FATCA, IRS Global Tax Law, Is Everywhere — Even Russia & China

FATCA—the Foreign Account Tax Compliance Act—is America’s global tax law. And it’s finally here after a four-year ramp up. It requires foreign banks to reveal American accounts holding over $50,000. Bank secrecy? Forget it. Non-compliant institutions could be frozen out of U.S. markets, so everyone is complying.
So far, 77,000 financial institutions have registered and 80 countries have too. Countries must throw their agreement behind the law or face dire repercussions. Tax havens have joined up. Even China and Russia are getting on board. The IRS has a searchable list of financial institutions. See FFI List Search and Download Tool and a User Guide. Countries on board are at FATCA – Archive.
FATCA grew out of a controversial rule. America taxes its citizens—and even permanent residents—on their worldwide income regardless of where they live. In 2009, the IRS struck a groundbreaking deal with UBS for $780 million in penalties and American names. Yet today, that huge deal seems only a drop in the bucket of what has happened since. Credit Suisse took a guilty plea and paid a record $2.6 billion fine.
(Photo credit: shaire productions)

With over a hundred Swiss banks taking a DOJ deal and many other developments, banking is now more transparent than could ever have been imagined. But in 2010, when only some of those developments were unfolding, FATCA was enacted. The idea was to cut off companies from access to critical U.S. financial markets if they didn’t pass along American data.
Cleverly, FATCA’s tax would be so catastrophic to those affected that everyone has opted to comply. Foreign financial institutions must withhold a 30% tax if the recipient isn’t providing information about U.S. account holders. Now, it seems unlikely that virtually anyone will pay the 30%. They will provide the data instead.
The U.S. even announced an agreement in principle with China. And amazingly, Russia too has just come aboard, with President Vladimir Putin Signing Law in 11th Hour to Satisfy U.S. Treasury. The U.S. and Russia were negotiating a FATCA deal until March, 2014, but Russia’s annexation of Crimea caused the U.S. to walk. That meant Russian financial institutions faced being frozen out of U.S. markets. Fortunately for them, President Putin signed a law allowing Russian banks to send American taxpayer data to the U.S.
Foreign Financial Institutions (FFIs) must report account numbers, balances, names, addresses, and U.S. identification numbers. For U.S.-owned foreign entities, they must report the name, address, and U.S. TIN of each substantial U.S. owner. Of course, apart from taxes, U.S. persons with foreign bank accounts exceeding $10,000 must file an FBAR by each June 30.
These forms too are serious. FBAR failures can mean fines up to $500,000 and prison up to ten years. Even non-willful civil FBAR penalty can mean a $10,000 fine. Willful FBAR violations can draw the greater of $100,000 or 50% of the account for each violation (and each year is separate). The numbers can add up fast. Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance.
U.S. account holders who aren’t compliant have limited time to get to the IRS. The IRS recently changed its programs, making its Offshore Voluntary Disclosure Program a little harsher. Yet for those not willing to pay the 27.5% penalty—which goes to 50% for some named banks August 4, 2014—the new IRS’s Streamlined Program may be a good option for those who qualify.
The latter applies now to both foreign and U.S.-based Americans. Some still want to amend their taxes and file FBARs in a “quiet disclosure” which could bring civil FBAR penalties or even prosecution. Thus, caution is clearly in order.
Indeed, FATCA is making banking transparent virtually worldwide. With Swiss bank deals, prosecutions, summonses, and now FATCA, the IRS has quicker, better and more complete information than ever.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

