Asher Rubinstein’s article, Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, has been published in Tax Notes International, Volume 75, Number 6 (August 11, 2014).
Please click here for a PDF of the article.
With Israeli Bank Accounts Under IRS Scrutiny, Israel is Becoming the IRS’ Most Severe Enforcer of FATCA
In recent years, there has been increasing cooperation between the taxation authorities of many governments. For example, when Germany purchased bank account information from bank employee “whistle blowers”, Germany shared this information with other European and North American governments, which resulted in tax investigations of people in various countries. The Foreign Account Tax Compliance Act (“FATCA”), passed by the U.S. Congress in 2010 and coming into effect this year, provides for foreign governments and foreign financial institutions to share information with the IRS regarding U.S. taxpayers with accounts in foreign countries. Dozens of foreign countries and thousands of foreign banks have signed on to FATCA. According to one recent report, a staggering 77,000 foreign financial institutions have agreed to cooperate and share information with the IRS, under FATCA. The reach of the IRS is now truly global creating a challenge for a foreign asset attorney.
On May 1, 2014, Israel announced that it had reached a FATCA agreement with the U.S. The agreement is a “Model 1” agreement, by which Israeli banks will provide the required information to the Israeli government, which in turn will provide it to the U.S. government. The FATCA agreement is reciprocal, meaning that the U.S. can report to Israel regarding Israeli owned U.S. accounts.
Israel’s eagerness to accede to FATCA was apparent long before the May 1 official announcement. In 2012, the Association of Banks in Israel urged Israel’s central bank, the Bank of Israel, to ask the Israeli government to reach a FATCA agreement with the U.S. Earlier in 2014, even before the signing of the FATCA agreement with the U.S., the Bank of Israel ordered Israeli financial institutions to begin to implement FATCA procedures, including appointing an officer to oversee FATCA compliance, identify U.S. customers, make U.S. customers sign IRS declarations (such as IRS Form W-9) and expel any clients unwilling to do so. While some foreign governments faced criticism for “caving in to” U.S. pressures to sign FATCA, Israel appears to have needed very little persuasion; in fact, Israel seems to have backed FATCA, and the reach of the IRS into Israeli banks, willingly and eagerly.
Further, Israel appears to be unique among countries in its vigilance to uphold and enforce FATCA within its own borders. The Israeli Ministry of Finance has drafted proposed regulations which would impose criminal penalties upon Israeli financial institutions (including banks, brokerage houses and insurance companies) that do not comply with their FATCA reporting obligations. Individual employees at these financial institutions who knowingly assist clients in avoiding FATCA disclosures could face jail sentences as severe as seven years.
It should be noted that of all the foreign “facilitators” charged criminally by the U.S. Department of Justice (i.e., the foreign bankers, lawyers and other professionals who assisted U.S. taxpayers to commit U.S. tax fraud via “secret” accounts), facilitators from Switzerland comprise the largest group, followed next by Israeli bankers. With Israel’s eagerness to criminally enforce FATCA under Israeli law, it appears to some that Israel may be overcompensating to now maintain a clean banking image.
While Israel has long been known as a first world country for many industries including science and technology, Israel’s status as a “tax haven” was lesser known, but still real. As Haaretz reported, seemingly in opposition to Israel’s embracement of U.S. law:
“Israeli banks are subject to laws in Israel, and not to U.S. laws such as FATCA. Until now, Israeli banks were obliged to protect their customers’ privacy and were forbidden from providing information on account holders to any parties unless Israeli regulators explicitly stated otherwise.” (Haaretz, March 19, 2014).
While Israel’s banking privacy regime was not as well-known as that of Switzerland, Israeli banks have long been utilized by U.S. taxpayers who have not reported their accounts, nor the income earned in the accounts, to the IRS. As a result, within the last few years, Israeli banks have joined Swiss banks under the scrutiny of the U.S. Department of Justice (DOJ) and the IRS for facilitating U.S. tax fraud. The Swiss branches of Bank Leumi, HaPoalim and Mizrachi Tefahot have been the targets of DOJ criminal investigations, along with major Swiss banks such as Credit Suisse and Julius Baer. Although these three Israeli banks have been publicly named as being the targets of criminal tax investigations, it is likely that many other Israeli banks are also being investigated for offering accounts that allowed U.S. taxpayers to escape taxation.
