MORE FBAR/FATCA FROM THE MAINSTREAM MEDIA

This is based on an article in a recent Wall Street Journal article which reports the latest turn in the U.S. government’s three-year crackdown on illegal offshore accounts, which already has resulted in 36 convictions since 2009, with four cases still awaiting trial and many more expected to come.

New rules affecting 2011 tax returns require taxpayers with assets held offshore to make extensive disclosures to the Internal Revenue Service or risk harsh penalties. The goal: to ferret out secret accounts used to skirt U.S. taxes. It is funny, but the tax code is encouraging people to exploit offshore investing schemes to an unusual extent, even as the IRS intensifies its crackdown on secret foreign accounts. Some tax advisers are seeing new tax advantages—fully legal—in investments based offshore. There are legitimate reasons for holding offshore assets ranging from vacation homes and business interests to accounts held jointly with family living abroad. But income from foreign-based accounts, and the accounts themselves, must often be disclosed under the U.S. tax code.

The problem is that some people have long taken advantage of lax U.S. enforcement and foreign tax haven secrecy to stash assets abroad to evade taxes. In 2009, a scandal at the giant Swiss bank UBS offered a glimpse into the extent of the problem. UBS admitted to helping people evade U.S. taxes, paid $780 million and disclosed the names of more than 4,500 U.S. taxpayers with secret accounts at the bank. UBS  said the cross-border matter was fully resolved as of the end of 2010, and their commitments to U.S. agencies were fulfilled. The repercussions from the UBS case continue today. Swiss and U.S. officials are negotiating a sweeping agreement to name U.S. account holders from at least 11 more Swiss banks—including Credit Suisse Group. It was reported in the Wall Street Journal that Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York who has handled nearly 1,000 confessions of U.S. taxpayers with secret foreign accounts,says he has seen evidence of U.S. investigations into banks in Israel, and believes investigations are ongoing into Hong Kong and Singapore banks.

The IRS has held two limited amnesties for offshore account holders in recent years, and more than 30,000 U.S. taxpayers have stepped forward to pay back taxes and stiff penalties in hopes of avoiding criminal prosecution. Now the IRS is mining data from those confessions and from foreign banks to find others who haven’t come clean. Agents are apparently conducting what seem to be routine audits and asking about foreign accounts only at the end, before telling taxpayers they have foreign bank records in hand. I have personal experience with this IRS “routine audit” fiction. Incidentally, they must have closed down and gone away for the holidays as they have yet to respond to all the paperwork that I sent them.

The WSJ article states that Kevin Packman, a attorney at Holland & Knight who has had handled more than 200 of these cases says, “that in its limited amnesties, the IRS hasn’t distinguished between an 84-year-old grandmother who is a Holocaust survivor or a U.S. taxpayer of Indian descent whose father put an account in his name without telling him—which is common—and the crooked businessman who skims cash in the U.S. and hides it abroad.” Tell me about it! I am neither a grandmother nor a Holocaust survivor, but a simple retiree who has lived as an expat for 19 years and six months and always declared all income and paid the IRS its due, trying to live the remainder of his life in peace and quiet.

They further report that in Canada, many generally law-abiding citizens with dual U.S. citizenship are in technical violation of the rules, from small farmers to David Alward, the premier of the province of New Brunswick, who was born in Beverly, Mass. “I’m not different from thousands of dual citizens in New Brunswick, which has strong ties to the U.S.,” he says. “The threat of losing significant assets has been a real concern.” To avoid criminal prosecution, some confessors have had to agree to a 25% penalty on the highest value of a wide range of foreign assets since 2003, not just bank accounts—even if those values have since fallen.

Congress responded to the UBS scandal by passing the Foreign Account Tax Compliance Act of 2010. Known as Fatca, it is a multifaceted effort to rein in offshore tax evasion that applies both to individuals and a broad range of financial institutions. Phase One of Fatca applies to individuals and takes effect in 2011 for the 2012 filing season, according to an IRS spokesman. Expats who file US taxeds will have to file a new form disclosing offshore assets when the total exceeds $400,000. Among other assets, the form covers offshore financial accounts held directly and indirectly, such as bank and brokerage accounts; direct ownership of foreign stock; direct or indirect ownership of partnership interests such as offshore hedge and private-equity funds; foreign retirement accounts; and offshore pensions and annuities. The new IRS form 8938 is due with the tax return, and it is different from the Foreign Bank Account Report that many U.S. taxpayers also have to file separately with the Treasury Department. But as with the bank account report, the penalties for nonfilers are harsh: up to $10,000 for each 30 days of nonfiling. For extreme evaders there are criminal penalties as well.

