreement (Feb. 2009)
• Approximately 117 individual account holders have been
criminally charged to date
– 90 guilty pleas
– 12 convictions following trial
– 5 fugitives from justice
• Numerous prosecutions of facilitators
– 12 guilty pleas
– 2 convictions following trial
– 23 fugitives from justice
Enforcement Actions Against Banks
• Bank Leumi (Israel) – December 2014; deferred
prosecution agreement. $270 million penalty and turn
over of more than 1,500 names of account holders.
• Credit Suisse (Switzerland) – May 2014; guilty plea. $2.6
billion penalty.
• LLB-Vaduz (Liechtenstein) – July 2013; non-prosecution
agreement. $23 million penalty.
• Wegelin Bank (Switzerland) – January 2013; guilty plea.
$58 penalty and $16.2 forfeiture.
Use of “John Doe” Summonses
• Used to obtain information about U.S. taxpayers through
correspondent accounts
• To date, such summonses have been issued for bank
account information in Switzerland, India, the Bahamas,
Barbados, the Cayman Islands, Guernsey, Hong Kong,
Malta, and the United Kingdom
• September 16, 2015: federal court in Miami authorizes
IRS to serve “John Doe” summons seeking information
about taxpayers with bank accounts in Belize
Swiss Bank Program Resolutions
(as of May 29, 2015)
• More than 100 Swiss Banks enrolled
• More than 40 Swiss bank have reached resolutions with
U.S. government to date
• Over $300 million paid in penalties
United States v. Zwerner Jury Verdict
May 28, 2014
• Zwerner failed to file FBARs for Swiss bank account with
balance of $1.4 million
• Jury found Zwerner liable for willfully failing to file FBARs for
2004, 2005, and 2006
• Potential penalty: 50% of balance of account for each year
(total 150% penalty)
• Even though he filled out a tax organizer provided by his
accountant, every year, Zwerner answered “no” to questions
asking whether “you have an interest in or signature authority
over a financial account in a foreign country, such as a bank
account, securities account or other financial account” and
whether “you have any foreign income or pay any foreign
taxes.”
Foreign Bank Account Reporting
(FBAR)
Foreign Bank Accounting Reporting
• Required as part of Bank Secrecy Act since 1970s
• U.S. 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)
Form 1040, Schedule B
Breaking News:
Modified FBAR Filing Deadlines
• Due June 30 for all taxpayers
– For 2015, FBAR is due June 30, 2016
– No extensions permitted
• Starting 2016 tax year, due April 15
– New law, enacted early August 2015
– For 2016, FBAR is due April 15, 2017
– Now, eligible for six-month extension – to October 15
• Expect regulations on how to request an extension
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
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.
Foreign Account Tax Compliance
Act (FATCA)
Foreign Account Tax Compliance Act
(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 by Congress to target noncompliance by U.S. taxpayers using foreign
accounts. FATCA requires foreign financial institutions
(FFIs) to report to the IRS information about financial
accounts held by U.S. taxpayers, or by foreign entities in
which U.S. taxpayers hold a substantial ownership
interest.” (www.treasury.gov)
Two Primary FATCA Requirements
• Foreign financial institutions are annually required to
report directly to the U.S. government information about
financial accounts held by U.S. taxpayers, or held by
foreign entities in which U.S. taxpayers hold a substantial
ownership interest.
• U.S. taxpayers with specified foreign financial assets that
exceed certain thresholds must report those assets to the
IRS annually on an information return.
FATCA Policy in Context of U.S. Tax Laws
• U.S. taxpayers’ investments have become increasingly global
in scope
• Recognition that foreign financial institutions (FFIs) are in best
position to identify and report with respect to their U.S.
account holders
• Absent reporting by FFIs, some U.S. taxpayers may attempt to
evade U.S. tax by hiding money in offshore accounts
• “To prevent this abuse of the U.S. voluntary tax compliance
system and address the use of offshore accounts to facilitate
tax evasion, it is essential in today’s global investment climate
that reporting be available with respect to both the onshore
and offshore accounts of U.S. taxpayers.” (Preamble to Final
Regulations)
What Does FATCA Require of FFIs?
• FATCA requires Foreign Financial Institutions (FFIs) to
report to the IRS information about financial accounts
held by U.S. taxpayers, or by foreign entities in which
U.S. taxpayers hold a substantial ownership interest.
In order to avoid withholding under FATCA, a
participating FFI will have to enter into an agreement
with the IRS to:
– Identify U.S. accounts,
– Report certain information to the IRS regarding U.S. accounts,
and
– Withhold a 30 percent tax on certain U.S.-connected payments to
non-participating FFIs and account holders who are unwilling to
provide the required information.
International Coordination and
Model Intergovernmental Agreements
• Treasury is collaborating 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 U.S. 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 U.S. accounts
required by FATCA directly to the IRS.
