Gallet, Dreyer & Berkey, LLP
As the year draws to a close, we offer valuable planning tips to our clients, colleagues, and friends of the firm regarding their assets, tax, and estate concerns.
Foremost, there are still some time-sensitive ways to save taxes that could result in much more money for your family.
As the year comes to a close, we offer some planning tips to our clients, colleagues and friends of the firm regarding their assets, tax and estate concerns.
Foremost, there are some time-sensitive ways to save taxes that could result in much more money for your family.
I am pleased to announce that, along with two esteemed colleagues, I will be presenting a webinar on February 6, 2019 at 1pm EST. I will be discussing U.S. reporting requirements for offshore assets, how to come into compliance if you haven’t reported these assets, and what the government might do if you fail to report foreign assets and are discovered. I will also be discussing recent IRS enforcement initiatives for non-reporting of Bitcoin and other crypto currencies. This webinar will also explore how to make a disclosure of offshore assets to the IRS now that the IRS Offshore Voluntary Disclosure Program (OVDP) has ended, as well as additional compliance opportunities, including the IRS Streamlined Disclosure Procedures and the IRS Delinquent Informational Return Procedures.
The panel will review these and other priority issues:
Additional information may be found at the Strafford website, here.
The value of Bitcoin has surged 125% in 2017 alone. In addition to its value ascent, it has also gained in legitimacy. While it was once the currency of choice on the illicit Silk Road “dark web”, shut down by the U.S. Department of Justice in 2013, Bitcoin is now accepted for payments by Amazon.com and other mainstream businesses. Whether you’ve weathered the Bitcoin roller coaster or invested recently, you must ensure IRS compliance for Bitcoin.
The IRS has taken an interest in Bitcoin for various reasons. First, Bitcoin is largely unmonitored and stands apart from the traditional structure of U.S. banking with 1099 forms and regular reporting. There is a huge mass of Bitcoin value that is relatively unknown to the IRS, and gains in value are essentially hidden from the IRS, and the IRS doesn’t like that. In addition, Bitcoin has a large potential for tax non-compliance, both because its very nature is anonymous, and because Bitcoin holdings give rise to significant IRS reporting (the “FBAR” form, IRS Form 8938, IRS Form 8949, capital gains taxes, etc.) and many Bitcoin owners don’t heed (or even know) the reporting requirements.
In November 2016, the IRS obtained a federal court authorization to issue a “John Doe” summons to Coinbase, Inc., a web-based global digital currency wallet and platform. The IRS has in the past successfully used the “John Doe” summons to obtain information from financial institutions (e.g., UBS, HSBC and Cayman Islands banks) for a broad class of U.S. taxpayers who are not individually named but whom the IRS has reason to believe may have utilized the financial institution to improperly evade tax. The John Doe summons upon Coinbase seeks records from 2013 through 2015 for any Coinbase user with a US address, telephone number, e-mail domain, etc., and all records related to disbursement of funds to any user. A recently filed Affidavit by an IRS agent in the Coinbase enforcement litigation revealed that in 2015, only 802 taxpayers revealed Bitcoin information to the IRS on Form 8949, which is the form applicable to capital gains and losses. Other virtual currency platforms, such as Localbitcoins, Kraken and ItBit may receive similar summonses for transactions with Bitcoins and other virtual currencies like Ethereum and Litecoin.
Bitcoin’s anonymity feeds its non-compliance, and there are many opportunities to run afoul of tax law and IRS requirements, intentionally or inadvertently. One issue is the failure to report income with respect to Bitcoin. In 2014, the IRS issued Notice 2014-21 describing how various income recognition and other US tax principles apply to virtual currency transactions. In that Notice, the IRS clarified that virtual currencies are “property” subject to income tax, capital gains tax, etc. This means that if Bitcoin is sold for a profit, that profit is income and is subject to capital gains tax. The income is reportable on IRS Form 8949 which is then attached to Schedule D of Form 1040. If you exchange your Bitcoin for goods or services, that too is a taxable event, as the IRS considers you to have earned income on the value of the good or service, less your cost basis in the Bitcoin (i.e., your Bitcoin purchase price).
