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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘FBAR’

New IRS Procedures to Ensure Effectiveness of Civil FBAR Penalties

Posted by William Byrnes on August 12, 2015


The purpose of the IRS interim guidance is to implement procedures to improve the administration of the Service’s FBAR compliance program.

When asserting an FBAR penalty, the burden is on the IRS to show that an FBAR violation occurred Irs_logoand, for willful violations, that the violation was in fact willful. The FBAR penalty provision of Title 31 establishes only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case.

Read the May 13, 2015 IRS FBAR Guidance

Prof Jack Townsend, on his federal tax crimes blog, discusses the recent Moore v United States (W.D. WA 2015) in which the Court “admonishes the IRS and imposes a cost for misleading the taxpayer” about a FBAR assessment.

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Congress Matches FBAR Filing to Tax Return Dates, Allows Extension, Penalty Abatement

Posted by William Byrnes on August 5, 2015


BNA Reports – Practitioners are praising the new deadline for reporting foreign bank accounts tucked into newly signed legislation (Pub. L. No. 114-041) to extend the Highway Trust Fund.

The measure ensures that the due date for the Report of Foreign Bank and Financial Accounts Irs_logo(FBAR), formerly June 30, is now the same as the U.S. tax filing deadline of April 15—a change that practitioners said would help taxpayers who frequently didn’t know the deadlines were different.

Taxpayers can also now ask for the same six-month extension for FBARs that they can get for their tax returns—permitting them to file by Oct. 15. That option didn’t exist before.

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Jury Determines 150-Percent FBAR Penalty and U.S. Seeks FBAR Related Forfeiture of $12 Million!”

Posted by William Byrnes on October 4, 2014


International Financial Law Prof Blog.

In Zwerner, the government assessed civil FBAR penalties equivalent to 50 percent of the highest account balance for each of tax year 2004, 2005, 2006 and 2007, aggregating $3,488,609.33 for an account that appears to have had a high balance of $1,691,054 during the relevant time period! The IRS asserted a 75-percent civil income tax fraud penalty for tax years 2004, 2005 and 2006. …  The jury trial in Zwerner began on May 19, 2014 …

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Offshore Voluntary Disclosure Initiative (OVDI) leads to average $2,220 a year FBAR penalty for $17 dollar tax understatement

Posted by William Byrnes on July 18, 2014


Disclosures and Amount Recovered Thus Far by OVDI from Non-Compliant Taxpayers 

Treasury-Dept.-Seal-of-the-IRSOn June 18, 2014, IRS Commissioner John Koskinen disclosed that the 2009, 2011, and ongoing 2012 OVDIs have generated more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest and penalties.  Thus, on its face, the OVDIs look to be batting an average of approximately 9,000 taxpayers a year with approximately $1.3 billion revenue.

However, at the beginning of the year it was reported that (OVDI) have led to 43,000 taxpayers paying back taxes, interest and penalties totaling $6 billion to date.  The past 6 months only generating 2,000 additional disclosures and $500 million additional revenue may lead one to speculate that the OVDI, at least for high net wealth disclosures, is petering out.  Regarding the 2012 IRS Streamlined OVD program, the Taxpayer Advocate found that as of September 2013, 2,990 taxpayers submitted returns reporting only an additional $3.8 million in taxes.

Substantial Money Laundering Penalties – But Not Tax Collection

The substantial majority of the $6.5 billion OVDI revenue is FBAR penalty, not tax collection and not tax penalty.

In the July 16, 2014 report, the Taxpayer Advocate found that the 2009 OVD program, the median offshore penalty paid by those with the smallest accounts ($87,145 or less) was nearly 6x the tax on their unreported income.  Among unrepresented taxpayers with small accounts it was nearly 8x the unpaid tax. The penalty was also disproportionately greater than the amount paid by those with the largest accounts (more than $4.2 million) who paid a median of about 3x their unreported tax.