What IRS Calls ‘Willful’ May Surprise You–And Mean Penalties, Even Jail

What’s willful and what’s not? Most of us know that innocent, even stupid mistakes can be forgiven. Intentional wrongdoing? Much less so. Since taxes are complex, you might assume that just about anything can be called an innocent mistake. Don’t.
The tax law draws a line between non-willful and willful, and huge penalties or even prosecution can hang in the balance. A good example is offshore accounts. A new IRS Streamlined amnesty program for offshore accounts applies to non-willful activity. But IRS says if you were willful you should go into the IRS program called OVDP instead.
What’s the difference? A lot. The OVDP requires 8 amended tax returns and 8 FBARs. You pay taxes, interest and a 20% penalty on what you owe. To top it off, you pay a penalty of 27.5% of the 8 year high point in your offshore account. For some named ‘bad’ banks, you pay 50% unless you beat August 4, 2014 deadline.
By comparison, Streamlined is a cakewalk. You file 3 tax returns, 6 FBARs, and pay taxes and interest but no penalties. Even better, instead of paying 27.5% of your offshore account, you pay 5% of that highest balance. If you live abroad, you don’t even pay that 5%.
Is it any wonder that Americans are flocking to the Streamlined program? Maybe not, but the IRS is watching. And warning that ‘willful’ doesn’t mean what you think it means. Willfulness is bad for tax return reporting and for FBARs too.
To participate in the Streamlined program, you have to certify you weren’t willful. That’s no big deal, right? Maybe. The IRS can inquire further, and its views about willfulness may not jibe with yours. It could mean big penalties or conceivably even prosecution. And the courts may side with the IRS.
According to the IRS, the test is whether there was a voluntary, intentional violation of a known legal duty. Willfulness is shown by your knowledge of reporting requirements and your conscious choice not to comply. Willfulness means you acted with knowledge that your conduct was unlawful—a voluntary, intentional, violation of a known legal duty.
It applies for civil and criminal violations. You may not have meant any harm or to cheat anyone, but that may not be enough. The failure to learn of filing requirements, coupled with efforts to conceal the existence of the accounts, may mean a violation was willful.
The mere fact you checked the wrong box, or no box, on a Schedule B shouldn’t itself be sufficient to make an FBAR violation willful. The IRS says it needs to establish that you had knowledge of a duty to file FBARs. If you did, you knew it was illegal not to file one. But if you didn’t know about FBARs, are you off the hook?
Not necessarily. Your conduct is relevant. Some courts say willfulness is a purpose to disobey the law, but one that can be inferred by conduct. Watch out for conduct meant to conceal. Setting up trusts or corporations? Filing some forms and not others? Using another passport? Telling your bank not to send statements? Using code words over the phone? Visits in person? Cash deposits and cash withdrawals?
All could suggest willfulness. So can moving money from one bank to another when the banks don’t want undisclosed American accounts. It may be the banks putting you in this tough spot. It may be advisers telling you to follow these protocols, saying that everyone’s doing it. But that may not absolve you.
Even if it can explain one failure, repeated failures to comply can morph conduct from inadvertent neglect into reckless or deliberate disregard. Even willful blindness may be enough, a kind of conscious effort to avoid learning about reporting requirements. And just remember, ask yourself if your explanation passes the straight face test. Or get some advice about your facts from an experienced tax lawyer.
“Gee, I didn’t know,” can work in some cases. But the IRS says that with hardly any diligence, taxpayers could learn of the requirements quite easily. IRS says any person with foreign accounts should read government tax forms and instructions. And failing to follow-up can provide evidence of willful blindness. See Excerpt From Internal Revenue Manual, 4.26.16.4.5.3, Paragraph 6.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Lois Lerner’s Law Makes ‘I Lost My Receipts’ Legal With IRS!