Israel’s recent willingness to implement FATCA and criminalize FATCA non-compliance as a matter of Israeli internal law, comes at the same time as Israeli banks and bankers are increasingly under the spotlight for aiding U.S. tax fraud. While Israel announced its FATCA agreement with the U.S. on May 1, one day earlier, on April 30, 2014, Israeli banker Shokrollah Baravarian, of Beverly Hills, California, was criminally charged with assisting his U.S. clients with committing U.S. tax fraud, including utilizing accounts in Israel and the Cayman Islands, and also through the use of offshore entities in jurisdictions such as Nevis and the British Virgin Islands. Baravarian was a senior vice president at Mizrachi Tefahot.
In 2013, multiple U.S. taxpayers with undisclosed foreign accounts in Israel and Israeli banks with branches elsewhere were prosecuted by the DOJ, among them: David Raminfard (who failed to disclose his Israeli account, along with a Turks & Caicos entity, and accessed his funds via “back to back” loans); Aaron Cohen (accounts in Israel and Cayman, used “back to back” loans); Moshe Handelsman (account in Israel), and Alexei Lazlovsky (account at the Luxembourg branch of an Israeli bank). In addition, in 2013, David Kalai and Nadav Kalai, two tax preparers in the U.S. with Israeli clients, were prosecuted for facilitating tax fraud through the use of undeclared accounts at Israeli banks, including Israeli banks with branches in Luxembourg. Israeli accounts appear to be second only to Swiss accounts as targets of DOJ prosecutors.
Against this background, on June 9, 2014, it was reported that Bank Leumi is in discussions with DOJ to settle the tax fraud probe, and that the bank has set aside one billion Shekel (US$300 million) to pay in settlement, in return for a deferred prosecution agreement which would avoid a formal criminal indictment against Bank Leumi. Only two weeks prior, Credit Suisse paid $2.5 billion to settle U.S. tax fraud charges. UBS paid $780 million to settle U.S. tax fraud charges in 2009, also in return for a deferred prosecution agreement. As part of its settlement with the U.S. government, UBS released the names of almost 5,000 Americans with formerly “secret” UBS accounts.
It is possible that Leumi’s settlement with DOJ will also include the release of the bank’s client’s names. Even if not (as was the case with the Credit Suisse settlement last month), the U.S. can still obtain client names via a treaty request or “John Doe” summons which are frequently approved by U.S. courts and served on foreign banks such as HSBC in India and UBS in Switzerland. John Doe summonses are also served upon U.S. banks in connection with foreign accounts. In 2013, a U.S. court approved John Doe summonses upon Bank of New York (Mellon), Citibank, JPMorgan Chase, HSBC Bank USA, and Bank of America to produce information about U.S. taxpayers with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom. Also in 2013, a U.S. court approved John Doe summonses upon the Bank of New York (Mellon) and Citibank to produce information about U.S. taxpayers who may have had unreported accounts at Zurcher Kantonalbank (“ZKB”) in Switzerland. Thus, even if the Credit Suisse and Bank Leumi settlement agreements with the U.S. government do not include the banks handing over “secret” account details, the IRS and DOJ can still readily obtain the identities of U.S. clients at foreign banks.
It should be noted that any undisclosed account in Israel, or at a branch of an Israeli bank elsewhere, is vulnerable to discovery by the U.S. government, whether via FATCA, John Doe summons or treaty request. The threshold for reporting foreign accounts to the IRS is low, only $10,000. DOJ will prosecute U.S. taxpayers with accounts of all values, not only in the millions of dollars. DOJ does not want an account owner with, e.g., “only” $50,000 offshore to feel that his or her account is “too low” for IRS scrutiny. In addition, even if a U.S. taxpayer had an undisclosed foreign account, but did not utilize foreign corporations, back to back loans, and other methods of hiding the foreign funds, the taxpayer could still be the target of an audit, investigation and civil penalties. Such civil penalties can exceed the value of the foreign account. Even if the account is depleted by such penalties, the U.S. taxpayer would still be responsible for the deficiency, and the IRS would then proceed against the taxpayer’s U.S. assets.
As noted, the account holder need not have employed sophisticated methods of offshore concealment. The following examples, all much more benign, are all still subject to IRS reporting:
- Use of an account in Israel in connection with Israeli real estate (and if such real estate gives rise to rental income unreported to the IRS, then the taxpayer has a double problem);
- Use of an account in Israel in connection with the support of relatives in Israel;
- Israeli accounts that remained open following immigration to the U.S.
