Can Foreign Account Nondisclosure Be A Conspiracy?

Can Foreign Account Nondisclosure Be A Conspiracy? - Forbes

Any indictment makes you think, and ones based on foreign accounts are increasing.

Federal Judge Green Lights IRS Search For California Gift Tax Cheats.

Federal Judge Green Lights IRS Search For California Gift Tax Cheats. - Forbes

In national crackdown, IRS is looking for property transfers between family members, for little or no cash, that weren't reported on Form 709 as required.

M&A Holliday Wishes

Marini & Associates

wishes everyone

a Merry Christmas,

Happy Hanukkah and a

Happy and Prosperous

 New Year !

--------------------- Tax Litigation Tax Collections &   Tax Planning www.TaxLaw.ms ¡Feliz Navidad y Prospero Año Nuevo!

3rd Time Is The Charm for the New Form 8938 Just Released!

The United States Internal Revenue Service has at long last posted to its website the instructions and form for reporting non-U.S. (foreign) financial assets under section 6038D of the Internal Revenue Code. This new Form applies from January 1, 2011 for tax returns filed from January 1, 2012 onwards.

Form 8938, "Statement of Foreign Financial Assets", is used to report the ownership of specified foreign financial assets.

The reporting thresholds requiring filing for the 7 million U.S. taxpayers living outside of the United States are:
• Single taxpayers/married filing separately: $200,000 on the last day of the year or $300,000 anytime during the year.
• Married filing jointly living abroad: $400,000 on the last day of the year or $600,000 at anytime during the year.

The limits requiring filing for taxpayers living within the United States are:

• Single taxpayers/married filing separately: $50,000 on the last day of the year or $75,000 anytime during the year.
• Married filing jointly: $100,000 on the last day of the year or $150,000 at anytime during the year.

This new form will add several hundred pages of additional information reporting to U.S. tax returns for millions of individuals.

The value of all pension plans will be reported annually, the value of every investment, every partnership, every insurance policy, every PayPal account - even online gambling accounts and accounts held as funeral plans or to give to the grandchildren when they are old enough will have to be disclosed. Valuing all these assets alone will make completing every U.S. tax return hugely more time consuming.

Ready or Not - Foreign Asset Reporting is Here!

On December 16, 2011, the Internal Revenue Service issued temporary and proposed regulations relating to provisions that require foreign financial assets to be reported to the IRS for tax years beginning after March 18, 2010. The actual proposed and temporary regs provide that:

1. The foreign asset reporting requirement applies to individuals required to file 1040 or 1040-NR and to domestic entities, although only the individual form, Form 8938, is available now.

2. The taxpayer characteristics for the filing is in some respects more favorable, than the statute.

a. Unmarried taxpayers living in the US: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year

b. Married taxpayers filing a joint income tax return and living in the US: The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year

c. Married taxpayers filing separate income tax returns and living in the US: The total value of your 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.

d. Taxpayers living abroad.

i. Status is other than a joint return and the total value of 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

ii. Married filing joint return and the value of specified foreign assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad.

e. Married individuals who file a joint annual return for the taxable year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.

3. Assets Covered. 

a. Both foreign financial and non-financial assets are covered.

b. Exceptions from reporting are made for assets reported on certain other tax forms. These include: Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891. The value of specified foreign financial assets reported on these forms are included in determining the total value of assets for Form 8938 purposes, but the assets do not need to be reported on Form 8938. In this situation, the taxpayer identifies on Form 8938 which and how many of these form(s) report the specified foreign financial assets.

c. A beneficial interest in a foreign trust or a foreign estate is not a specified foreign financial asset of a specified person unless the specified person knows or has reason to know of the interest.

d. For Section 6038D purpose, an individual has an interest in the financial account if potential tax attributes or transactions related to the account would be reported on the individual’s tax return. The concept of signature authority does not apply for Section 6038D purposes.

4. Noncompliance.

a. Taxpayers required to file Form 8938 who do not are subject to penalties – a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.

b. The statute of limitations is extended to six years after a taxpayer’s return is filed if the taxpayer omits $5,000 from gross income attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions.

c. If the taxpayer fails to file or properly report an asset on Form 8938, the statute of limitations for the taxable year is extended until the taxpayer provides the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not the entire tax year.


5. FBAR filing is required.

6. Entity filing is required pursuant to the proposed regs. There is no form yet to make the filing.

IRS Audits of Quiet Filers Have Begun.

I recently attended an ABA conference where multiple representatives from the IRS including, Senior Litigation Counsel Kevin M. Downing, were speakers and they all reiterated that the IRS has a program in place to audit Quiet Filers, who chose not to make a voluntary disclosure but rather chose solely to amend their tax returns to include their previously unreported income from their foreign bank accounts.