The IRS can’t produce emails and some Republicans think it’s time to turn the tables.  That’s why Rep. Steve Stockman of Texas has introduced a bill called the “The Dog Ate My Tax Receipts Act,” to allow us all to try out some excuses. The IRS says a computer glitch erased the hard drives of all incriminating evidence in the tea party targeting scandal. Then, when investigators wanted to see the hard drives?
The hard drives are not available for forensic investigation because they have been destroyed for recycling. Hey, we’re green. Now, Rep. Stockman says, “Taxpayers should be allowed to offer the same flimsy, obviously made-up excuses the Obama administration uses.”
This bill would allow taxpayers who do not provide documents requested by the IRS to claim one of the following reasons:
The dog ate my tax receipts.
Convenient, unexplained, miscellaneous computer malfunction.
Traded documents for five terrorists.
Burned for warmth while lost in the Yukon.
Left on table in Hillary’s Book Room.
Received water damage in the trunk of Ted Kennedy’s car.
Forgot in gun case sold to Mexican drug lords.
Forced to recycle by municipal Green Czar.
Was short on toilet paper while camping.
At this point, what difference does it make?
The resolution says that the “IRS must allow taxpayers the same lame excuses for missing documentation that the IRS itself is currently proffering.”
(Photo credit: rpavich)

Is this serious? Probably not, but every taxpayer has looked for receipts. Seinfeld fans may remember the ‘‘The Truth,’’ Episode 19, aired Sept. 25, 1991. The IRS questioned Jerry about a $50 charitable contribution to the people of Krakatoa. The IRS normally doesn’t require extra substantiation of charitable donations less than $250, so Jerry’s check or bank statement would have sufficed.
More generally, receipts are critical. But if you can’t find one, remember the Cohan Rule, from Cohan v. Commissioner.  George M. Cohan was a Broadway pioneer with hits like “Give My Regards to Broadway” and “Yankee Doodle Boy.” His statue still commands Times Square. But the IRS disallowed Cohan’s travel and entertainment expenses for lack of receipts.
He took the IRS to the predecessor to today’s U.S. Tax Court. Receipts being the stock in trade of the tax system, it upheld the IRS.  Cohan appealed to the Second Circuit, which in 1930 rocked the IRS back on its heels with the Cohan Rule. To this day, it is as an exception to stringent IRS record-keeping requirements, allowing taxpayers to prove by “other credible evidence” they actually incurred deductible expenses.
The Cohan Rule often doesn’t impress the IRS and doesn’t always work in court. Still, if the IRS or a court is convinced by oral or written statements or other supporting evidence, and a reasonable approximation can be made, you’re golden despite your lack of documentation. Even charitable contributions have been allowed under the Cohan Rule, though not where there are special strict substantiation requirements. Those rules require you to have a receipt even for small cash donations, including $20 put in the collection plate on Sunday and (for donations of more than $250) a contemporaneous written acknowledgement from the charity before filing your tax return.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS Names Offshore Accounts With Higher Penalties—Unless You Beat August 4, 2014 Deadline

The IRS’s Better Offshore Amnesty Program has sparked new interest in cleaning up offshore accounts. The timing is good, since over 100 Swiss banks are about to provide data to the IRS. More globally, FATCA disclosures are right around the corner. Many foreign banks are rooting out Americans with increasing vigilance.
Although many of the changes in the IRS deal are liberalizing, some changes to the Offshore Voluntary Disclosure Program are not. For some, the penalty goes from 27.5% To 50%. But for who? The IRS has released a list of the 10 firms currently under investigation whose clients could be subject to this new 50% penalty.
The IRS also revealed a hard deadline. This higher penalty will take effect on Aug. 4. According to the IRS, the 50% penalty applies to all taxpayers with accounts at financial institutions or with facilitators which are named, are cooperating or are identified in a court filing such as a John Doe summons. Here’s the current list:
UBS AG
Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
Wegelin & Co.
Liechtensteinische Landesbank AG
Zurcher Kantonalbank
swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates

Some people may find this 50% penalty high, since many people already find the 27.5% figure hard to pay. If you apply to the OVDP thinking you will pay 27.5%, what if the IRS says 50%? Fortunately, the IRS is trying to be clear with this list. Plus, there’s a very generous August 4, 2014 deadline.
The August 4 deadline means pre-clearance letters submitted after this date come under this enhanced penalty. Other important modifications to the OVDP include:
Requiring additional information from taxpayers applying to the program;
Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application; and
Enabling taxpayers to submit voluminous records electronically rather than on paper.
Remember, you must report worldwide income on your tax return. If you have an interest in a foreign bank account you must check “yes” (on Schedule B). You may also need to file an IRS Form 8938 to report foreign accounts and assets. If you have foreign accounts exceeding $10,000 in the aggregate at any time during the year, you must file an FBAR by each June 30.
If you aren’t compliant with these rules, it is safest to join one of the two IRS programs, the Streamlined program or the OVDP. The IRS says “quiet” foreign account disclosures are not enough. Apart from potential criminal liability, even civil penalty exposure can be catastrophic. To begin with, the non-willful FBAR penalty is $10,000 each.
And as you consider the new post-August 4, 2014, 50% penalty, consider that willful civil violations can draw penalties equal to the greater of $100,000 or 50% of the amount in the account for each violation. Each year is a separate violation. A Florida man was recently hit with civil penalties amount to 150% of his account. See Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance.
In that sense, even the new 50% penalty isn’t a bad deal. In fact, it can look pretty good, particularly when you consider the possibility of prosecution or even just higher civil FBAR penalties.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS Announces Better Offshore Amnesty Program

The IRS has rolled out important changes to its successful offshore account amnesty programs. How successful have they been for the IRS? More than 45,000 taxpayers have fixed their tax problems via the IRS programs, paying about $6.5 billion in taxes, interest and penalties.
As FATCA and global bank transparency kick in July 1, 2014, the IRS can expect even more mea culpas. But one group unhappy with the rules so far has been expats. Americans abroad have long complained that they have foreign accounts for legitimate reasons and shouldn’t be penalized for technical reporting failures.
Expats should be pleased that the IRS’s Streamlined Program, a big disappointment when announced in 2012, is now a good deal broader. The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. For many, that was a non-starter. Plus, there were different degrees of review based on the amount of tax due and the taxpayer’s response to a risk questionnaire.

The revamped Streamlined Program is broader. It can even apply to some people living in the U.S. Moreover, the expanded streamlined procedures are available to more U.S. taxpayers living abroad. The changes include:
Eliminating the rule that the taxpayer have $1,500 or less of unpaid tax per year;
Eliminating the required risk questionnaire;
Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible U.S. taxpayers residing outside the U.S., all penalties will be waived. For eligible U.S. taxpayers residing in the U.S., the only penalty will be a miscellaneous offshore penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issue.
Expat or not, for many U.S. persons with foreign income and accounts, it’s clear that compliance is required. But a primary fear is precisely how to begin in a way that is not too expensive and not too risky. The IRS view is that either the OVDP or the Streamlined Program is best.
That remains true. After all, the IRS programs are certain which is worth a lot. But some taxpayers still want to explore alternatives.
“Quiet Disclosures.” A “quiet” disclosure is a correction of past tax returns and FBARs without drawing attention to what you are doing. The IRS warns against it. See “Quiet” Foreign Account Disclosure Not Enough.
Prospective Compliance. Some people consider filing complete tax returns and FBARs prospectively, but not trying to fix the past. However, the risk is that past non-compliance will be noticed and it may then be too late to make a voluntary disclosure.
Voluntary Disclosure. The two IRS programs are worth considering, especially under the Revised IRS Voluntary Disclosure Practice. Each program  is worth a look. After all, although criminal cases are rare, FBAR violations and tax violations can both be criminal.
But even civil penalty cases can be catastrophic. The non-willful FBAR penalty is $10,000 each. Willful violations are hit with $100,000 or 50% of the amount in the account for each violation. A Florida man was recently hit with 150% of his account. See  Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance.
You can have money and investments anywhere in the world as long as you disclose them. Get some professional advice and try to get your situation resolved in a way that makes sense for your facts and your risk profile.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Medtronic To Buy Covidien, Go Irish, Says It’s Not About Offshore Taxes