GAO-13-318, Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion

Table 2: Selected Penalty Information for 2009 OVDP Individual Taxpayers with Closed Cases as of November 29, 2012
10th percentile 25th percentile Median 75th percentile 90th percentile
Offshore account(s) balance $78,315 $190,365 $568,735 $1,595,805 $4,054,505
2009 OVDP penalty $13,320 $35,670 $107,949 $310,476 $793,166
Additional tax owed, tax years 2003-2008 $103 $1,661 $12,748 $60,449 $190,399
Interest,
tax years 2003-2008
$52 482 3,486 17,398 57,129
Other penalties 84 605 3,457 14,290 45,163
Total penalties, interest and taxes $2,318 $22,120 $95,982 $330,185 $923,300
Source: GAO analysis of IRS’s Enforcement Revenue Information System (ERIS) and Individual Returns Transaction File.

In her January 9, 2014 report, the Taxpayer Advocate previously found that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due!  The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances.  The GAO Report of 2013 found that for small accounts of less than $100,000 that over a six year period had only an average of $103 tax owing ($17 a year additional tax revenue), the IRS imposed a FBAR penalty of $13,320 (i.e. $2,220 a year FBAR penalty on average for $17 dollar tax understatement, in additional to the tax penalty and interest).  The 25% percentile paid on average a $5,945 FBAR penalty for an average annual $277 tax understatement.  The median paid a FBAR penalty $17,991 a year for $2,125 a year understatement.

When the IRS audited taxpayers who opted out (or were removed), on average, it assessed smaller, but still severe, penalties of nearly 70% of the unpaid tax and interest.   Given the harsh treatment the IRS applied to benign actors, the Taxpayer Advocate reported that non-compliant taxpayers have made quiet disclosures by correcting old returns or by complying in future years without subjecting themselves to the lengthy and seemingly-unfair OVD process.  Still others have not addressed FBAR compliance problems, and the IRS has not done enough to help them comply.

Have These Efforts Substantially Increased Taxpayer Compliance?

Taxpayer AdvocateThe Taxpayer Advocate, replying on State Department statistics, cited that 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, yet the IRS received only 807,040 FBAR submissions as recently as 2012 (see Report Volume 1, Page 229).  The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater).  Thus, currently, less than 10% of taxpayers with FBAR filing requirements are probably compliant.

The Taxpayer Advocate noted that “more than one million U.S. citizens reside in Mexico and many Mexican citizens reside in the U.S.”  The Report pointed out that most persons that worked in Mexico had to pay into a government mandated retirement account (known as an AFORES), and that this retirement account may be reportable to the IRS as a foreign trust.

The GAO reviewed the 2009 OVDP and found that some immigrants stated in their 2009 OVDP applications that they were unaware of their FBAR filing requirements. The GAO found that the immigrants had opened banks accounts in their home country prior to immigrating. The GAO Report revealed:

IRS officials from the Offshore Compliance Initiative office stated that although there are several FBAR education programs, none are specifically targeted at new immigrants. These officials stated that one of the challenges that they face in their office, which is part of IRS’s Large Business and International Division, is that taxpayer education and outreach is the responsibility of IRS’s Wage and Investment Division and that issues concerning FBARs fall under IRS’s Small Business/Self-Employed Division.

The IRS reported to the Taxpayer Advocate that its FY2014 FBAR Communication Strategy includes efforts to reach U.S. citizens residing abroad via Internet, social media, and collaboration with the State Department.

The IRS also responded as follows (excerpted):

Congress enacted both the Title 31 and the Title 26 provisions regarding the reporting requirements of the FBAR … and Form 8938 (Statement of Specified Foreign Financial Assets). Reporting on the FBAR is required for law enforcement purposes under the Bank Secrecy Act, as well as for purposes of tax administration. As a consequence, different policy considerations apply to Form 8938 and FBAR reporting. These are reflected in the different categories of persons required to file Form 8938 and the FBAR, the different filing thresholds for Form 8938 and FBAR reporting, and the different assets (and accompanying information) required to be reported on each form. Although certain information may be reported on both Form 8938 and the FBAR, the information required by the forms is not identical in all cases, and reflects the different rules, key definitions (for example, “financial account”), and reporting requirements applicable to Form 8938 and FBAR reporting.