Issues that were not answered include:

1.     What FBAR penalty will apply?

o   the civil penalty for willfully failing to file an FBAR, greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).

o   the civil penalty for non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. See 31 U.S.C. § 5321(a)(5)(B) or

o   the penalty of 25% (or more) of the total balance of the foreign account in conformity with OVCI #2?

2.     How will the IRS collect these FBAR penalties under title 31? (File in FDC to reduce them to an enforceable judgment?)

3.     Is the Quite Filer only subject to a 3 year statute limitations for income tax assessments, where the understatement of income is less and 25% of the taxpayers AGI?

4.     Does the fraud provision stop the Statute of Limitations from running?

We are sure there's are even more issues. Stay tuned as these issues and more get developed, during the various IRS audits of Quiet Filers, which has already begun.

IRS Releases Guidance on Foreign Financial Asset Reporting

IRS NEWSWIRE WASHINGTON—The Internal Revenue Service in coming days will release a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). 

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

Temporary & Proposed Regulations on Reporting of Specified Foreign Financial Assets released by IRS

The Internal Revenue Service Dec. 14 released temporary regulations (T.D. 9567) relating to the provisions of the Hiring Incentives to Restore Employment (HIRE) Act that require foreign financial assets to be reported to IRS for taxable years beginning after March 18, 2010.

The temporary regulations provide guidance concerning the requirement that individuals attach a statement to their income tax return on foreign financial assets in which they have an interest. The temporary regulations affect individuals required to file Form 1040, U.S. Individual Income Tax Return, and certain individuals required to file Form 1040-NR, Nonresident Alien Income Tax Return.

The temporary regulations also serve as the text of proposed regulations contained in a cross-reference notice of proposed rulemaking (REG-130302-10). The proposed regulations describe requirements for certain domestic entities to report foreign financial assets in the same manner as an individual.

This document is unpublished, but on 12/19/2011 it is scheduled to be published.

Swiss Upper House Approves U.S.-Swiss Double Taxation Treaty

The Swiss parliament’s upper house gave its approval to proposed amendments to a new U.S.-Swiss double taxation treaty that would make it easier for U.S. authorities to seek information on secret bank accounts held by U.S. taxpayers with Swiss banks.

The Council of States, the Swiss equivalent of the U.S. Senate, approved the amendments by a large majority, with 27 representatives voting in favor and five against. The vote clears the way for a final decision on the amendments in the National Council, the parliament’s lower house. The 200 members of the National Council are due to vote on the matter Dec. 21.

The treaty is designed to replace a 1996 treaty. Both provide for judicial assistance in cases of tax fraud, but the new treaty defines the framework for this more precisely and admits tax evasion as well as fraud, in some cases, as grounds for a request for assistance. Under previous agreements, Switzerland limited cross-border cooperation to cases of suspected tax fraud.

IRS Will Not Acquiesce on Tax Court's Fraud Finding in ‘Norris'

The Internal Revenue Service announced in Action on Decision 2011-05 that it will not acquiesce on a U.S. Tax Court finding that, after weighing each of the 11 badges of fraud equally, the service did not establish taxpayers' intent to fraudulently evade taxes.

In Norris v. Commissioner, T.C. Memo. 2011-161, the Tax Court found that the service was only able to prove four badges of fraud in regard to William and Sharon Norris's failure to pay taxes on the income from illegal gambling machines in their convenience store in 1996.

William pleaded guilty to tax evasion for 1998, and IRS issued a notice of deficiency claiming the pair failed to report income for 1996 and 1998. While the Tax Court found the couple was collaterally estopped from claiming they intended to evade taxes for 1998, it said the service failed to prove they intended to evade the 1996 taxes, as well.

Estate Taxes - As Filing Deadline Approaches it Create Challenges for Form 8939.

Executors filing the Internal Revenue Service's Form 8939 to elect into the modified carryover basis regime for people who died in 2010 must file the form as completely as possible, keeping in mind that amendments are limited.

You've got one chance to get this thing right and you have a do-over within six months, but you've got to file something by Jan. 17, 2012.

No protective election is permitted and no extension of time is permitted.

Form 8939 allows executors to opt out of the estate tax for 2010 decedents and into a carryover basis regime in which executors can allocate a basis increase of $1.3 million to assets passing to any person, and an additional $3 million to assets passing to a surviving spouse.

Whistleblower Can Remain Anonymous During Litigation

The U.S. Tax Court, in an issue of first impression, said Dec. 8 that a whistleblower can remain anonymous in court proceedings prosecuting a whistleblower claim in order to protect the former executive's privacy concerns while serving as a confidential informant (Whistleblower 14106-10W v. Commissioner, T.C., No.14106-10W, 137 T.C. No. 15, 12/8/11).

Judge Michael Thornton said “Petitioner's request to seal the record or alternatively to proceed anonymously presents novel issues of balancing the public's interests in open court proceedings against petitioner's privacy interests as a confidential informant.”