In addition, the following scenarios could also trigger IRS reporting requirements:
- Americans who immigrated to Israel (made Aliyah), still remain U.S. citizens and are obligated to report to the IRS their foreign accounts and Israeli income;
- Israeli children of American citizens, who may never even have visited the U.S. nor have any U.S. tax nexus, but are still subject to U.S. tax law and reporting requirements.
The tentacles of the IRS are clearly global, both in terms of the extra-territorial reach of U.S. tax law and reporting obligations, as well as the willingness of foreign governments and foreign financial institutions to join FATCA and report to the IRS. In the case of Israel and Israeli financial institutions, the IRS seems to have found ready, willing and eager partners, more so than in any other foreign country.
In light of the DOJ and IRS investigations and prosecutions of U.S. taxpayers with undeclared accounts in Israel, coupled with Israel’s eagerness to join FATCA and assist the IRS, U.S. taxpayers with undisclosed accounts at Israeli banks must take steps to come into U.S. tax compliance. There is an opportunity to come into U.S. tax compliance pre-emptively, avoid criminal prosecution and pay lower penalties than if the IRS learns about the accounts first (such as via FATCA). If you have unreported foreign assets, you must see a U.S. tax attorney with experience in offshore accounts and IRS compliance. Come speak with a foreign asset attorney, before the IRS finds you.
The Potential for the IRS to Become Even More Aggressive When Imposing Penalties for Not Filing FBARs for Foreign Accounts
As we’ve written, the law requires US taxpayers to report their ownership, signatory authority or other control over foreign financial accounts with a value in excess of $10,000. The means of reporting such accounts are (1) on IRS Form 1040, Schedule B, where a taxpayer “checks the box” that he or she has such ownership or control over a foreign account, (2) on a form known as the “FBAR”, Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (formerly TD 90-22.1), and (3) on IRS Form 8938, Statement of Specified Foreign Financial Assets.
The penalties for failure to file the FBAR are severe. If the IRS determines that the failure was “willful”, then the penalties can be as high as $100,000 per year, per account, or 50% of the value of the account for each year of non-filing of the FBAR, whichever is higher. If the failure to file the FBAR was non-willful, then the penalties are up to $10,000 per year, per account. It is thus conceivable that the penalties can exceed the value of the account itself. In such a case, the taxpayer remains obligated for the full amount of penalties, even after the funds in the foreign account are depleted by the penalties. In other words, if the penalties exceed the value of the foreign account(s), the taxpayer is still “on the hook” for the full penalty amounts.
Note that the 50% penalty per account, per year is what the law allows the IRS to impose in penalties. However, the IRS usually assesses the 50% penalty for one year only, usually the year with the highest account balance. This is true even in criminal tax fraud prosecutions, when the government prosecutes taxpayers who failed to declare their foreign accounts. In such prosecutions, the punishments which follow settlements, plea bargains and guilty pleas usually include one single FBAR penalty equal to 50% of the highest balance year, not 50% for each year which the law would otherwise allow.
A recent case, U.S.A. v. Zwerner, may change the usual practice of the IRS asserting the 50% penalty for one year only. In Zwerner’s case, the IRS imposed the 50% penalty for each of four years of FBAR non-filing. The highest balance in Zwerner’s unreported account was $1,691,054. The FBAR penalties asserted by the IRS came to a total of $3,488,609. On May 24, 2014, a jury in Federal District Court in Florida upheld FBAR penalties of $2,241,809.
The take-away from the Zwerner case is as follows:
1. The IRS may now be emboldened to impose FBAR penalties for multiple years. As noted, previous practice was for the IRS to assert the FBAR penalty for one year only, even in criminal tax fraud cases. The IRS’ assertion of multiple year FBAR penalties in Zwerner’s case could have been seen as an outlier case. However, after the jury upheld the multiple year FBAR penalties, the IRS, and prosecutors around the country, could rely on Zwerner to assert multiple year penalties. This would be a change in IRS practice that would make the already-severe FBAR penalties even more crippling to taxpayers who did not file FBAR forms.
