Wednesday, July 20, 2016

The IRS, in recent years, is enforcing rules requiring “U.S. Persons[1]” to register (by filing an FBAR or related form) almost all foreign financial accounts, whether residing in the U.S. or abroad.

They are requiring registration of these accounts, even if the accounts are not earning interest, and even if they are simply holding money for a family member or someone else.

A second development is the law now requires reporting to the IRS, by nearly all foreign banks who are serving American customers (or those who they think may have a business connection with Americans or American interests). Nearly all the banking information is reported to the IRS through an online virtual international banking database accessible by not only the U.S. government, but with provisions for reciprocal access to the database by foreign governments as well, who are on the lookout for their own citizens who may be hiding something.  

Foreign banks are requiring their customers to fill out IRS forms regarding their foreign accounts; or many governments have signed agreements with the U.S. to collect the names from their home country banks directly from them and then send them on to the IRS.


The Bad News is if the government finds out about these accounts before you try to comply with the law, you may be unable to mitigate some of the penalties which could be very high, $10,000 per account, per year, for just non-willful violations even if there is no unreported income. If the government believes they can prove that the failure to disclose the account was done on purpose, they can make your life miserable for years trying to defend yourself against a lengthy audit, additional penalties and by incurring legal expenses.
The Good News is the IRS has a program under which taxpayers who can meet certain conditions can voluntarily come forward and either simply file the delinquent forms straightaway (the Streamlined program), where the taxpayer has merely been negligent about keeping abreast of the changes. Alternatively, even if the failure to comply was done on purpose (or willfully), a taxpayer can work directly with the IRS to get compliant and pay a larger fine. Fines under current disclosure procedures range from zero or as low as 5% or as high as 50% in willful situations. 
The IRS is keeping a list of some “bad banks” throughout the world who have been giving them trouble, in which case the OVDP penalty increases from 27.5% to 50% of the balances in the accounts. Nevertheless, even if your conduct was willful, if you qualify for the second program, the Offshore Voluntary Disclosure Program, the IRS is not likely to start a criminal investigation against you or even recommend a 75% civil fraud penalty for failure to file or for filing a false tax return by not including interest earned in the foreign account or investment.
Parts of this program have been around since 2009, so in some cases the IRS may take the position that it is becoming a little late to say you “just learned about” these filing requirements, especially if the behavior looks purposeful.
Second, if you should die before this is resolved you could be saddling your family and heirs with tax, legal and accounting problems which could go on for years and consume enormous fees by tax professionals thus diminishing your intended bequests to your loved ones.
Next, these new banking rules were written to search out first, hidden accounts which are still open. Shortly, the rules require the banks to search their records for prior years even if the account is now closed.

[1] The FBAR filing rules define the term U.S. Person for purposes of determining if the requirement is applicable.

Tuesday, April 5, 2016

The impact of the Panama Papers mega-news story is being absorbed with lightning speed around the globe. The tax compliance community is going to feel the ripples for the next several years. The real story is not so much the disclosure of world leaders whose names show up on the lists, but rather the fall-out to the secondary level of people who will be exposed as tax authorities around the world begin their investigations. The mistaken belief of any tax cheat that no one would ever find out about their honey pot in the Cayman Islands or the fake corporations they formed in the British Virgin Islands is not based in reality.  

As this story unfolds, the IRS and its world-wide FATCA- friendly partners are in year six of implementing FATCA, a law passed in 2010. The law requires almost all of the banks in the world to register with the IRS if they want the privilege of earning, moving, or even touching U.S. source income. FATCA seeks to create, with the blessing and cooperation of dozens of other nations, including China, Russia and Middle Eastern countries, an international banking and financial database. The purpose of the data base is to enable the respective FATCA-friendly countries to track compliance of their respective citizens.

How ironic in this age of FATCA, Big Government is handed on a silver platter enough work to keep them so busy for the next few years, they may want to put FATCA on hold for a while. It would appear from the news stories that tax law enforcement worldwide has been given a huge gift. This treasure trove of data is likely to turn up the names of a few Americans. If so, this latest leak could be a windfall for the IRS. So far, it appears only one U.S. person is directly named.

In the netherworld of offshore tax evasion, financial investigators spend their days connecting dots that start in the Caribbean and lead to tax evaders all over the world including in Iceland, Moscow, and New York. There are some clear U.S. connections with entities formed in Nevada, meetings in the U.S., the Mossack Fonseca firm’s U.S. presence, etc.

Forget any talk about the fact that these documents may have been obtained illegally. For practical purposes, if the names and information are out there in the public domain for all to see, the IRS and other law enforcement agencies are entirely free to use it to get information on taxpayers who are guilty of cheating on their taxes through the use of offshore accounts regardless of the source. As long as the IRS had no hand in any act to illegally obtain the Panama Papers, all the IRS needs is a name of an individual or entity with the slightest U.S. connection. They know what to do next!

Welcome to the fallout from the Panama Papers. Now, who needs FATCA?