These differing policy considerations were recognized by Congress during the passage of the HIRE Act and the enactment of Section 6038D. Congress’s intention to retain FBAR reporting requirements, notwithstanding the enactment of section 6038D, was specifically noted in the Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives To Restore Employment Act,” …

The Technical Explanation states that “[n]othing in this provision [section 511 of the HIRE Act enacting new section 6038D] is intended as a substitute for compliance with the FBAR reporting requirements, which are unchanged by this provision.” (Technical Explanation at p. 60.) …

How Much Tax Revenue Did Congress Expect

13.05.15-SubcommitteeThe Senate Permanent Subcommittee on Investigations issued a report March 4, 2009 entitled “Tax Haven Banks and U.S. Tax Compliance.” This report examined how tax haven banks facilitate tax evasion by U.S. clients that cost U.S. taxpayers an estimated “$100 billion each year”. This Report has been widely cited as authority for the claim that $100 billion is lost in taxes because of evasion of tax through tax havens.

However, the reports citation for this $100 billion figure is only its footnote 1 that cites five magazine articles unsubstantiated information, that also varied widely in terms of opinions regarding the amount of tax losses the U.S. incurs.  The five articles mentioned as the foundation for the $100 billion amount do not refer to any empirical study, do not provide any empirical evidence, and do not provide any statistical methodology.

IRS Commissioner Charles Shulman, in testifying before the Permanent Subcommittee on Investigations on March 4, 2009, was questioned on the analysis of hidden money criminally held overseas:

Senator McCaskell: “Has there been any analysis done of how much of this money that is being hidden overseas is, in fact, a result of criminal activity?”

Mr. Shulman: “Not that I am aware of. I mean, estimating how much money that is overseas and not being paid to the government. As far as I am aware, there is no credible estimate because it is kind of a chicken and egg. It is over there and we have not found it, it is hard to estimate what is there. And all estimates that I have seen have not broken down criminal versus civil because, again, until we see the cases, it is hard to say.”

In the February 25, 2014 175-page bipartisan staff report the Senate Subcommittee increased the $100 billion to $150 billion.  “Contributing to that annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150 billion each year.”  To justify the reporting of this $150 billion a year of lost tax revenue due to “offshore tax schemes”, the Senate Report cites its previous investigatory reports supported by third party articles that refer to transfer pricing issues, not to studies about individual taxpayer offshore noncompliance.

Relative to the reported figure of $150 billion, the additional OVDI tax collection of approximately $500 million a year is just .003% (a third of one percent) of the goal.  The FBAR money laundering penalties prop up the overall collection amount, but it’s a drop in the bucket of the Senate estimate.

How Much Did the Congressional Joint Committee on Tax Estimate FATCA Will Bring in Annually?

JCOT_bThe Congressional Joint Committee on Tax estimated that FATCA will only generate $8.7 billion over ten years or average revenue $870 million per year.  The $870 million annually appears not too far out of line with the tax collections generated by the OVDI the past six years, albeit the compliance costs to global industry to prepare for FATCA is currently estimated near this same amount based on government reports from the UK, Canada, Spain, among other trade partners of the US.

The Florida Bankers Association reported to Fitch that $60 billion and $100 billion in foreign deposits are held in Florida banks, close to 20% of the state’s total deposits.  In 2012, Fitch estimated that a substantial portion of these deposits would NOT expatriate from Florida.  But according to the Texas Bankers Association, FATCA has resulted in an outflow of $500 million of deposits from the Texas banking system already.