2. Mr. Zwerner attempted to come into tax compliance; however, he did so not through the IRS Offshore Voluntary Disclosure Program (OVDP), but via an attorney who contacted the IRS Criminal Investigations (CI) Division on an anonymous basis. Zwerner then filed amended tax returns with foreign income now reported, along with FBARs. This is known as a “quiet disclosure”, and resulted in an audit. One take-away from this case is that quiet disclosures do not work, as we’ve written before, and there is a substantial likelihood of an audit as a result of a quiet disclosure. An additional lesson is that one must proceed with extreme caution with regard to unreported offshore accounts, and utilize tax attorneys who are experienced in offshore matters, U.S. tax compliance and IRS interaction.
3. One possible negative conclusion from the Zwerner case is that coming into tax compliance by volunteering information to the IRS in an attempt to “clean up” offshore assets is risky, that the IRS will reward such positive intentions with severe FBAR penalties. However, it should be noted that Mr. Zwerner’s attempts at compliance were themselves questionable. First, his attorney came forward on an anonymous basis. Second, Zwerner’s attempt at compliance, as noted above, was a “quiet disclosure”.
Taxpayers who seek to clean up their offshore non-compliance have a more reliable method, which is the IRS Offshore Voluntary Disclosure Program (OVDP). Formally entering the OVDP subjects both the taxpayer and the IRS to a procedure and rules. Taxpayers will benefit from the IRS not referring the matter to the US Department of Justice (DOJ) for a criminal tax fraud prosecution. In addition, the penalties within the OVDP are pre-determined, usually 27.5% of the highest aggregate foreign account balance, which is in lieu of the more severe FBAR penalties (and other penalties) that would apply outside the OVDP (such as those penalties that applied to Mr. Zwerner’s quiet disclosure). In short, the OVDP would have provided Zwerner with a much better result.
4. The jury found that Mr. Zwerner was “willful” in not filing his FBARs. Further incriminating facts were that the accounts were in the name of two foundations, entities similar to trusts which are often used to create a layer between a US taxpayer and foreign assets, and further obscure the true beneficial ownership of the foreign assets. Yet, Zwerner attempted to come into tax compliance. Via counsel, he approached the IRS even before he was under audit or investigation, and when the IRS did not already know about his foreign accounts. He attempted to do good and correct his past non-compliance, and he was rewarded with staggering FBAR penalties. An additional point here is that an attempt at compliance at a later date may not negate non-compliance at an earlier date. It is the equivalent to the IRS saying “thank you for reporting the accounts and paying taxes on the income in the accounts. However, we are still going to hang you for not doing it properly initially.” Again, the penalty within the OVDP would have been lower, and would have applied instead of the much higher penalties for willfully not filing the FBARs.
5. It remains to be seen whether the jury’s award of multiple year FBAR penalties will be upheld, or whether the award violates the Excessive Fines Clause of the Eighth Amendment to the United States Constitution. The court will address this issue next. Stay tuned, as the outcome will have an effect on enforcement of FBAR penalties across the country.
Please contact us with any questions about the FBAR form, foreign assets and U.S. tax compliance.
FBAR Reporting for Foreign Annuities, Life Insurance and Trusts
We remind readers that FinCEN Form 114 (formerly TD 90-22.1), the Report of Foreign Bank and Financial Accounts (the “FBAR”), for calendar year 2013, is due by June 30, 2014. The FBAR must be filed electronically.
As we advised previously, in 2011, the U.S. Treasury Department issued revised regulations regarding the FBAR. The FBAR filing now applies to foreign annuity policies and foreign life insurance policies that are owned by U.S. taxpayers, and to some beneficiaries of foreign trusts. If you are subject to the FBAR filing requirement, the 2013 FBAR is due by June 30, 2014.
The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.
1. Foreign Annuity Policies
The 2011 FBAR regulations extend the FBAR requirement to foreign annuity policies that have a cash surrender value and are owned by U.S. persons. Under the new regulations, such annuity policies are considered a “foreign financial account”, reportable via the FBAR by the policy owner, which is usually the U.S. client. Such annuities are reportable even if they are deferred annuities and there are no present annuity payments.
2. Foreign Life Insurance
A foreign life insurance policy is now reportable as a “foreign financial account” if the insurance policy is owned by a U.S. person and the policy has a cash surrender value. The reporting requirement applies to the policy owner, if he/she is a U.S. person. It does not apply if the policy is owned by a foreign trust rather than a U.S. client. (Note, however, that a client who is a beneficiary of a foreign trust may still be subject to the FBAR, see 3 below.)