Although the court granted summary judgment for the Internal Revenue Service on whether the whistleblower was entitled to an award, Thornton concluded that granting the request for anonymity struck a reasonable balance between the petitioner's privacy interests as a confidential informant and the relevant social interests.

The parties were ordered to redact information that would tend to reveal the petitioner's identity as the case progresses through appeals and additional litigation.

IRS Spells Out FBAR Rules For Dual Citizens, Details Penalty Relief for Failure to File

The Internal Revenue Service spelled out the rules for U.S. and dual citizens who want to comply with U.S. requirements to report their foreign bank accounts, noting they will not be subject to penalties in all cases where they have failed to file.


IRS said it is aware that some taxpayers who are citizens of both the United States and a foreign country are only now realizing they are required to file a Report of Foreign Bank Account (FBAR) and want to come into compliance.


In a new fact sheet (FS-2011-13) dated Dec. 7, the agency explained that taxpayers who owe no U.S. tax will not have to pay failure to file or failure to pay penalties. “In addition, no FBAR penalty applies in the case of a violation that IRS determines was due to reasonable cause,” the fact sheet said. The document provided a detailed explanation of FBAR filing requirements and the circumstances in which penalties will and will not be imposed.

Florida Gov. Scott Proposes $35 Million in Tax Relief for Businesses

Florida Gov. Rick Scott (R) Dec. 7 unveiled his $66.4 billion spendingplan for fiscal year 2012-13—a budget that would contain $35 million in tax-relief proposals for businesses.

Scott proposed increasing the corporate income tax exemption from $25,000 to $50,000. Such a move, he said, would eliminate the tax liability for more than 25 percent of businesses currently paying the tax.

The exemption hike would be the second in as many years. In June, Scott signed a bill (H.B. 7185) that, as of Jan. 1, 2012, will increase the corporate income tax exemption from $5,000 to $25,000.

The hike would effectively eliminate the 5.5 percent tax rate for nearly half of the 30,000 Florida businesses that currently pay the tax.

FORM ZT09 - FL DOR TAXPAYER LIABILITY HISTORY

We've all had a new client come in the door and the first thing we want to know is their tax history.

Well, if you know what to ask for, then the Florida Department of Revenue has a specific form that provides a breakdown of taxes the DOR believes our client owes from past filing periods. The breakdown is by filing period and type of tax. This form can reveal issues that even the client didn't know about. 

First, as with any matter before the Florida Department of Revenue, you must have a valid Power of Attorney. Once the POA is in place, simply ask for a Florida DOR Form ZT09.

If you call the DOR and ask for this form, don't be surprised if the person on the other end of the line has never heard of the form.

It is a tool used by auditors to assess what other taxes may be outstanding prior to an audit. Convince them that it is available and don't let go until they find someone that can get it for you.

 

IRS to go easy on American residents in Canada

After protest from Ottawa, ambassador says IRS will institute new rules that will waive penalties for people filing late. Americans living in Canada who've neglected to pay their U.S. taxes are getting a big break from Uncle Sam.

The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don't owe any taxes, The Globe and Mail has learned.

The new rules will be announced within weeks by the IRS, according to David Jacobson, the U.S. Ambassador to Canada, who has been swamped with complaints from anxious Canadians.

The policy shift will come in the form of new guidance from the IRS, expected to be issued before the end of December. U.S. officials said the statement will make it clear that:

1. If a U.S. citizen files tax returns late and owes no taxes, there are no penalties for failure to file.
2. U.S. citizens who were unaware of the bank account reporting requirement can file previous reports now, along with a statement explaining why they're late. No penalty will be imposed if the IRS determines that there is reasonable cause.
3. Individuals who took part in earlier amnesty programs this year and in 2009 can reapply and get back penalties already paid.

U.S. officials would also not say what would happen to people who owe relatively small amounts to the IRS.

The change doe not address the concerns of Canadian financial institutions, which complain they'll face massive costs trying to track all their U.S. account holders.  The new U.S. bank reporting rules, slated to come in 2014, could violate Canadian privacy laws.

Offers in Compromise and Dissipated Assets

Under IRC Sec. 7122(a), taxpayers may request an offer in compromise (OIC) with the IRS to settle outstanding tax liabilities for less than the full amount owed. To qualify, taxpayers must prove that their outstanding tax liabilities exceed the amount of income and assets available to satisfy those liabilities during the time remaining in the collection period, generally, the statute of limitation. This is known as establishing the taxpayer’s reasonable collection potential (RCP).

The higher the taxpayer’s RCP, the lower the taxpayer’s chances of qualifying for an OIC. In calculating the RCP, the IRS takes into account current and potential earnings, as well as the value of assets exceeding those needed for necessary living expenses. The sum of the taxpayer’s income and assets is treated as available to satisfy the taxpayer’s federal tax liability.