Based on a rate of the 15% long terms capital gain that applies to that money over the past six look-back years of Statute of Limitation, the currently cited $150B of lost annual tax revenue would require $1 trillion of annual taxable (hidden) income. To generate $1 trillion of capital gains income at a 5% rate of return requires $20 trillion of “noncompliant” offshore dollars.  Is it likely that noncompliant money represents almost double the M2 money supply (Federal Reserve data of March 6, 2014 about $11T, see http://www.federalreserve.gov/releases/h6/current/) and about 20 times the actual amount of paper dollars that are in circulation?

book cover

 

Fifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

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Did you file your FBAR today? You still have a couple hours left!

Posted by William Byrnes on June 30, 2014


The FBAR is an annual report and must be filed on or before June 30th! The FBAR must be filed electronically through FinCEN’s BSA E-Filing System.  The application to file electronically is available at http://bsaefiling.fincen.treas.gov/

Who is considered an individual filer? 

An individual filer is a natural person who owns a reportable foreign financial account or has signature authority but no financial interest in a reportable foreign financial account that
requires the filing of an FBAR for the reportable year. An individual who jointly owns an account with a spouse may file a single FBAR report as an individual filer

What if I file an FBAR with my spouse? How will I be able to meet the two-signature requirement and E-File?

FinCEN’s BSA E-File system’s capability only allows for one digital signature. Although the current FBAR instructions state that a spouse included as a joint owner, who does not file a separate FBAR, must also sign the FBAR in Item 44, the E-Filing process will not allow for both signatures on the same electronic form. So, to use the E-Filing system, a Form 114a (http://www.fincen.gov/forms/files/FBARE-FileAuth114aRecordSP.pdf ) should be completed designating which spouse will file the FBAR. The Form 114a is retained by the filer and not sent to FinCEN. The spouse designated can then use the BSA E-Filing System to E-File the FBAR.

Who Must File an FBAR?

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year

What is a Financial Account?

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).

What is a Financial Interest?

A United States person has a financial interest in a foreign financial account for which:

1. the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or

2. the owner of record or holder of legal title is one of the following:

a. An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;

b. A corporation in which the United States person owns directly or indirectly:

(i) more than 50 percent of the total value of shares of stock or

(ii) more than 50 percent of the voting power of all shares of stock;

c. A partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital;

d. A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purposes. See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a trust;

e. A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or

f. Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

Are IRA Owners and Beneficiaries included?

An owner or beneficiary of an IRA is not required to report a foreign financial account held in the IRA.

Are Participants in and Beneficiaries of Tax-Qualified Retirement Plans included?

A participant in or beneficiary of a retirement plan described in Internal Revenue Code section 401(a), 403(a), or 403(b) is not required to report a foreign financial account held by or on behalf of the retirement plan.

What if I did not file FBAR in previous years?

See my previous article https://profwilliambyrnes.com/2014/06/18/new-offshore-voluntary-disclosure-program-ovdp-announced-with-50-penalty/

Also see this article: https://profwilliambyrnes.com/2014/06/11/why-is-the-irs-softening-the-offshore-voluntary-compliance-program/

book coverComplying with FATCA?

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters by 50 industry experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance challenges (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems.   A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

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new Offshore Voluntary Disclosure Program (OVDP) announced with carrot of reduced penalties or stick of 50% penalty

Posted by William Byrnes on June 18, 2014


As an update to my article – https://profwilliambyrnes.com/2014/06/11/why-is-the-irs-softening-the-offshore-voluntary-compliance-program/  – the IRS today formally announced the new, softer approach.

IRS Commissioner John Koskinen disclosed that the 2009, 2011, and ongoing 2012 OVDPs have generated more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest and penalties.  The substantial majority of this collection is FBAR penalty (see my previous articles on the OVDP and FBAR within this blog),

Commissioner Koskinen stated that in 2012 the IRS added the streamlined filing compliance procedures for a limited group of U.S. taxpayers living abroad who were not aware that they were out of compliance.  The streamlined process allows this group to catch up on their U.S. filing requirements without paying steep penalties.