3. Foreign Trusts
The 2011 FBAR regulations extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, such as foreign insurance trusts. The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust. A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in a trust’s assets or if the U.S. person received more than fifty percent of the current income of the trust. The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply. A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee does not have a “present” interest. However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.
Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR. Beneficiaries of a foreign discretionary trust may only receive distributions at the discretion of the foreign trustee. The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.
4. Additional Important Points
• Even if the annuity policy or insurance policy was cancelled in 2013, and the trust account closed during 2013, if they existed at any point during 2013, an FBAR is required.
• The requirement to file the FBAR exists irrespective of whether you filed IRS Form 8938, Statement of Specified Foreign Financial Assets. This is yet another IRS form to report foreign assets, including foreign annuity policies, foreign life insurance policies, and interests in foreign trust. We’ve written about IRS Form 8938, here. Form 8938 is due with your annual tax return.
• The June 30, 2014 deadline is the deadline for receipt of the FBAR by the Treasury Department.
• Even if you have an extension for filing your tax returns, the 2013 FBAR is still due by June 30, 2014. There are no extensions for the FBAR deadline.
• The FBAR is now required to be filed electronically.
It is crucial to preserve the integrity of your offshore planning and to maintain its tax compliance by abiding by all IRS rules and regulations. Please contact us for more information.
Offshore Asset Protection Trusts and FBAR Reporting
We again remind readers that FinCEN Form 114 (formerly TD 90-22.1), the Report of Foreign Bank and Financial Accounts (the “FBAR”), for calendar year 2013, is due by June 30, 2014. The FBAR must be filed electronically.
As we wrote previously, in 2011, the U.S. Treasury Department changed the FBAR filing requirements to now apply to U.S. grantors of foreign trusts, and in some cases their U.S. beneficiaries.
The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year. If you are subject to the FBAR filing requirement, the 2013 FBAR is due by June 30, 2014.
U.S. grantors (also known as settlors) of foreign asset protection trusts are deemed to be the owners of all trust assets for tax purposes. Thus, the FBAR filing requirement applies to such grantors, whether or not they actually control trust assets and whether or not they receive distributions from the trust.
The 2011 revised regulations now extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, including foreign asset protection trusts. The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust. A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in the assets of a trust or if the U.S. person received more than fifty percent of the income of the trust. The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply. A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee (asset protection trusts created by this firm are purely discretionary trusts) does not have a “present” interest. However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.
Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR. Usually, beneficiaries of a foreign asset protection trust receive distributions at the discretion of the foreign trustee. The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.
Please also note the following with respect to the FBAR requirement:
- Even if the trust account was closed during 2013, if the account existed at any point during 2013, an FBAR is required.
- The requirement to file the FBAR exists irrespective of whether you filed new IRS Form 8938, Statement of Specified Foreign Financial Assets. Please contact us for a copy of our memorandum regarding new Form 8938.
- The June 30, 2014 deadline is the deadline for receipt of the FBAR by the Treasury Department.
- Even if you have an extension for filing your tax returns, the 2013 FBAR is still due by June 30, 2014. There are no extensions for the FBAR deadline.
- The FBAR is now required to be filed electronically.
We also take this opportunity to remind you again that foreign asset protection trusts also give rise to filing IRS Forms 3520 and 3520-A, as well as Form 8938.
Having established an offshore asset protection trust to safeguard your assets from attack by creditors and litigants, it is crucial to preserve the integrity of the trust and to be in compliance with all IRS requirements. Please contact us with any questions.
Do you Have an Offshore Account? FBAR is due June 30, 2014
We take this opportunity to remind readers of important ongoing tax reporting requirements that must be met with respect to foreign accounts.
The FBAR – due June 30, 2014
The FBAR, Report of Foreign Bank and Financial Accounts, for 2013, must be filed by June 30, 2014. The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, any foreign financial account, including bank or securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2013. If the account existed at any point during 2013, then the FBAR must be submitted by June 30, 2014. Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically. Recently promulgated regulations now expand the type of offshore assets that require FBAR reporting. Now, foreign annuity policies and insurance policies are required to be reported on the FBAR.