Often the tax savings come from putting an investment into an offshore corporation in order to preserve deductions that would disappear if the same investment were made through a U.S.-based entity. The result: The investor owes U.S. tax on net income, not gross income. Offshore tax benefits also could provide a potent selling point for otherwise lackluster, high-fee investments. Hedge-fund managers are always looking for a way to justify their enormous fees. For the very rich, the drawbacks of offshore hedge fund investing usually don’t outweigh the potential tax benefits of these offshore vehicles. Depending on the taxpayer’s circumstances, there can be a difference of one to five percentage points, or more, in after-tax returns. Maybe you should look offshore despite the drawbacks. A big one is that investors in offshore funds have to take specific steps to avoid turning capital-gains into ordinary income, which is taxed at a much higher rate. Among the other benefits of such offshore funds: Holders can take state-tax and other deductions curtailed by the alternative minimum tax; avoid some or all of the 3.8% Medicare tax on investment income taking effect in 2013 for most couples with adjusted gross income above $250,000 ($200,000, single); and avoid limitations on itemized deductions for upper-bracket taxpayers, which have been proposed by the Obama administration.

IRS Throws a Bone to Expats – Just Published by the IRS

There is really nothing new here, but this IRS “Information” publication nicely outlines who has to pay what, who is subject to what reporting, and describes who they will penalize and who they will excuse. It is worth reading and understanding for all US persons residing abroad. Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.
FS-2011-13, December 2011The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so.  Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law.  This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties.Note that penalties will not be imposed in all cases.  As discussed in more detail below, taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties.  In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause. This fact sheet is provided for information purposes only, and the topics discussed may or may not apply to a particular taxpayer’s situation.  The IRS continues to consider the topics discussed in this fact sheet and will provide additional information as it becomes available. 1.  U.S. income tax return filing requirement As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction.  For information about whether you must file a federal income tax return for a particular tax year, including exemption amounts and standard deductions, see Publication 501 (Exemptions, Standard Deduction, and Filing Information) for that year.    Generally, you are required to report your worldwide income on your federal income tax return.  This means that you should report all income, regardless of which country is the source of the income.  Generally, you only need to file returns going back six years. 2.  Penalties imposed for failure to file income tax returns or to pay tax If you are required to file a federal income tax return and fail to do so, or you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty under Internal Revenue Code (IRC) section 6651, unless you show that the failure is due to reasonable cause and not due to willful neglect.  The penalty is 5 percent of the amount of tax required to be shown on the return.  If the failure continues for more than one month, an additional 5 percent penalty may be imposed for each month or fraction thereof during which the failure continues.  The total failure to file penalty cannot exceed 25 percent.  Note that there is no penalty if no tax is due. If you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty for failing to pay under IRC section 6651(a)(2), unless you show that the failure is due to reasonable cause and not due to willful neglect.  The penalty begins running on the due date of the return (determined without regard to any extension of time for filing the return) and is 1/2 percent of the amount of tax shown on the return.  If the failure continues for more than one month, an additional 1/2 percent penalty may be imposed for each additional month or fraction thereof that the amount remains unpaid.  The total failure to pay penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due. Under IRC section 6651(c)(1), the failure to file penalty is reduced by the amount of the failure to pay penalty for any month in which both apply. For more information regarding the failure to file penalty and the failure to pay penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest). Example 1:  Taxpayer is a United States citizen who lived abroad in Country A for all of 2010, during which time Taxpayer worked as an English instructor.  He maintained a checking account with a bank in Country A, and the highest balance in the account did not exceed $10,000 in 2010.  Taxpayer complied with Country A’s tax laws and properly reported all his income on Country A tax returns.  Although Taxpayer earned income in excess of the applicable exemption amount and standard deduction, he did not timely file a federal income tax return for tax year 2010.  After learning of his U.S. filing obligations, Taxpayer filed an accurate, though late, federal income tax return showing no tax liability after taking into account the section 911 foreign earned income exclusion and the foreign tax credit for taxes paid to Country A.  Taxpayer is not liable for a failure to file penalty, since the amount of tax required to be shown on the federal income tax return is zero.  Similarly, Taxpayer is not liable for a failure to pay penalty, since the amount of tax shown on the return is zero. Whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances.  Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them.  In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including: The reasons given for not meeting your tax obligations; Your compliance history; The length of time between your failure to meet your tax obligations and your subsequent compliance; and Circumstances beyond your control. Reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances.  Among the facts and circumstances that will be considered are: Your education; Whether you have previously been subject to the tax; Whether you have been penalized before; Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and The level of complexity of a tax or compliance issue. You may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement. Example 2:  Same facts as Example 1, except Taxpayer’s federal income tax return showed a tax liability of $2,100.  Taxpayer is subject to the failure to file penalty, unless Taxpayer shows that the failure to file was due to reasonable cause and not due to willful neglect.  Taxpayer is also subject to the failure to pay penalty, unless Taxpayer shows that the failure to pay was due to reasonable cause and not due to willful neglect.  Since the failure to file penalty is reduced by the failure to pay penalty for any month during which both apply, the maximum failure to file penalty is $472.50 (22.5 percent of $2,100).  The failure to pay penalty will accrue for 50 months before the 25 percent maximum is reached.  The maximum failure to pay penalty is $525 (25 percent of $2,100).  The penalties could be lower depending on when Taxpayer filed the return and paid the tax shown on the return.  The penalties also could be lower, or there could be no penalties at all, to the extent Taxpayer is able to show that the failure to file or failure to pay was due to reasonable cause and not due to willful neglect.  3.  Possible additional penalties that may apply in particular cases In addition to the failure to file and failure to pay penalties, in some situations, you could be subject to other civil penalties, including the accuracy-related penalty, fraud penalty, and certain information reporting penalties.  For information regarding the accuracy-related penalty and the fraud penalty, see IRS Notice 746 (Information About Your Notice, Penalty and Interest).  For information regarding information reporting penalties, see the instructions for the specific information reporting form.  For example, see the Instructions for Form 3520-A for information on the penalty for failure to file Form 3520-A. 4.  FBAR filing requirement As a United States citizen, you may be required to report your interest in certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).  For information about FBAR reporting requirements, including reporting exceptions, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions. 5.  How to file an FBAR For information about how and where to file an FBAR, see Form TD F 90-22.1 and the IRS FBAR Frequently Asked Questions. If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late.  You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR.  As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause.  Keep copies, for your record, of what you send. 6.  Possible penalties for failure to file FBAR If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty.  Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation.  See 31 U.S.C. § 5321(a)(5).  Note that this penalty is applicable only in cases in which there is willful intent to avoid filing.  Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.  There is no penalty in the case of a violation that IRS determines was due to reasonable cause.  For more information about the FBAR penalty, see Form TD F 90-22.1.  For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR). Example 3:  Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR.  The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause.  The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances.  Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case.  Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted. Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account.  There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause.  No single factor is determinative. Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.  As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause.  No single factor is determinative. Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter.  See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).  The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate.  Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination. Example 4:  Taxpayer is a United States citizen who lives and works in Country B as a computer programmer.  Taxpayer has checking and savings accounts with a bank that is located in the city where he lives.  The aggregate balance of the checking and savings accounts is $50,000 during the tax year.  Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns.  Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts.  After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR.  Taxpayer also filed federal income tax returns properly reporting all income and no tax was due.  The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances.  Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due.  Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case.  Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted. 7. New reporting requirement for foreign financial assets A new law requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 to report those assets to the IRS.  This reporting will be required beginning in 2012.  Taxpayers who are required to report must submit Form 8938 with their tax return.  See Notice 2011-55  for additional information about this reporting requirement under IRC section 6038D.