Medtronic has agreed to buy Covidien for $42.9 billion in cash and stock. Medtronic is the world’s largest stand-alone medical device maker, selling pacemakers, defibrillators, stents, etc., while Covidien makes devices used in surgical procedures, such as surgical staples, feeding pumps, ventilators, etc. The marriage will rival the biggest in the medical device industry, Johnson & Johnson.
Oh, Medtronic gets Ireland in the deal, which not coincidentally should slash its taxes. The party line is that the deal is about synergy with Covidien, not taxes. Medtronic is going out of its way to downplay the inversion deal, something that seems smart after Pfizer’s failed attempt to merge with AstraZeneca.
Medtronic said operational headquarters would remain in Minneapolis. It even pledged $10 billion in U.S. technology investments over 10 years. Still, it’s clear executive offices will be in Ireland, saving taxes.
Ireland (Photo credit: NASA Goddard Photo and Video)

Medtronic Chief Executive Omar Ishrak said Medtronic’s corporate tax rate will remain around 18 percent. Yet Medtronic is holding more than $14 billion in cash, most of it outside the U.S. since it doesn’t pay taxes until it brings profits back. That and other facts make the tax aspects of this deal huge.
With different lines, the deal seems unlikely to face antitrust problems. Although there will be synergies, it’s hard not to think about taxes, and some drop for Medtronic seems inevitable. The deals are called “inversions” when a U.S. company moves its domicile so that it is no longer subject to U.S. corporate taxes.
Two recent inversion attempts failed. One was Pfizer’s bid for Britain’s AstraZeneca, and the other was Omnicom Group’s grab for France’s Publicis Groupe. Inversions don’t cut taxes on pure U.S. earnings, but can shield income around the world from the high 35% U.S. corporate tax rate.
U.S. tax law started cracking down on inversions a decade ago. One cannot simply move company headquarters. And if you try, you may get stuck paying a lot of extra taxes, penalties and interest.
However, a foreign partner can be pretty alluring. First locate a foreign company to buy. Arrange it so the foreign company acquires the American one, or a holding company is formed to merge the two suitors. Make sure more than 20% of the post marriage combination is owned by foreigners.
Result? No longer an American company stuck in the U.S. tax code, the sophisticated global enterprise can stop being domiciled in the U.S. That means U.S. taxes go down materially.
Congress has tried to prevent these before. Section 7874 of the tax code already covers these deals, but is complex and has failed to work. Now, Congress is trying to make inversions much more restrictive.
Under present proposals, the 20% rule for these inversions would jump to a whopping 50%. That would make sure a foreign company would have to really and truly be the controlling buyer. President Obama has suggested something similar.
Why have more than 40 companies recently gone foreign? U.S. corporate tax rates are high at 35%. Ireland’s tax rate is 12.5%. And many companies take advantage of it.
Apple may be the most prominent example, not of an inversion but of Irish operations. According to a recent Senate report, Apple, avoided paying $9 billion in U.S. taxes in one year.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Donald Sterling Won’t Sell Clippers After All—Too Late To Call Off The IRS?

Isn’t $2 billion enough for the L.A. Clippers? For Donald Sterling? Given the record deal price and the cash wherewithal of buyer Steve Ballmer, you might wonder what’s going on now in this endless saga. Mr. Sterling liked the deal and was dropping his $1 billion suit against the NBA.
But now he won’t sell after all. In this latest installment of the story that won’t die, his wife Shelly Sterling is going back to court hoping to confirm the deal. Mr. Sterling turns out to be pretty nimble, although few would compare him to Mohammed Ali, who could float like a butterfly and sting like a bee.
Still, you have to hand it to Mr. Sterling for playing to the crowd (or the cheap seats). Like McDonald’s, he must be lovin’ it. And if you need any proof that Mr. Sterling is a showman, read Sterling’s statement. But since $2 billion is real money, it makes me wonder if the IRS will agree.
Donald Sterling