Form 8938
IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank and brokerage accounts and other foreign assets (including ownership interests in offshore trusts and corporations, bonds, mutual funds, annuity and insurance policies). IRS Form 8938 is due with your annual tax return.
“Check the Box” on Form 1040, Schedule B
In addition to the FBAR and Form 8938, if you maintained a foreign financial account at any time during 2013, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7. This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, a financial account in a foreign country. Even if you closed the account during 2013, you must still “check the box” if you maintained the account during any part of 2013. If you received a distribution from, or were the grantor of, or a transferor to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and file IRS Form 3520.
Report Foreign Income
In addition to “checking the box” on IRS Form 1040, beneficial owners of a foreign account must report all income (including interest, capital gains and dividends) realized in the foreign account, on IRS Form 1040. If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies).
Additional Forms for Entities (Foreign Trusts, Corporations)
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2013 you received assets from such a foreign entity, then you may also be required to file IRS Form 3520 and 3520A. Please contact us for a copy of our memorandum about this issue. If you had an interest in a foreign corporation, and such foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is due.
Conclusion
As we have long counseled, it is perfectly valid and legal to own offshore assets. However, one must pay careful attention to the IRS reporting and income tax obligations associated with foreign assets. In light of the eradication of bank secrecy, the reach of the Foreign Account Tax Compliance Act (FACTA) and the IRS’s tenacious pursuit of undeclared foreign assets and foreign income, your foreign assets must be properly reported, and income tax paid on all foreign income, each year.
If you have any questions or would like our assistance in preparing the 2013 FBAR, please contact us.
Credit Suisse Pleads Guilty; Asher Rubinstein Quoted in Businessweek
As we’ve previously written, Credit Suisse had been under investigation by the U.S. Department of Justice (DOJ) for the past few years for facilitating tax fraud by U.S. clients with “secret” Credit Suisse accounts in Switzerland. On May 19, 2014, Credit Suisse pleaded guilty to the charges and agreed to pay a fine of $2.5 Billion to Federal and New York authorities. Credit Suisse was allowed to stay in business, which had been an open issue, since a bank which pleaded guilty to a federal crime could have its banking license cancelled. It is very likely that DOJ and the IRS will now proceed against American taxpayers with undisclosed Credit Suisse accounts.
Asher Rubinstein was quoted in Bloomberg Businessweek on the end of Swiss banking secrecy. Please see: http://www.businessweek.com/articles/2014-05-20/the-end-of-the-swiss-bank-account-as-we-know-it
If You Have Foreign Assets, IRS Form 8938 Is Due April 15, 2014
Readers are reminded that IRS Form 8938, Statement of Specified Foreign Financial Assets, is due with their 1040 tax returns by April 15, 2014. IRS Form 8938 was first introduced for tax year 2011, and is yet another IRS form to report ownership of foreign assets. In many cases, Form 8938 is due even if the same foreign assets are reported on different IRS forms, such as Form 3520 for foreign trusts, Form 5471 for foreign corporations, and the FBAR form (Report of Foreign Bank and Financial Accounts, FinCEN Form 114) for foreign financial accounts. If a taxpayer obtains an extension for submission of Form 1040, then Form 8938 should be submitted when the Form 1040 is submitted on extension.
The following are examples of foreign assets that are subject to reporting on Form 8938:
- foreign bank and brokerage accounts;
- stock of foreign corporations and interests in foreign LLCs and partnerships;
- interests in a foreign entity such as a trust or foundation;
- ownership of foreign financial instruments, such as bonds and promissory notes;
- ownership of foreign investment instruments and contracts issued by a foreign entity, including foreign annuity policies and insurance policies;
- interests in a foreign investment fund, hedge fund, mutual fund and private equity fund.
FATCA (the Foreign Account Tax Compliance Act) is coming into effect internationally and foreign financial institutions (FFIs) will soon begin to report to the IRS regarding US owners of foreign assets. Thus, it is imperative to file Form 8938 before the IRS first learns of the asset from an FFI.
We can assist in determining whether you are subject to Form 8938, and can answer your questions regarding US tax compliance for foeign assets. Contact us for a confidential consultation.
For our prior guidance on IRS Form 8938, please read our article here.
For a helpful comparison between Form 8938 and the FBAR, please click here.
Revisiting the Threat from Whistleblowers; Are you Protected?
This week, in an annual report to the US Congress, the IRS announced that last year it paid out 122 whistleblower awards totaling $53 million. That is an average award of nearly $435,000.