Taxpayers that dispose of their assets solely to qualify for an OIC are likely to fail, since a number of court cases support the IRS’ practice of including dissipated assets in the RCP calculation. A dissipated asset is defined as any asset (liquid or nonliquid) that has been sold, transferred or spent on nonpriority items or debts and that is no longer available to pay the tax liability.

 The Tax Court recently decided two cases upholding the IRS’ rejection of OICs where the court found that the taxpayers had disposed of assets that would otherwise have been available to satisfy their outstanding tax liabilities. In Tucker, T.C. Memo. 2011-67, the individual taxpayer’s request for an OIC was denied when the examiner included dissipated assets in the RCP calculation, resulting in an RCP sufficient to satisfy the outstanding tax liability within the statutory collection period. The taxpayer was aware of his unpaid tax liabilities when he transferred funds into an online brokerage account to engage in day trading and subsequently lost a portion of the money. The IRS determined, and the Tax Court held, that the taxpayer lost the money in disregard of his outstanding tax liability. But for the failed investments, the taxpayer’s reasonable collection potential exceeded his outstanding tax liabilities, and the court held that the settlement officer did not err in determining that the taxpayer could fully pay his federal income tax liabilities.

 

Dissipated assets are not limited to those lost through negligence or disregard of one’s tax liabilities, however. In Layton, T.C. Memo. 2011-194, the taxpayer’s request for an OIC was rejected after the IRS examiner included the excess balance of an IRA distribution in the RCP calculation. The taxpayer had been unemployed for several years and had liquidated an IRA account to help pay her necessary living expenses. The remaining balance of the taxpayer’s IRA distributions, however, went to pay other nonessential debts. The taxpayer was not able to demonstrate that the debts she paid were necessary living expenses, so the Tax Court ruled in favor of the IRS.

http://www.journalofaccountancy.com/Issues/2011/Dec/20114622

European Commission Pushes U.K., Germany to Renegotiate Terms of Swiss Tax Deals

The European Commission legal services have concluded that bilateral tax treaties signed by Switzerland, the United Kingdom, and Germany violate European Union law, but European Taxation Commissioner Algirdas Semeta is hopeful that both EU member states will revise the terms of the Swiss deals without having to revert to a long-drawn out legal challenge.

European Commission Spokeswoman Emer Traynor denied media reports that Semeta was threatening legal action against the United Kingdom over the terms of its recently agreed bilateral deal with Switzerland. She noted that the United Kingdom and Germany agreements with Switzerland have not been ratified and that the EU executive was confident that each side “will work to remove the parts that impinge on EU law.”

A legal battle between the European Commission and the United Kingdom and Germany has been brewing since August when the bilateral deals, which are designed to repatriate billions of dollars in revenue hidden in secret Swiss bank accounts, were first announced. Both agreements commit the Swiss to impose penalties but would not alter their bank secrecy laws any more than they have already done to meet OECD and G-20 requirements on tax havens.

The European Commission believes the Swiss deals with the United Kingdom and Germany are illegal because they go against the terms of the EU cross-border savings tax legislation that calls for a system of automatic information exchange.

IRS Criminal Tax Bulletin Highlights Recent Rulings

The IRS Nov. 18 posted to its website an issue of the Criminal Tax Bulletin, published by the Criminal Tax Division of the Office of Chief Counsel, which summarizes notable federal appellate rulings addressing criminal issues between April and September 2011.

Among the decisions summarized in the bulletin were the 9th Circuit's rulings that the Fifth Amendment Privilege Is Inapplicable to Subpoena for Foreign Bank Records.

 

In re Grand Jury Investigation M.H. v. United States, 648 F.3d 1067 (9th Cir. 2011), the Ninth Circuit held that foreign bank account records required to be kept under the Bank Secrecy Act (“BSA”) fall within the Required Records Doctrine, thus rendering the Fifth Amendment privilege against self-incrimination inapplicable to a subpoena for these records.

IRS Identifies Gift Tax Non-Filers Using State Property Records

According Forbes, Josephine Bonaffini, the Federal/State Coordinator for the IRS Estate and Gift Tax Program, between sixty percent and ninety percent of taxpayers fail to file a gift tax return despite having engaged in a transaction requiring a return.

Although gift tax audits are historically rare, the IRS has examined hundreds of taxpayers in the last two years whom the IRS suspects made large gifts, yet failed to file the appropriate returns.

Borrowing from techniques long employed to identify noncompliant taxpayers in the income tax context, the IRS is using records obtained from third parties—namely, land records maintained in state and county offices—to root out intra-family land transfers for little or no consideration.

According to Bonaffini, in the past two years, 323 taxpayers have been audited for failure to file gift tax returns relating to gifts of real property, 217 cases were still under examination, and another 250 cases were being researched to determine whether to conduct gift tax audits. At the time, the IRS had determined that ninety-seven taxpayers had violated gift tax reporting requirements by failing to file, and just twelve cases resulted in assessment of tax and penalties.