The IRS agrees that some transactions can be unwound and that tax effects can be ignored. But to pretend a deal never happened you must meet two tough conditions:
Each party must go back to its position before the transaction as if it never occurred. Rescission isn’t a one-sided deal.
The go-back must occur in the same tax year as the deal. See Revenue Ruling 80-58.
But there could be other problems too. If you turn down money, sometimes the IRS can tag you with the income even though you didn’t collect. It’s called constructive receipt. It requires you to pay tax when you have a legal right to payment even if you chose to be paid later. The IRS invokes this tax doctrine more than you might think.
If you had the right to the income but turn it down, the IRS can demand its cut. The IRS is used to people trying to manipulate when they are paid. The classic example is a bonus your employer tries to hand you at year-end. What if you insist you’d rather receive it in January? Too bad. Because you had the right to receive it in December, it is taxable then even if the company pays you in January.
It’s different if you negotiate for deferred payments before you provide services. If you contract to provide services or sell goods now but with no payment until next year is there constructive receipt? No. In general, you can do this kind of tax planning as long as you negotiate for it up front.
Plainly, the IRS won’t like it if you document a transaction one way and later argue you didn’t mean it. If Mr. Sterling had already signed agreeing to the sale and then undid it, it’s conceivable that the IRS could argue Mr. Sterling had constructive receipt. It depends on how far along the deal is and if it later closes.
In fact, most constructive receipt cases involve timing, questions like whether something is 2014 or 2015 income. Even if Mr. Sterling had signed a contract calling for selling the Clippers for $2 billion in cash, the IRS would be unlikely to succeed with a constructive receipt argument if Mr. Sterling never sells the team.
But what if Mr. Sterling signed a contract to sell the Clippers in 2014 for $2 billion, then revoked the deal, and later sold under a deal calling for payment in 2015? That might be different. Much of this is about legal rights. If you refuse an offer—even for tax reasons—it will be effective.
But if you’re careful, you can even agree to sell for cash in January and that will be respected. Because you condition the transaction on a transfer of legal rights (title to the team), there should be no constructive receipt. Applying these rules to Mr. Sterling’s sale of the Clippers?
Suppose that he refuses to sell for cash and instead insists on payment in installments over ten years. Mr. Sterling shouldn’t have constructive receipt. But he would have constructive receipt if he asked for installments after he signed all the papers entitling him to cash for his beloved team.
Now, Mr. Sterling is back to the courthouse and his lawsuit against the NBA. Lawsuit settlements often raise tax issues, and constructive receipt comes up there too. If you are settling a lawsuit, you might refuse to sign a settlement agreement unless it states that the defendant will pay you in installments. Even though you could have gotten the money sooner, there is no constructive receipt because you conditioned your signature on receiving payment in the fashion you wanted.
This too could be part of Mr. Sterling’s game plan. Tune in tomorrow?
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS Announces A Taxpayer Bill Of Rights

Are feeling disgruntled or upset about your latest tax bill or the unsatisfying interaction you had with the IRS? You’re not alone, and the IRS is trying to make sure you know you have some rights when you’re facing the often daunting tax process. You may have thought Congress would pass a taxpayer bill of rights, as it did twice in the 1990s.
But the IRS has done it on its own, adopting a “Taxpayer Bill of Rights.” It takes existing rights in the tax code and groups them into 10 categories. The IRS says it had extensive discussions with the Taxpayer Advocate Service. National Taxpayer Advocate Nina E. Olson has been talking about this for years, and even listed it as her top priority in her most recent Annual Report to Congress.
“Congress has passed multiple pieces of legislation with the title of ‘Taxpayer Bill of Rights,’” Olson said. “However, taxpayer surveys conducted by my office have found that most taxpayers do not believe they have rights before the IRS and even fewer can name their rights. I believe the list of core taxpayer rights the IRS is announcing today will help taxpayers better understand their rights in dealing with the tax system.”
Taxpayer Bill of Rights