People are thus incentivized to “blow the whistle” and report to the IRS the alleged tax misdeeds of other people. The report to Congress also revealed that the IRS received 9,268 whistleblower claims last year. Whistleblowers are not only motivated by the financial awards, but also to “get even” with their adversaries, whether former business partners, spouses, employers and the like.
The IRS is authorized by law (Section 7623 of the Internal Revenue Code, the “Informant Claims Program”) to reward whistle blowers who report tax violators. If the information provided by the whistle blower is used by the IRS, the whistle blower may receive up to 30 percent of the additional tax, penalty and other amounts collected by the IRS. In addition, the identity of the whistle blower is protected by the IRS (at least until the whistle blower becomes a necessary witness in a tax prosecution). Reports to the IRS can also be made anonymously.
In addition, under Section 922(a) of the new Dodd-Frank Act, whistle blowers are now empowered to report information to the SEC. If the whistle blower report leads to enforcement action resulting in sanctions greater than $1 million, the whistle blower may receive a payment of 10 to 30 percent of the sanctions.
Why should you care?
As we wrote, if threats exists from, e.g., a spouse, business associate, employee, etc. who may feel motivated to contact a government authority such as the IRS or SEC, and share potentially damaging information about you, your business, your assets or your finances, you should take preemptive action to mitigate the potential consequences. An asset management attorney can help avoid these problems.
What can you do? Make sure your house is in order.
- Run a self-tax audit. Is there reason to go back and alter past tax returns to disclose previously unreported income, foreign accounts, improper deductions taken, etc.? Should you file tax forms or reports that should have been filed but were not, e.g., for involvement in foreign accounts, ownership of foreign trusts or offshore corporations? Preemptively addressing these issues before they are brought to the attention of the IRS could result in lower fines and penalties and avoidance of criminal prosecution. As we have long-counseled, any of these threats – – whether from weakening bank secrecy laws, exchange of information by governments, from renegade bank employees, or an angry business partner or former spouse – – are harmless if you are tax-compliant. Correcting past tax non-compliance would serve multiple purposes: make good with the IRS, lower potential penalties and punishment, and eliminate the tax blackmail card that a nasty creditor might play. If you bring your tax matters into compliance, the threat of a whistle blower or creditor would be pre-emptively mitigated.
- Protect your assets. Don’t leave your assets exposed to potential claimants and litigants. Protect your assets proactively, before legal action against you, rather than defensively, in response to an action already commenced, when your asset protection options may be limited.
A second reason why whistle blowers may impact you is if you have any unreported assets offshore, whether bank accounts, real estate, business interests or interests in foreign trusts or other foreign entities. As we have written before, many foreign accounts have been exposed by bank employees within the banks themselves, who have, in multiple cases over the past few years, stolen internal bank information and handed that bank information over to foreign governments. In many cases, governments pay millions of euros for that information. Those governments then use that information for tax investigations and prosecutions, and also share that information with other foreign governments.
As reported in the Wall Street Journal this week, speaking about the arrests of three Cayman investment advisors who were charged with facilitating tax fraud by Americans, “an official at the Justice Department said the sting should serve as a warning about offshore accounts. ‘The Cayman case illustrates that we have ways of getting information that people don’t know about’ . . . the Government receives account information from many sources, including whistleblowers hoping for monetary rewards.’” (Wall Street Journal, April 4-5, 2014, “The Next Offshore Target”)
It might be said that the entire unraveling of Swiss banking secrecy over the past few years can be attributed to a single causative event: UBS employee Bradley Birkenfeld coming forward to the US Government and revealing how UBS lured wealthy American clients to open accounts at UBS in Switzerland and how UBS then advised the clients on how to keep the accounts secret from the IRS, and how the bank earned high fees for managing the accounts. So began DOJ’s civil and criminal cases against UBS, UBS paying $780 million in penalties, and UBS revealing the names of some 5,000 Americans with non-compliant accounts at UBS. Dozens of these Americans have since been criminally prosecuted for tax fraud. Birkenfeld’s whistleblower award was $104 million. He went to jail for thirty one months, but only Birkenfeld can decide whether those months were worth $104 million.
If you have unreported foreign assets, you must address your risk of being revealed to the IRS by a whistleblower. Contact us for a confidential consultation.
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