Page Last Reviewed or Updated: December 07, 2011

Latest of 30 Guilty of Not Reporting to the IRS = What happened to one man who didn’t report his FBAR

This post is from the United States Department of Justice website.

I emphasize that this individual, Michael Reiss, WAS AND IS NOT AN EXPAT. The next post will deal with how these thieves are causing the IRS to be on high alert and hunting for huge amounts of money that are legally and morally due to the United States. These American thieves who live IN America are causing we expats, who try to comply with the law, to suffer as a result of intense scrutiny by the IRS.

United States Attorney Southern District of New York
FOR IMMEDIATE RELEASE
AUGUST 5, 2011
CONTACT:
U.S. ATTORNEY’S OFFICE
ELLEN DAVIS,JERIKA RICHARDSON,CARLY SULLIVAN
PUBLIC INFORMATION OFFICE
(212) 637-2600
IRS
JOSEPH FOY
PUBLIC INFORMATION OFFICER
(212) 436-1032

NEW JERSEY DOCTOR AND MEDICAL PROFESSOR PLEADS GUILTY
IN MANHATTAN FEDERAL COURT TO FAILING TO INFORM IRS
OF MILLIONS HIDDEN IN SWISS BANK ACCOUNTS

PREET BHARARA, the United States Attorney for the Southern District of New York, and CHARLES R. PINE, the Special Agent-in-Charge of the New York Field Office of the Internal Revenue Service, Criminal Investigation Division (“IRS-CID”),announced that MICHAEL REISS, a Princeton, New Jersey, doctor,professor, and medical researcher, pled guilty today to willfully failing to file Reports of Foreign Bank and Financial Accounts(“FBARs”) with the IRS, regarding Swiss bank accounts that he maintained and controlled. REISS utilized the services of BEDA SINGENBERGER, a Swiss financial adviser who was charged in an indictment returned in the Southern District of New York on July21, 2011. As part of his agreement resolving the criminal charges, REISS agreed to pay back taxes of at least $400,000, and to pay a civil penalty of over $1.2 million. REISS entered his guilty plea before U.S. Magistrate Judge HENRY B. PITMAN.
Manhattan U.S. Attorney PREET BHARARA said: “As our prosecutions of tax cheats like Michael Reiss should make abundantly clear, failing to report assets overseas to circumvent the law and avoid paying taxes is a crime and, along with our partners at the IRS, we will aggressively enforce the law in this area. The people who engage in this conduct are among the more privileged in our society, but they are not above the law.”
IRS Special Agent-in-Charge CHARLES R. PINE said:”Offshore tax enforcement has become a major priority for every
part of the IRS, including IRS-Criminal Investigation. Tax secrecy continues to erode and we are not letting up on international tax issues. It’s a matter of restoring publicconfidence in our tax system and assuring all Americans are held to the same standard of paying their fair share.”

According to the Information filed today in Manhattanfederal court, the previously filed Singenberger Indictment, and statements made in connection with REISS’s guilty plea:
From 2000 until 2010, REISS was required to file an FBAR annually with the IRS for various accounts he held at Swiss banks. He was required to identify the financial institutionwith which his account was held, the type of account, the account number, and the maximum value of the account during the calendar year for which the FBAR was being filed. He failed to do so.
Specifically, starting 2000, REISS held an account at UBS AG in Switzerland (“UBS”). In 2002, REISS transferred the assets held in that account to another Swiss bank. Later, inSeptember 2003, REISS, with the assistance of SINGENBERGER,opened an undeclared account at yet another Swiss bank (“SwissBank No. 1”) in the name of a sham foundation, the FloranovaFoundation. The foundation, of which REISS was the sole beneficiary, had previously been formed by SINGENBERGER under thelaws of Liechtenstein. By opening the account at Swiss Bank No.1 in the name of the Floranova Foundation, REISS was attemptingto obscure his ownership of the assets in the account from the IRS. As of March 31, 2008, REISS’s account at Swiss Bank No. 1 in the name of the Floranova Foundation account held assets valued at approximately $2.588 million.
In November 2008, REISS, again with SINGENBERGER’s assistance, opened another undeclared account at Swiss Bank No.
1. The account was opened in the name of Upside International Ltd., a corporation previously formed by SINGENBERGER under the laws of Hong Kong. The assets of REISS’s account at Swiss Bank No. 1 in the name of the Floranova Foundation were then transferred shortly thereafter into REISS’s Upside InternationalLtd. account.
For each of the calendar years from 2000 through 2007,REISS filed and caused to be filed with the IRS an FBAR. On each of these FBARs, REISS indicated that he had an interest in one or more bank or securities accounts at ABN AMRO Bank in the Netherlands, but he failed to disclose financial accounts at UBS and Swiss Bank No. 1, as well as an account at the Swiss branch of another bank that REISS held. For the calendar years 2008 and 2009, REISS did not file an FBAR with the IRS disclosing hissignatory or other authority over his account at Swiss Bank No.
1. REISS’s tax returns for the years 2000 through 2009 were
similarly false in omitting the information about his Swiss bankaccounts.
REISS’s guilty plea is the seventh in the Southern District of New York by a U.S. taxpayer who held an undeclaredaccount in Switzerland at UBS and/or other Swiss banks, and who  failed to make a timely voluntary disclosure to the IRS as partof the IRS’s Voluntary Disclosure Program.
* * *
REISS, 60, faces a maximum term of five years in prison, a maximum term of three years of supervised release, and fines of the greatest of $250,000, or twice the gross pecuniary gain derived from the offense or twice the gross pecuniary lossto any victim.
SINGENBERGER is alleged to have helped U.S. tax payers hide more than $184 million at various Swiss banks. The case against him is pending. The charge and allegations contained in the Indictment of SINGENBERGER are merely accusations, and he ispresumed innocent unless and until proven guilty.
Mr. BHARARA praised the outstanding efforts of IRS-CID in the investigation, which he noted is ongoing. Mr. BHARARA also thanked U.S. Department of Justice’s Tax Division for their assistance in the investigation.
This case is being handled by the Office’s ComplexFrauds Unit. Assistant U.S. Attorneys DANIEL W. LEVY, DAVID B.MASSEY, and JASON H. COWLEY are in charge of the prosecution.
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