Like the U.S. Constitution’s Bill of Rights, the Taxpayer Bill of Rights contains 10 provisions. They are:
The Right to Be Informed
The Right to Quality Service
The Right to Pay No More than the Correct Amount of Tax
The Right to Challenge the IRS’s Position and Be Heard
The Right to Appeal an IRS Decision in an Independent Forum
The Right to Finality
The Right to Privacy
The Right to Confidentiality
The Right to Retain Representation
The Right to a Fair and Just Tax System
The rights have been incorporated into IRS Publication 1, “Your Rights as a Taxpayer,” that’s sent to millions of taxpayers who receive IRS notices on issues ranging from audits to collection. The rights will also be publicly visible in all IRS facilities for taxpayers and employees to see.
The publication initially will be available in English and Spanish, and updated versions will soon be available in Chinese, Korean, Russian and Vietnamese. The IRS has also created a special section of the IRS website to highlight the 10 rights.
IRS Commissioner Koskinen said “While these rights have always been there for taxpayers, we think the time is right to highlight and showcase these rights for people to plainly see. I also want to emphasize that the concept of taxpayer rights is not a new one for IRS employees; they embrace it in their work every day. But our establishment of the Taxpayer Bill of Rights is also a clear reminder that all of the IRS takes seriously our responsibility to treat taxpayers fairly.”
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS Penalties Can Feel Cruel, But Are They Ever Unconstitutional?

If you have ever forked over additional taxes, interest and penalties to the IRS, you may have uttered a few choice words. Yet odds are you probably didn’t say, “this is unconstitutional.” That’s good since arguing that IRS penalties are unconstitutional is a loser in almost all cases.
But before you dismiss this as a tax protester rant, consider that many penalties can be big. Common tax penalties amount to 25%, but some ratchet up over time. The civil fraud penalty is 75%. And that’s not all. The IRS penalty on responsible persons for payroll taxes  is 100%, and that can be assessed against many different individuals.
But all of these penalties are keyed to the amount the government has lost. And they are all constitutional. But what about willful FBAR penalties for failing to report offshore bank accounts?
Now the numbers can get even bigger. For a willful FBAR violation, the penalty can be 50% of the account balance each year. That means if you fail to file an FBAR for a $100,000 offshore account for 4 years in a row? Your penalty is 200% or $200,000. Is that reasonable?
First three words of the U.S. Constitution (Photo credit: Wikipedia)

Mr. Carl R. Zwerner was recently judged to be willful when he didn’t file FBARs. In fact, Mr. Zwerner was saddled with three willful penalties so will have to pay FBAR penalties of $2,241,809 on an account worth $1,691,054. In short, the account that all the fuss was about was a lot less than the penalties. See Florida Man Penalized Record 150% for Swiss Account.
Now, the court may end up having to decide the constitutionality point too, although reports suggest the case is settling. If that’s so, it may mean this nicely teed up issue will not be decided, at least not this time. The government hasn’t traditionally tried to double dip to exceed the account value with FBAR penalties. But Mr. Zwerner’s case suggests that was then.
Are FBAR penalties meant to compensate the government or penalize the taxpayer, or both? FBAR penalties are often applied when all taxes have been paid. A case in point was Mrs. Mary Estelle Curran, who paid back taxes of over $660,000 and an FBAR penalty of $10.8 million on a $21.7 million Swiss account. Her FBAR penalty was approximately 16 times the taxes she owed Uncle Sam.
In another case, Beanie Baby creator Ty Warner paid $53.5 million in FBAR penalties on a bank account worth $93.6 million. There were big taxes paid too, but the FBAR penalties were more than 50 times Mr. Warner’s tax liability. An even bigger multiple—FBAR penalties worth several hundred times the tax loss—was paid by Mr. Pius Kampfen in another Swiss account case.
These cases show variations, but they were deals to which taxpayers agreed in connection with criminal cases. It’s not likely that most people would agree to penalties equal to 100%, 150% or 200% of their account. Does it begin to sound like forfeiture?
Under the Eighth Amendment, excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted. A civil penalty can be unconstitutional if the punishment is grossly disproportionate to the conduct. In the case of FBARs, there is often no tax loss to the government, since in most cases the taxes are paid, including interest and penalties.
If someone has paid all their back taxes and interest, and even IRS penalties on the back taxes, is it fair to slap on such a big FBAR penalty? In U.S. v. Bajakajian, the Supreme Court said a fine must be proportional. The amount of the forfeiture must bear some relationship to the gravity of the offense it is designed to punish.
Following Bajakajian, Congress modified the statute governing forfeitures to include a proportionality analysis. The law now says that in determining proportionality, courts should compare the forfeiture to the gravity of the offense. If the forfeiture is grossly disproportional to the offense, the court is supposed to reduce or eliminate it.
Are FBAR penalties? It will depend on the facts, of course. But in some cases, where there are few tax dollars lost and the money is lawful, it’s worth asking how a 200% penalty would look. Arguing unconstitutionality will be risky and expensive, but it hardly sounds crazy on the right facts.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Offshore Bank Letters, FATCA, & IRS Penalties—Are Any Choices Left?