He then announced two sets of actions:

“First, we’re expanding the streamlined procedures to cover a much broader group of U.S. taxpayers we believe are out there who have failed to disclose their foreign accounts but who aren’t willfully evading their tax obligations. To encourage these taxpayers to come forward, we’re expanding the eligibility criteria, eliminating a cap on the amount of tax owed to qualify for the program, and doing away with a questionnaire that applicants were required to complete.”

“Second, we will be reshaping the terms for taxpayers to participate in the OVDP. This is designed to cover those whose failure to comply with reporting requirements is considered willful in nature, and who therefore don’t qualify for the streamlined procedures. These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.”

Thus, in the first case, the IRS is removing the $1,500 cap for tax owed to be able to enter the non willful OVDP, and eliminating the submission of the extensive questionnaire.

But in the second case, the penalty will be increased from 27.5% to 50% if the bank that holds (held) the taxpayer’s account has come under investigation by the IRS before the taxpayer receives the IRS OVDP clearance letter.  The questionnaire will be expanded.

The formal new Streamlined Procedures program has been published as a set of FAQs with relevant links.   The 2012 program is as per the below.  An analysis of the new 2014 program will be published on this blog June 26, 2014.

50% Penalty

Beginning on August 4, 2014 (see Q&A 7.2), any taxpayer who has an undisclosed foreign financial account will be subject to a 50% miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation, an event has already occurred that constitutes a public disclosure that either

(a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person;

(b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or

(c) the foreign financial institution or other facilitator 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 or have accounts established or maintained by the facilitator.

Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.   A list of foreign financial institutions or facilitators meeting this criteria is available.

Description of the Streamlined Procedure

This streamlined procedure is designed for taxpayers that present a low compliance risk. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.  Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past three years and to file delinquent FBARs for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13. (December 2011).

In addition, retroactive relief for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by relevant treaty is available through this process. The proper deferral elections with respect to such arrangements must be made with the submission. See instructions below.

Eligibility

This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed a U.S. tax return during the same period. These taxpayers must present a low level of compliance risk as described below

Amended returns submitted through this program will be treated as high risk returns and subject to examination, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty. It should be noted that this relief is also available under the Offshore Voluntary Disclosure Program.  See below for the information required to be submitted with such requests. (If you need to file an amended return to correct previously reported or unreported income, deductions, credits, tax etc, you should not use this streamlined procedure. Depending on your circumstances, you may want to consider participating in the Offshore Voluntary Disclosure Program.)

All tax returns submitted under this procedure must have a valid Taxpayer Identification Number (TIN). For U.S. citizens, a TIN is a Social Security Number (SSN). For individuals that are not eligible for an SSN, an Individual Taxpayer Identification Number (ITIN) is a valid TIN. Tax returns filed without a valid SSN or ITIN will not be processed. For those who are ineligible for an SSN, but who do not have an ITIN, a submission may be made through this program if accompanied by a complete ITIN application. For information on obtaining an SSN, see http://www.ssa.gov. For information on obtaining an ITIN, see the ITIN page.

Compliance Risk Determination

The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a Questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.

The risk level may rise if any of the following are present:

  • If any of the returns submitted through this program claim a refund;
  • If there is material economic activity in the United States;
  • If the taxpayer has not declared all of his/her income in his/her country of residence;
  • If the taxpayer is under audit or investigation by the IRS;
  • If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
  • If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
  • If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
  • If there is U.S. source income; or
  • If there are indications of sophisticated tax planning or avoidance.

For additional information about what information will be requested to evaluate risk, please see the Questionnaire.

Instructions for Using This Procedure

Taxpayers wishing to use these streamlined procedures must:

1. Submit complete and accurate delinquent tax returns, with appropriate related information returns, for the last three years for which a U.S. tax return is due.

  • Please note that all delinquent information returns being filed under this procedure should be sent to the address below with the rest of the submission.

2. Include at the top of the first page of each tax return “Streamlined” to indicate that the returns are being submitted under this procedure. This is very important to ensure that your returns get processed through these procedures.

