ARTICLE
1 September 2010

Developments in Offshore Tax Compliance

CD
Caplin & Drysdale

Contributor

Having celebrated our 50th Anniversary in 2014, Caplin & Drysdale continues to be a leading provider of legal services to corporations, individuals, and nonprofits throughout the United States and around the world. We are also privileged to serve as legal advisors to accounting firms, financial institutions, law firms, and other professional services organizations. Please visit www.caplindrysdale.com for more information.
Who Has Foreign Accounts and Assets?
United States Tax
To print this article, all you need is to be registered or login on Mondaq.com.

Who Has Foreign Accounts and Assets?

  • Historical reasons
  • War and persecution
  • Families with international presence
  • Americans living overseas for a time
  • American business interests
  • Inheritance, gifts
  • Diversification
  • Tax Cheats...

Exposure in Undeclared Account Cases

  • Tax Returns – Form 1040
  • "Check the box," list the countries
  • Report all investment income – interest, dividends, capital gains/losses
  • "FBAR" – TDF 90-22.1 – all "financial accounts" broadly defined; due June 30
  • Recent guidance – suspension of requirement for "signature authority only" accounts; foreign persons in U.S.; private equity/hedge funds

Exposure in Undeclared Account Cases

  • Fiduciaries
  • Estate Tax Returns – omitted assets
  • 1041s – check the box, investment income
  • Fiduciary FBAR obligations
  • Possible personal liability
  • Additional reporting obligations:
  • Receipts of foreign gifts or bequests
  • Foreign trust relationships
  • Reporting of interests in foreign corporations

Hire Act: FBAR Information on Tax Return

  • US tax returns – will now have info similar to FBAR
  • $50,000 asset threshold – report all foreign accounts and many foreign investments
  • In addition to TDF 90-22.1 (FBAR)
  • although that form may change...
  • Effective with 2011 tax year

Sanctions – Criminal Penalties

  • Tax evasion
  • Filing false returns
  • Conspiracy
  • Failure to file FBAR
  • Proof of Intent, Willfulness
  • Felonies, usually leading to incarceration
  • Generally six year statute of limitations

Sanctions – Civil Penalties

  • FBAR -- penalties up to 50% of account balances per year for willful failure to file
  • Six year SOL
  • Tax penalties – accuracy, fraud – % of the tax
  • Substantial penalties for non-compliance regarding unfiled forms regarding trusts, corporations, foreign gifts
  • Unfiled returns – no statute of limitations

War on Foreign Accounts – 2007-2010

  • LGT, UBS
  • Civil John Doe Summons; Criminal Investigation
  • Deferred Prosecution Agreement; data turnover
  • Indictments of bankers, advisors, taxpayers
  • Congressional Hearings
  • Summons Settlement...the UBS 4450
  • Special IRS Voluntary Disclosure Initiative
  • Feds are going after more banks

Voluntary Disclosure Program

  • Per longstanding IRS policy:
  • Legal source income
  • Timely – disclosure before IRS has info regarding taxpayer
  • Truthful and complete
  • Full cooperation
  • Good faith arrangements to pay

Voluntary Disclosure Program

  • 1040s, FBARs
  • Also applies to estate tax returns
  • Eliminates criminal exposure for fiduciaries or beneficiaries
  • Other forms as well – 3520s, 5471s, etc.
  • Generally six year look back driven by criminal SOL
  • There are exceptions...

Voluntary Disclosure Program

  • "Special" on offshore accounts expired 10/15/09
  • Voluntary Disclosure still available
  • Penalty caps now gone
  • Shaky start to civil audits in VDP Special Initiative
  • Standard IDR...third generation
  • The good: closing Agreements re sham entities
  • The not so good:
  • Taking the 20% penalty v. opting out
  • PFIC Issues

Voluntary Disclosure – Post 10/15/09 Tactics

  • What to do now? Noisy v. Quiet?
  • Noisy:
  • Contact CID, preclearance, intake letter
  • Eventual 6 year look back w/tax, interest, penalties
  • IRS non-committal on FBAR penalty
  • Leverage – 50%/year
  • Benefit: clearly get out of criminal jeopardy; closure
  • Cost: near certain substantial penalty payment

Voluntary Disclosure – Post 10/15/09 Tactics

  • Quiet
  • Amend returns – 3 to 6 years; pay tax, interest
  • Can amend for a decedent...common in these cases
  • File FBARs?
  • Explanatory statement required
  • 3520s? 5471s?
  • Benefit: possible avoidance of penalty, audit
  • Risk: no clear criminal closure, no clear closure at all
  • IRS hostility to "quiet disclosures"

Voluntary Disclosure – Post 10/15/09 Tactics

  • Factors in Considering
  • Likelihood of bank disclosure
  • UBS 4450 – must go noisy
  • Recent IRS slowdown....why?
  • HSBC, J. Bar...
  • One never knows: will a whistleblower emerge?
  • Criminal Exposure? Evidence of Willfulness?
  • Real tax cheat v. accidental American
  • Deceased primary actor; passive beneficiaries
  • Number of years – SOL, criminal, civil (3 or 6)

Voluntary Disclosure – Post 10/15/09 Tactics

  • Retrospective Cleanup v. Prospective Compliance
  • No obligation to go back
  • BUT...must advise to comply going forward
  • Another vehicle for IRS to learn that account was held in prior years
  • Postscript: Watch the criminal cases...will the IRS prosecute good faith disclosures? If so, what happens to the VDP?
  • The UBS 285....

Continuing Enforcement in Foreign Asset Area

  • U.S. Government – needs money! IRS claims $100 billion lost tax revenues/year
  • US reaction – DOJ, IRS, Congress
  • Political dynamics in US – then and now

Aggressive Enforcement will Continue

  • Whistleblowers and informants
  • Criminal Investigation of banks and bankers
  • Civil summons process
  • Treaty based information exchange
  • FATCA and beyond

This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More