With the impending FATCA compliance rollout and the U.S. Justice Department deal for Swiss banks, there are lots of letters and phone calls being made to account holders with American indicia. American citizens, residents—even people with a U.S. address or phone number—should be prepared. Possible American status means proving you’re compliant with the IRS or proving you’re not American after all.
Some people react like a deer in the headlights. But the bank’s letter or call is unlikely to evaporate. Failing to respond in any way is likely to mean the bank will close your account, if it isn’t closed already. Banks routinely turn over the names of closed accounts, and may even be more likely to disclose closed accounts than active ones..
Swiss banks are the most serious, since they are trying to get better penalty categories for themselves. But FATCA, the Foreign Account Tax Compliance Act, is also taking some blame. The U.S. can penalize foreign banks if they don’t hand over Americans.
(Photo credit: CCFoodTravel.com)

Bank secrecy anywhere is fast becoming a thing of the past. Americans can have money and investments anywhere, but tax returns must report worldwide income. Some must file IRS Form 8938 and many must file a separate FBAR by each June 30.
Tax return and FBAR violations are dealt with harshly. Tax evasion can mean five years in prison and a $250,000 fine. A false return earns three years and a $250,000 fine.
Failing to file FBARs can be criminal with prison up to ten years and fines up to $500,000. Even non-willful civil FBAR violations draw a $10,000 fine. Willful—but civil—FBAR violations are most controversial with the potential to exceed your account. The penalty is the greater of $100,000 or 50% of the account for each year you fail to file.
Those numbers can add up and be much worse than the 27.5% Offshore Voluntary Disclosure Program penalty. Recently, Mr. Carl R. Zwerner failed to get out of civil FBAR penalties that were 150% of his Swiss account. See Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance. Tax lawyers expect the IRS to be bolder now with FBAR penalties, and more reluctant to reduce or waive penalties once assessed.
Meanwhile, the IRS Offshore Voluntary Disclosure Program or OVDP looks even more attractive than it did before. In the OVDP, you pay back taxes and penalties but you will not be prosecuted. Taxes on previously unreported income, interest, and a 20% penalty are palatable, and at the end of the case, you pay 27.5% of the highest account balance over 8 years.
A certain 27.5% is far more attractive than the risk of 150% or even more. Many taxpayers seem to assume that the feds can’t and won’t prosecute everyone. That may be true, yet it is still a serious gauntlet to run.
And while a quiet disclosure—filing amended tax returns and FBARs—is verboten according to the IRS, the risk of big civil FBAR penalties must now be counted as a distinct possibility. For anyone facing a bank letter, a quiet disclosure or mere prospective compliance is unlikely to be enough.
Although the chance of prosecution or big civil penalties may still be uncertain, it is increasingly looking like Russian roulette.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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