3. Submit payment of all tax due and owing as reflected on the returns and statutory interest due and owing.

  • For returns determined to be high risk, failure to file and failure to pay penalties may be imposed in accordance with U.S. federal tax laws and FBAR penalties may be imposed in accordance with U.S. law. Reasonable cause statements may be requested during review or examination of the returns determined to be high risk. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13(December 2011).

4. Submit copies of filed FBARs for the last six years for which an FBAR is due. (You should file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers. Through June 30, 2013, you may file electronically (http://bsaefiling.fincen.treas.gov) or by sending paper forms to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621. After June 30, 2013, you must file electronically (http://bsaefiling.fincen.treas.gov.)) If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or (if calling from outside the United States) 1-703-905-3975 to determine possible alternatives for timely reporting.

NOTE: Taxpayers filing FBARs electronically do not currently have the technological ability to include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers. Until such time that they have the ability, it is not necessary to include the statement. (July 18, 2013)

5. Submit a complete, accurate and signed Questionnaire.

6. If the taxpayer must apply for an ITIN in order to file delinquent returns under this procedure, the application and other documents required for applying for an ITIN must be attached to the the required forms, information and documentation required under this streamlined procedure. See the ITIN page for more.

7. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit:

  • a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty provision;
  • for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission; and
  • a dated statement signed by the taxpayer under penalties of perjury describing:
    • the events that led to the failure to make the election,
    • the events that led to the discovery of the failure, and
    • if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.

8. This program has been established for non-resident non-filers. Generally, amended returns will not be accepted in this program. The only amended returns accepted through this program are those being filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty. Non-resident taxpayers who have previously filed returns but wish to request deferral provisions will be required to submit:

  • an amended return reflecting no adjustments to income deductions, or credits; and
  • all documents required in item 7 above.

9. The documents listed above must be sent to:

Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn: Streamlined
Austin, TX 78741

Other Considerations

Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on Jan. 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. For additional information go to the OVDP page. It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. It should also be noted that taxpayers who are ineligible to use OVDP are also ineligible to participate in this procedure.

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Why Is The IRS Softening the Offshore Voluntary Compliance Program ?

Posted by William Byrnes on June 11, 2014


On June 3, 2014 the IRS Commissioner John A. Koskinen stated before The U.S. Council For International Business-OECD International Tax Conference:

“Now while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.

 We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. … We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. …”

Amount Recovered Thus Far from Non-Compliant Taxpayers 

According to the GAO Reports and the Senate Subcommittee report, the 2008, 2011, and the ongoing 2012 offshore voluntary disclosure initiative (OVDI) have led to 43,000 taxpayers paying back taxes, interest and penalties totaling $6 billion to date, with more expected.

However, the vast majority of this recovered $6 billion is not tax revenue but instead results from the FBAR penalties (anti money laundering financial reporting form sent by June 30 to FINCEN, separate from the 1040 tax filing to the IRS sent by April 15) assessed for not reporting a foreign account.  The Taxpayer Advocatefound that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due!  The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances.

From the IRS OVDP FAQ:

“For example, assume the taxpayer has the following amounts in a foreign account over the period covered by his voluntary disclosure. It is assumed for purposes of the example that the $1,000,000 was in the account before 2003 and was not unreported income in 2003.

 

Year Amount on Deposit Interest Income Account Balance
2003 $1,000,000 $50,000 $1,050,000
2004   $50,000 $1,100,000
2005   $50,000 $1,150,000
2006   $50,000 $1,200,000
2007   $50,000 $1,250,000
2008   $50,000 $1,300,000
2009   $50,000 $1,350,000
2010   $50,000 $1,400,000

(NOTE: This example does not provide for compounded interest, and assumes the taxpayer is in the 35-percent tax bracket, does not have an investment in a Passive Foreign Investment Company (PFIC), files a return but does not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.)