International Coordination
(continued)
• To date, 112 countries have either signed IGAs or are
actively in negotiations with United States
• Including Bermuda, Canada, Cayman Islands, Chile,
Costa Rica, Denmark, Finland, France, Germany,
Guernsey, Honduras, Hungary, Ireland, Isle of Man, Italy,
Japan, Jersey, Luxembourg, Malta, Mauritius, Mexico, the
Netherlands, Norway, Spain, Switzerland, and United
Kingdom
FATCA Also Requires Reporting of Foreign
Assets by U.S. Taxpayers
• U.S. 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 U.S. 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.
What is a
“Specified Foreign Financial Asset”?
A specified foreign financial asset (SFFA) is:
• Any financial account maintained by a foreign financial
institution
–
–
–
–
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Foreign bank accounts
Foreign mutual funds
Foreign hedge funds
Foreign private equity funds
Certain foreign insurance products
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)
What are the reporting thresholds for domestic
taxpayers?
• Unmarried taxpayers living in the U.S.: 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 U.S.: 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 U.S.: 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 U.S. 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 U.S. 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 U.S. Taxpayers with
Undisclosed Foreign Assets
Option 1 – Streamlined Domestic Offshore
Procedures
• Penalty of 5%.
• Look back period of three years for amended returns and six years
for FBARs.
• Penalty is on assets which are reportable on FBAR or Form 8938
during the relevant lookback period.
– Includes value of foreign bank accounts, foreign securities accounts, foreign
stock, etc.
– Does not include signature authority accounts or assets not reportable on FBAR
or 8938 (e.g., income producing real estate).
• Best Option For:
–
–
–
–
–
U.S. residents for last three years; and
Filed U.S. income tax returns last three years; and
Need to pick up taxable income on an amended return from a foreign asset; and
Needs to file an FBAR, 8938 or other information return; and
Acted non-willfully.
How to Determine Willfulness
•
•
•
•
•
•
•
•
•
Unreported income in the offshore account;
Use of structure/entity to hold offshore account;
Use of non-U.S. identification to open account;
Checking the box “no” on Schedule B;
Failing to advise return preparer of existence of offshore
account;
Transferring offshore funds to another institution or safe
deposit box to avoid detection;
Sophistication of taxpayer;
Hold mail instruction;
Willful blindness to tax/FBAR reporting obligations.
Required Certification of Non-Willfulness
• “My failure to report all income, pay all tax, and submit all required
information returns, including FBARs, was due to non-willful
conduct. I understand that non-wilful 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.”
• “I recognize that if the Internal Revenue Service receives or
discovers evidence of wilfulness, fraud, or criminal conduct, it may
open an examination or investigation that could lead to civil fraud
penalties, FBAR penalties, information return penalties, or even
referral to Criminal Investigation.”
• “Under penalties of perjury, I declare that I have examined this
certification and all accompanying schedules and statements, and to
the best of my knowledge and belief, they are true, correct, and
complete.”
Option 2 – Streamlined Foreign Offshore
Procedures
• No Penalty.
• Look back period of three years for amended returns and
six years for FBARs.
• Best Option For:
– U.S. taxpayer who was a non-resident for one of the last three
years; and
– Needs to pick up taxable income on an amended return from a
foreign asset; and
– Needs to file an FBAR, 8938 or other information return; and
– Acted non-willfully.
OPTION 3 – Offshore Voluntary Disclosure
Program
– Penalty between 27.5% and 50% - depends on where
the taxpayer banked and whether the taxpayer acted
willfully.
– Look back period of 8 years.
– Penalty is on non-compliant assets (e.g., foreign
accounts, income producing real estate, artwork
purchased with funds escaping U.S. taxation, foreign
businesses, etc.)
– Best Option for:
• Willful taxpayers with “bad facts”.
• FBARs and information returns not filed.
• Significant taxable income to pick up.
OVDP – 50% Penalty
50% penalty in OVDP if foreign financial institution is:
– (1) under investigation by the IRS or Department of Justice (see list
at www.irs.gov),
– (2) cooperating with the IRS or Department of Justice in connection
with accounts beneficially owned by a U.S. person, or
– (3) has been identified in a court-approved issuance of a summons
seeking information about U.S. taxpayers who may hold financial
accounts (a “John Doe summons”) at the foreign financial institution
Questions?
Matthew D. Lee
Blank Rome LLP
One Logan Square
Philadelphia, PA 19103
(215) 569-5352
(215) 832-5352 (facsimile)
Lee-M@BlankRome.com
www.taxcontroversywatch.com
Jed M. Silversmith
Blank Rome LLP
One Logan Square
Philadelphia, PA 19103
(215) 569-5789
(215) 832-5789 (facsimile)
JSilversmith@BlankRome.com
www.taxcontroversywatch.com
Thank you for participating in this webinar.
National Society of Accountants
1010 North Fairfax Street
Alexandria, VA 22314-1574
Phone: (800) 966-6679
members@nsacct.org