If you are audited by the IRS regarding Bitcoin, you may have to show multiple cost bases for multiple transactions. Proper record keeping with respect to Bitcoin is essential. The IRS could take the position that your cost basis in your Bitcoin is zero, and you would pay tax on the full value of the Bitcoin on the date of the transaction, unless you can provide records of your purchases of Bitcoin.
In addition to income tax issues on Bitcoin income, there are reporting issues irrespective of income. Because a Bitcoin wallet would be considered by the IRS to constitute an “account”, if you hold your Bitcoins in foreign wallets or on foreign Bitcoin exchanges, then foreign account reporting requirements are triggered, including the FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) and IRS Form 8938 (Statement of Specified Foreign Financial Assets). If you invested in a foreign fund that invested in Bitcoin, the IRS may consider the fund to be a “PFIC” (Passive Foreign Investment Company), which has its own tax methodology, and IRS Form 8621 would be due. Penalties for non-reporting foreign accounts are significant, including potentially 50% of the value of the account.
Clearly, the IRS’ increased interest in Bitcoin necessitates proper compliance with respect to Bitcoin assets. The IRS offers opportunities to come into compliance before the IRS obtains information about unreported assets (virtual or actual) and income, including via a pre-emptive voluntary disclosure (offshore or domestic) of digital currency income and accounts. A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving open tax issues, along with peace of mind and finality.
Please contact us to discuss IRS compliance for Bitcoin assets, along with other tax issues.
The Wall Street Journal article, “The Tax Man Cometh and, Holy Cow, He Means Business” (WSJ, June 3-4, 2017), despite its provocative title, doesn’t break new ground on the IRS attack on offshore accounts. Instead, it offers us the following lessons:
The IRS has obtained a vast amount of information from sources that include foreign banks, the Panama Papers and the Foreign Account Tax Compliance Act (FATCA). Additional sources include Tax Information Exchange Agreements (TIEs), foreign bankers and other people’s voluntary disclosures. According to the IRS, there are hundreds of US taxpayers subject to criminal tax charges in relation to their offshore accounts, and thousands more subject to large civil fines and penalties.
There are also opportunities to come forward before the IRS gets a taxpayer’s name, in return for lower penalties. If a taxpayer willfully hid foreign assets and income (for instance, a taxpayer who set up an account in a tax haven country like Switzerland or Panama, without any legitimate ties to that country, or a taxpayer who utilized offshore entities like foreign trusts, corporations or foundations, or diverted business income away from the IRS), then such a taxpayer should apply to the IRS Offshore Voluntary Disclosure Program (OVDP) in return for lower penalties and no criminal prosecution.
On the other hand, if a taxpayer was non-willful (for example, a U.S. taxpayer who inherited a foreign account from a foreign relative, or a recent immigrant who was unaware that accounts “back home” become reportable to the IRS), then such a taxpayer may be eligible to make a Streamlined disclosure for much lower penalties, or in the case of US taxpayers who reside abroad, zero penalties.
Legal counsel experienced in representing people with offshore assets before the IRS can assess the background facts and help determine whether someone is willful or not, and can present the taxpayer and facts in the best light possible before the IRS.
Contact us to discuss IRS compliance for foreign assets including offshore accounts, the OVDP, Streamlined programs and alternatives to making a voluntary disclosure.
Asher Rubinstein will be a featured speaker in an upcoming Strafford live webinar, “FBAR and U.S. Tax Reporting and Compliance Requirements for Foreign Assets” scheduled for Tuesday, June 20, 2017 at 1pm EST. We have a limited number of complimentary registrations for clients and friends of the firm.
The IRS has made modifications over the past several years to the programs that allow for late reporting of previously undisclosed offshore assets. At the same time, the IRS continually reaffirms its commitment to cracking down on U.S. taxpayers failing to disclose foreign assets. Taxpayers and their advisers must act quickly to take advantage of the benefits of a pre-emptive disclosure, before the IRS learns of the foreign asset from a foreign financial institution, a foreign banker, FATCA (Foreign Account Tax Compliance Act) report, tax treaty with a foreign government or alternative means of discovery.