If the taxpayers in the above example come forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:

They would pay $518,000 plus interest. This includes:

  • Tax of $140,000 (8 years at $17,500) plus interest,
  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
  • An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $385,000 (i.e., $1,400,000 x 27.5%).

If the taxpayers didn’t come forward, when the IRS discovered their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty.”

The IRS example to enter the OVDP has 75% of the OVDP collection amount from the FBAR penalty.  The FBAR penalty is 2.75 larger than the tax due.  But not entering leads to owing an amount four times the account value.

Thus, judged by the amount of tax funds recovered, the OVDP has substantially underperformed to date.  But by leveraging a taxpayer’s lack of compliance with the non-tax FBAR, the OVDP and IRS civil prosecutions appear to meet performance goals of raising revenue and obtaining overall tax compliance for US persons with foreign accounts and/or residing abroad.  Or do they?

Have These Initiatives Increased Taxpayer Compliance?

The Taxpayer Advocate, replying on State Department statistics, cited that 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, yet the IRS received only 807,040 FBAR submissions as recently as 2012.  The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater).  Moreover, Non-Resident Aliens (NRAs) must file a FBAR as well.  Thus, all the initiatives to date have produced a compliance rate below 10% compliance.  Sounds more like the War on Drugs rather than a drive to increase tax compliance.

This is not to say that obtaining a highly level of compliance with the tax law, like compliance with the drug laws and DUI laws, is not a public good in itself – such tax compliance is a public good that the public has chosen, via Congress (and its investigatory hearings), for resource allocation. But like the War on Drugs, there are many potential strategies to bring about compliance.  The ones used to date just haven’t worked very well, and caused more problems (the War on Drugs has led to one of the highest rates of imprisonment of the world, that some have called a scorched earth policy against young male minorities in particular).

Have These Initiatives Met the Tax Collection Goals?

The Subcommittee Report states: “Offshore tax evasion has been an issue of concern … because lost tax revenues contribute to the U.S. annual deficit, which today exceeds $500 billion. Collecting unpaid taxes is one way to reduce the deficit without raising taxes.”

The Senate Subcommittee reported that: “According to the IRS, the current estimated annual U.S. tax gap is $450 billion, which represents the total amount of U.S. taxes owed but not paid on time, despite an overall tax compliance rate among American taxpayers of 83 percent. Contributing to that annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150 billion each year.”

To justify the reporting of the number of $150 billion a year of lost tax revenue due to “offshore tax schemes”, the Senate Report primarily cites its own investigatory reports and third party articles that refer to transfer pricing issues.  While transfer pricing regulations have been under scrutiny, at least by the Democrats, in the Senate, it is certainly not commonly held by those same Democrats that transfer pricing is illegal or constitutes an “offshore scheme”.

It is proven beyond a doubt by the UBS, Credit Suisse, and other similar investigations, validated by the OVDI disclosures, that some Americans are noncompliant, and that some of those noncompliant Americans would owe tax if disclosing foreign income on their tax returns.  There is also no doubt that the total number of noncompliant Americans between 2008 and 2013 was more than the 43,000 who were brought in from the wilderness.

There is also no doubt that the tax that would have been collected from these noncompliant taxpayers had they been compliant during their time in the wilderness is in fact, relative to the reported figure of $150 billion lost annually, miniscule (somewhere probably between $300 million and $500 million a year for lost tax (recalling the majority of the $6 billion collected representing FBAR penalties, tax penalties, and interest).  To date, of the $150 billion referred to as lost a year to offshore schemes, only approximately .003% (a third of one percent) has been collected – and that assuming the higher number of $500 million a year.  Not a good result by any measure.  And not going to dent the annual $450B – $500B deficit (not including unfunded liabilities).

Are More Than 90% of Taxpayers with Foreign Accounts Tax Evaders?