The recent flurry of gift tax compliance activity took many in the tax community by surprise. The compliance initiative received no appreciable public attention until the recent dispute in California federal court where the District Court for the Eastern District of California, refused to enforce the IRS' John Do Summons against the California Board of Equalization (“BOE”) where it refused to voluntarily turn over this requested information. The court’s denial of the government’s petition may embolden additional states to refuse the IRS’s request for records.

As National Debts Pile Up, Tax Evaders Face Greater Scrutiny

NY Times-London - Disputes are raging from Athens to Washington about how to reduce government debt without further damaging already weak economies.  But there is at least one thing on which global leaders seem to agree: cracking down on tax havens and tax evasion would help. 

Tax evasion and compliance was on the agenda of the meeting of the Group of 20 countries in Cannes amid hope that the economic crisis has given policy makers new impetus to push for a coordinated attempt to hunt for some of that offshore wealth. 

Assets held offshore by individuals worldwide have probably almost doubled from $11.5 trillion six years ago, according to the Tax Justice Network, a nongovernmental organization. 

Efforts to go after tax evaders range from investing in technology and hiring tax officers to working with the O.E.C.D. to reach agreements governing tax havens. 

Whatever steps are taken, policy makers agree that it takes international cooperation and initiatives by individual countries to reduce tax evasion.

Willful Failure to File FBARs - What if you Really Did not Know?

BNA - Over the past three years, the U.S. government has intensified its pursuit of taxpayers who fail to pay taxes on money held in foreign bank accounts; this includes a massive increase in criminal investigations and prosecutions.

While “willfulness” is generally recognized to be a high legal standard requiring proof that the accused acted in conscious violation of a known legal duty, IRS's published guidance and filed actions suggested the IRS believed it could do more with less.

But two recent cases—an FBAR case out of the U.S. District Court for the Eastern District of Virginia and patent infringement case out of the U.S. Supreme Court—call both assumptions into significant question.

FBAR enforcement will continue to be a powerful tool for IRS. But in cases where knowledge is a contested issue, the government will have to do more than it has previously done. Cases based upon what a taxpayer should have known or could have discovered based on knowledge of a substantial risk will not satisfy the standards established by Williams and Global-Tech.

If you really did not know, you really did not know.

IRS On Track to Issue Proposed Rules, Draft Bank Agreement Under FATCA

Internal Revenue Service is “on track” to issue proposed regulations on the Foreign Account Tax Compliance Act (FATCA) around the end of the year, a top IRS international official said Nov. 17.

IRS Large Business & International Division Deputy Commissioner (International) Michael Danilack said if the guidance does not come out by Dec. 31, he expects it will be issued shortly thereafter.

Danilack said that along with the regulations, IRS hopes to issue a draft agreement for foreign financial institutions that want to start reporting U.S.-owned accounts to U.S. tax authorities under FATCA. The law requires such reporting or banks may face a 30 percent withholding tax.

The IRS official said if the draft agreement does not come out together with the rules, it will be issued soon after that guidance is released. He said IRS is envisioning a system where banks will be able to apply online and will be immediately given an identification number. “We're in very good shape on that,” Danilack said.

In another key point, the official said he expects that there will be bilateral agreements between the United States and other countries on the implementation of FATCA.

Switzerland Eases Rules on Account Data Transfer for U.S. Clients of Swiss Banks

The government of Switzerland has agreed to ease existing rules on the transfer of information on secret Swiss bank accounts of U.S. clients in a further effort to diffuse tensions with the United States over funds hidden away in Swiss banks.

The Swiss government announced Nov. 16 that the Federal Council, the government’s executive arm, adopted amendments to a June 1998 ordinance on the implementation of an existing 1996 U.S.-Swiss double taxation agreement.

The amendments will allow U.S. requests for information on U.S. clients suspected of tax fraud to be made under the existing 1996 treaty based on “certain patterns of behavior” rather than requiring the identification of the U.S. taxpayer.

The decision follows the Nov. 8 admission by Swiss tax authorities that they had received a U.S. request for administrative assistance in suspected cases of tax fraud, based on the 1996 double tax agreement. A spokesman for Credit Suisse, Switzerland’s second largest bank, confirmed the same day that the bank was ordered by Swiss tax authorities to hand over information with regard to accounts of domiciliary companies belonging to certain U.S. persons as beneficial owners.

Is Domestic Asset Protection Dead?

There has been quite a bit of buzz about a recent bankruptcy case involving an Alaska asset protection trust. However, the case merely confirms a weakness in the use of domestic asset protection trusts that was obvious even before this case.  

Domestic asset protection trusts (DAPTs) promise the holy grail of creditor protection - a trust where the settlor/grantor can transfer assets to, be a discretionary beneficiary of. but still have the assets of the trust be protected from the settlor's/grantor's creditors. Alaska, Delaware, and Nevada are three popular jurisdictions for these trusts.

There are open questions about the effectiveness of the trusts for creditor protection purpose, including enforceability across state lines under the U.S. Constitution. A major issue is the 10 year voidability provision of 11 U.S.c. Section 548(e) that entered the U.S. Bankruptcy Code in 2005.

In Battley v. Mortensen, a bankruptcy court in Alaska found that a transfer to a DAPT could run afoul of 11 U.s.e. Section 548(e), even though the debtor was solvent at the time of creation of the trust.
The court noted:  

"when property is transferred to a self-settled trust with the intention of protecting it from creditors, and the trust's express purpose is to protect that asset from creditors, both the trust and the transfer manifest the same intent. In this case, I found that the trust's express purpose could provide evidence of fraudulent intent."

Since a debtor can be placed in bankruptcy by his creditors on an involuntary basis, one cannot simply avoid this exposure by not filing for bankruptcy protection.

The result in Mortensen is clear: Domestic Asset Protection Trusts don’t protect assets from creditors for the first ten years after the trust is settled.

As we have been advising clients for years, only a Foreign (Non US) Juridiction can provide certainty of your asset protection solutions.  With Domestic Asset Protection, you never KNOW that you do not have it until, a US Judge decides that you do not have it!

Swiss Parliament Approves Amended U.S.-Switzerland Tax Treaty

A Swiss parliamentary committee Nov. 10 gave its go-ahead to proposed amendments to a new U.S.-Swiss double taxation treaty that would make it easier for U.S. authorities to seek information on secret bank accounts held by U.S. taxpayers with Swiss banks.

The amendment allows for the handover of files on suspected tax offenders to the U.S. in cases where the U.S. authorities don’t know the identities of American holders of Swiss bank accounts and are basing requests for information merely on certain patterns of behavior.

According to the amendment, Switzerland will only grant administrative assistance in cases where the U.S. tax authorities produce clear evidence of a suspected offense, Eugen David, the president of the committee, told reporters in the capital, Bern. In addition, they must detail the pattern of behavior and explain why they need the information.

There must be evidence of wrongdoing by the Swiss bank where the U.S. client had the account and the mere fact that a U.S. citizen had an account with a Swiss bank isn’t sufficient, David said.

The Council of States decided on Sept. 21 to send the amended treaties back to the foreign affairs committee. The upper house “wants to wait until the Federal Council makes clear progress towards a comprehensive solution to the tax dispute with the United States.”

For more information go to: http://www.businessweek.com/news/2011-11-10/swiss-parliament-panel-approves-amendment-to-tax-deal-with-u-s-.html

Former UBS Client Sentenced for Stashing $7.1 Million in Swiss Accounts

Bloomberg reports that Richard Werdiger, 64, is one of 36 Americans charged since 2007 in a U.S. crackdown on offshore tax evasion, and his was the longest prison term by a day. Werdiger, who pleaded guilty in March in federal court in New York, paid a civil penalty of $3.84 million and was fined $50,000 yesterday at his sentencing.

A New York diamond merchant, who is a former client of the Swiss banking giant UBS AG has, been sentenced to a year and a day in prison for hiding more than $7.1 million in Swiss bank accounts and evading more than $400,000 in U.S. taxes, prosecutors announced Nov. 9 (United States v. Werdiger, S.D.N.Y., No. 10-CR-325, sentencing 11/9/11).

The penalty was part of his plea agreement when he admitted in March to a single count of conspiring to defraud IRS and five counts of filing false tax returns. His prison term was just over half of the lower end of a range of 24 months to 30 months recommended in the plea agreement.

Public Anger and Shareholder Unease Threaten Tax Havens' Tranquility

The Economist recently reported that - Under intense international pressure to lift banking secrecy, the first and biggest of the world’s “tax havens”—places that charge low or no taxes to foreigners—is ceding some ground. In a deal signed on October 6th, Switzerland agreed to tax money held in its banks by British residents (it had already done a similar deal with Germany). These customers face a levy of up to 34% as well as, from 2013, a withholding tax.

That could bring the British treasury around £5 billion ($7.8 billion). But Nicholas Shaxson, author of “Treasure Islands”, a book on offshore finance (and a former contributor to this paper), calls it a “Swiss tax swizz”: the country will in effect pay a fat fee to avoid revealing clients’ names. That undermines efforts at the Organisation for Economic Co-operation and Development, a Paris-based club of mostly rich countries, to set international standards on tax evasion.