The Taxpayer Advocate, relying on State Department statistics, cited that 7.6 million U.S. citizens reside abroad.  Most are required to file a FBAR.  The Taxpayer Advocate noted that in Mexico alone, more than one million U.S. citizens reside, and many Mexican citizens reside in the U.S. (and thus are required to file a FBAR for any Mexican accounts of $10,000 or greater).

Many more U.S. residents have FBAR filing requirements because of having signatory, control, or ownership of an overseas account.  The Department of Homeland Security reported in Population Estimates (July 2013) that an estimated 13.3 million LPRs lived in the United States as of January 1, 2012, some of who will have FBAR filing requirements.

For 2011, approximately four million individual returns included foreign source income and 450,000 included the Foreign Earned Income Exclusion.  Yet the IRS received only 807,040 FBAR submissions as recently as 2012.

Based on these numbers, more than 90% of taxpayers with foreign accounts are NOT compliant with the FBAR filing requirement.  Add it up: 7.6 million Americans abroad, 13.3 LPRs in the USA, at least 1 million NRAs in the US, and some number of American citizens in the US with foreign accounts.  Must equal at least 10 million taxpayers that should be filing the FBAR.   The IRS has stated that a substantial number of US taxpayers living abroad do not file tax returns at all.

The IRS reports that 87% of American residing taxpayers are tax compliant.  So the remaining 13% … statistically speaking, being an American residing in America and having a foreign account is indicative of tax evasion, especially if FBAR is considered a “tax” compliance obligation (which it is not).

Based on these numbers, being an American living in a foreign country is a leading cause of criminality.  What the statistics do not tell is which comes first: criminality or foreign activity?  A person tends toward criminality and thus opens a foreign account or moves to a foreign country?  Or the act of moving abroad to a foreign country leads to criminality?  Absurd questions?      

Is the FBAR form necessary?  Why has it not been combined with the 1040?  Why not with the new 8938?  Questions to ponder in another article.

Posted in Compliance, FATCA | Tagged: , , , , | 8 Comments »

3 Tax Facts for US Taxpayers Living Abroad or With Foreign Assets

Posted by William Byrnes on June 2, 2014


In Newswire 2014-52, IRS reminded US taxpayers living abroad of 3 Tax Facts concerning filing requirements.

1. Filing Requirements of a US taxpayer Living and / or Working in a Foreign Country?

The Internal Revenue Service reminds U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013, that they may have a U.S. tax liability and a filing requirement in 2014.

The filing deadline for a tax return for a US taxpayer who lives or works outside the US (or serving in the military outside the U.S.) is Monday, June 16, 2014.  To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for details.

2. Foreign Assets Reporting?

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

3. FBAR Reporting Also Required?

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website. For details regarding the FBAR requirements, see Report of Foreign Bank and Financial Accounts (FBAR).

Any U.S. taxpayer here or abroad with tax questions can use the online IRS Tax Map and the International Tax Topic Index to get answers.

tax-facts-online_medium

Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

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Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

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For an indepth analysis of deductions for donations to U.S. charities (and the government’s policy encouraging or discouraging these donations), download my article at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me: profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour”

Posted in Compliance, FATCA, Taxation | Tagged: , , , , | 1 Comment »

IRS Provides FBAR Answers

Posted by William Byrnes on November 11, 2011


Failure to file an FBAR (Report of Foreign Bank and Financial Accounts) can result in harsh consequences. The report is that fines of up to $500,000 and 10 years imprisonment can be rendered. Therefore, the need to for you and your clients with foreign financial accounts (FFAs) to familiarize yourselves with the Treasury’s escalating FBAR rules. Unfortunately, understanding the FBAR rules has not always been a straightforward proposition.

Until recently, the FBAR requirements were shrouded in mystery; but with the release of  the last FBAR regulations earlier this year, the rules are finally clear. Furthermore, important clarifications  were made by the IRS at a June 1 webcast.

Read this complete analysis of the impact at  AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber). For previous coverage of the FBAR in Advisor’s Journal, see Do Your Clients’ International Assets Create Criminal Tax Exposure? (CC 11-73).

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