Global Financial Integrity, a campaigning group, says poor countries “lose” more than $1 trillion a year to tax havens, around ten times the aid they receive. Two-thirds of this is tax evasion and avoidance, the group says, the rest transfers by criminals and the corrupt. Another outfit of fiscal inquisitors, the Tax Justice Network (TJN), cites research by the Bank for International Settlements, the Boston Consulting Group and McKinsey to calculate that global offshore deposits amount to at least $9 trillion, some $2 trillion more than the total held at home by American banks. ActionAid, a charity, published research this week showing that the companies in the FTSE 100 index had 8,492 offshore subsidiaries.

Campaigners also want to see more countries agree to the automatic exchange of tax information on non-residents. Bilateral tax treaties normally require such exchanges only on request. This works if the government seeking information knows precisely what it is looking for and if the host government can obtain it. As this issue has moved up policymakers’ agendas, some havens have voluntarily become more co-operative. The Isle of Man, for instance, now automatically swaps information (though Jersey refuses to follow suit for fear of losing “competitive advantage”).

Overall, however, resistance to change remains strong, not least in big Western financial centre's such as Wall Street and in the City of London, which see the flexibility offered by tax havens as an essential part of their business model. Public discontent may be filling the campaigners’ sails, but political support for reforms is still patchy. France, which holds the presidency of the Group of 20 (a club of the world’s biggest economies) wants to discuss tax havens at next month’s meeting in Cannes. But other countries are less keen, and more urgent items crowd the agenda.

Swiss Order Credit Suisse to Disclose U.S. Account Information

The Swiss government has ordered Credit Suisse, the country’s second-largest bank, to hand over information on undeclared bank accounts held by U.S. taxpayers, a move that represents the latest escalation of U.S. efforts to tear down Switzerland’s previously impenetrable wall of banking secrecy.

Credit Suisse AG, Switzerland's second-largest bank, has begun notifying certain U.S. clients suspected of offshore tax evasion that it intends to turn over their names to the U.S. Internal Revenue Service, with the help of Swiss tax authorities.

The bank has been asked by the U.S. Internal Revenue Service to provide the requested information in line with an existing 1996 bilateral tax treaty between Switzerland and the United States, a Credit Suisse spokesman confirmed Nov. 8.

Credit Suisse mailed letters Nov. 2 to certain U.S. clients notifying them that the bank has been ordered to deliver information to the Swiss authorities, the spokesman said. The clients have also been told they must provide the Swiss authorities the name of a person authorized in Switzerland to receive legal documents and orders on their behalf.

The move by Credit Suisse to disclose American client names and account information is the latest twist in a showdown between Switzerland and the United States over the battered tradition of Swiss bank secrecy.

U.S. authorities, who suspect tens of thousands of wealthy Americans of evading billions of dollars in taxes through Swiss private banks in recent years, are conducting a widening criminal investigation into scores of Swiss banks, including Credit Suisse.

It is unclear how many American clients of Credit Suisse hold private banking accounts that have gone undeclared to U.S. tax authorities.

For more information go to Reuters.

Disregarded Entities Are Not Always Disregarded

Under the check the box rules, entities owned by one person can often be disregarded for federal tax purposes. Such entities are referred to as "disregarded entities."

 

As time has progressed since the passage of the check the box rules, the IRS has created more and more exceptions to the disregarded treatment. The following is a summary of the principal exceptions, but is not intended to be exhaustive. If any readers think we have missed anything major, please feel free to comment to this posting.

1. Status is modified if the single owner of the entity is a bank. Treas. Regs. Section 301.7701-2(c)(2) (iii). 
2. Status is modified for certain tax liabilities. Treas. Regs. Section 301.7701-2(c)(2)(iii). These include: (1) federal tax liabilities of the entity with respect to any taxable period for which the entity was not disregarded; (2) federal tax liabilities of any other entity for which the entity is liable; and (3) refunds or credits of federal tax. 
3. Disregarded status ignored or modified for taxes imposed under Subtitle - Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A 24, and 25 of the Code) and taxes imposed under Subtitle A including Chapter 2 - Tax on SelffEmployment Income. Treas. Regs. Section 301.7701-2(c) (2) (iv) (A). 
4. Status is modified for certain excise taxes, as described in Treas.Regs. Section 301.7701-2(c)(2J(v). Although liability for excise taxes isn't dependent on an entity's classification, an entity's classification is relevant for certain tax administration purposes, such as determining the proper location for filing a notice of federal tax lien and the place for hand-carrying a return under Code Section 6091
5. Conduit financing proposed regulations will treat a disregarded entity as separate from its single member. Code Section 7701 (I).
6. Special rules will apply in hybrid situations. Hybrid situations are circumstances where an entity is not disregarded in one jurisdiction but is disregarded in another.

Switzerland, Liechtenstein Among 11 ‘Tax Havens'

President Nicolas Sarkozy Nov. 4 named 11 jurisdictions that he said the world's leading economies consider “tax havens,” because they have failed to adequately adopt or implement legal systems to allow tax information exchange and transparency.

Countries Identified as Havens.

In his final press conference in which he described summit outcomes, Sarkozy said that, in a report to the G-20, the Global Forum on Transparency and Information Exchange for Tax Purposes, fingered:

• Antigua
• Barbados
• Botswana
• Brunei
• Panama
• the Seychelles
• Trinidad and Tobago
• Uruguay and
• Vanuatu

as lacking legal systems that allow exchange of information for tax purposes.

He said the reports name two more, Liechtenstein and Switzerland, that he said have failed to adequately implement information exchange mechanisms that they have recently adopted.

“Countries that remain tax havens with banking secrecy will have to answer to the international committee,” Sarkozy warned.

OECD Comment.
The Organization for Economic Cooperation and Development, which hosts the Global Forum, cautioned that the 11 countries Sarkozy named, which are all forum members, have committed to make changes to improve their information exchange.

Another BLACK LIST? 

Stay Tuned!

No Swiss payment offer over U.S. tax probe

ZURICH, Nov 4 (Reuters) - Switzerland has not offered a financial settlement to end a U.S. tax investigation into a number of Swiss banks but remains willing to hand over bank client names as part of any deal, a government spokesman said on Friday.
Basler Kantonalbank , Credit Suisse and Julius Baer are among 11 Swiss banks under investigation in connection with allegations they helped Americans dodge taxes.

Mario Tuor, a spokesman for the Swiss department responsible for international financial affairs, reiterated Switzerland's stance that client names could be transferred under existing double-taxation treaties.

While Switzerland has expressed an interest in sealing a deal for the whole banking sector, Tuor would not comment on a report that the government had offered a deal for the country's more than 300 banks.

"I assume that we will find a solution by the end of the year," she told the weekly Bilanz, adding Switzerland would continue to refuse any so-called 'fishing expeditions', or broad requests for bank client data with little evidence.

But parliament should deal with a government proposal to allow U.S. authorities to request help finding names of suspected tax dodgers based on defined behavioural patterns in its December session, she told Bilanz.

Credit Suisse said earlier this week it had taken a provision of 295 million Swiss francs ($334 million) for settling the U.S. investigation, suggesting a deal might be near. It said the final settlement might exceed the current provision.

Asked whether Credit Suisse would have to hand over more client details than the 4,450 UBS had to provide, Widmer-Schlumpf said Switzerland would only deliver more bank data when its courts had denied any client appeals.

Opting Out Of IRS Voluntary Disclosure?

OVCI #2 was announced February 8, 2011, to allow taxpayers to come clean with foreign accounts and get into compliance with the IRS. The program runs through August 31, 2011, but in some cases can be extended until November 29, 2011.
Some find the system inflexible and fear they may be paying more than necessary given their facts.

There’s been discussion of “opting out” of the program to take your chances in audit, but it’s a topic fraught with fear. Now, however, there is guidance about opting out of the program that makes much of it transparent.

Program Basics. Under the OVDI, taxpayers are subject to a penalty of 25 percent of the highest aggregate account balance on their undisclosed account(s) between 2003 and 2010. If the value was less than $75,000 at all times during those years, the penalty is only 12.5 percent. See FAQ 53. Moreover, in limited inheritance situations, a penalty of only 5 percent may be imposed. See FAQ 52.

These account balance penalties are in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties. Plus, participants are required to pay taxes and interest on any monies (such as interest income on foreign accounts) they previously failed to report. Finally, they must pay an accuracy-related penalty equal to 20 percent of the underpayment of tax, plus interest.
Opting Out. Opting out of the program can make sense for some, though it involves taking your chances with an IRS examination. The IRS has published a separate guide detailing the rules and procedures for opting out. The IRS illustrates pros and cons of opting out with examples.  See FAQ 51.
Here are some of the rules.

1.     Program Status Report. Before you can opt out, the IRS sends a letter reporting on the status of your disclosure and what you still must submit. If you’ve given enough data, the IRS will calculate what you would owe under the OVDI. You should provide any missing items within 30 days.

2.     Written Warning. The IRS sends another letter explaining that opting out must be in writing and is irrevocable. You have 20 days thereafter to opt out in writing.

3.     Taxpayer Submission. Within 20 days, the taxpayer opts out in writing and makes a written case what penalties should apply and why.

4.     IRS Summary. The IRS employee who has been handling your case summarizes it, agreeing or disagreeing with your view of penalties, and listing how extensive an audit he or she recommends.

5.     Central Committee. A Committee of IRS Managers reviews the summary and decides how extensive an audit to conduct. The IRS says “the taxpayer is not to be punished (or rewarded) for opting out.” The Committee also decides whether to assign your case for a normal civil audit or to assign it for a Criminal exam.

6.     Interview? Some audits will include taxpayer interviews.

Bottom Line? The opt out procedure is helpful but still a bit daunting.

If you are considering it, make sure you get some solid advice from an experienced tax lawyer about the nature of your facts. See FAQ 51.