The two most significant programs aiding taxpayers with unreported foreign assets are the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Procedures for domestic (SDOP) and foreign (SFOP) residents. Taxpayers may benefit from substantially reduced or no penalties for failure to report offshore accounts and assets. However, taxpayers and their advisors must be aware of the risks in each of the programs. The penalties imposed upon taxpayers who willfully fail to disclose offshore assets are extremely punitive.
Taxpayers and their advisers must evaluate whether a disclosure program will help a taxpayer avoid increased IRS penalties, and whether the taxpayer is eligible to enter one of the programs. Eligibility is very fact-specific. If eligible, counsel must guide the taxpayer in meeting the very specific information requirements of the disclosure program. The OVDP, SDOP and SFOP may end at any time without notice, at which point the taxpayer may face the full measure of penalties (including criminal consequences).
The Webinar panel will provide taxpayers, legal counsel and tax advisers with the tools necessary to navigate the new rules regarding the FBAR and offshore voluntary disclosure programs.
We will review these and other key issues:
After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.
For more information about this Webinar, please visit the Webinar program description.
Contact us with any questions about this Webinar or other offshore reporting and IRS compliance issues.
In 2014, Credit Suisse pleaded guilty in U.S. federal court to facilitating tax fraud by Americans via secret bank accounts in Switzerland. This was among the largest guilty pleas ever by a foreign bank, and Credit Suisse agreed to pay $2.6 billion in fines to the U.S. and New York State. (Our previous report from 2014 is here, along with a Bloomberg Businessweek article that quoted Asher Rubinstein in 2014.) Now, Credit Suisse is again facing similar allegations, this time for the bank’s “Israel desk” facilitating tax fraud by Israeli-Americans.
The current accusations stem from the Department of Justice prosecution of Dan Horsky, who held joint U.S. and Israeli citizenship and kept millions of dollars in cash and stock accounts at unreported Credit Suisse accounts in Switzerland. Mr. Horsky pled guilty, cooperated with DOJ and provided information about Credit Suisse that could result in a new prosecution or punishment of Credit Suisse. Following the 2014 guilty plea, a new prosecution will likely have severely negative results for Credit Suisse and other U.S.-Israeli taxpayers with unreported secret bank accounts at Credit Suisse and other banks.
We have written extensively about non-compliant foreign accounts in Switzerland, Israel and other jurisdictions around the world. There is a limited opportunity to bring such accounts into U.S. tax compliance, but only if the IRS does not already know about the accounts. If Credit Suisse, as part of an investigation, settlement, fine or penalty, reveals the names of its account holders to DOJ, it would be too late for the account holders to make a pre-emptive disclosure in order to avoid prosecution, severe penalties and even jail. Banks have routinely disclosed the identities of their account holders in order to settle charges of facilitating tax fraud, including UBS, Credit Suisse and Bank Leumi.
If you have unreported foreign accounts, commonly known as secret bank accounts, contact us to discuss your options.
Annual tax season is upon us, and we remind readers of important tax reporting requirements that must be met with respect to foreign assets.
If you had signature authority or a financial interest (e.g., ownership) in a foreign financial account (including a bank account, securities account, brokerage account, etc.) at any time during 2016, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7. If your foreign account(s) were valued at more than $10,000 in the aggregate, you must also “check the box” on line 7 regarding the FBAR form, FinCEN 114 (see item 5, below). This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country. Even if you closed the accounts during 2016, you must still “check the box” if you maintained the accounts during any part of 2016. 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 also file IRS Form 3520.
In addition to “checking the box” on IRS Form 1040, Schedule B, U.S. taxpayers must report all income (including interest, capital gains, dividends and pension distributions) realized during 2016, 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) for tax year 2016 (e.g., IRS Form 8621). If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it. You may be eligible to deduct real estate expenses and real estate taxes paid to a foreign tax authority. In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid. Even so, all foreign income should still be declared.
IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign financial assets (including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies). IRS Form 8938 is due with your annual tax return (April 18, 2017, unless you obtain an extension).
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2016 you received assets from the a foreign entity, then you may also be required to file IRS Forms 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 the foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is also due. These forms are usually due with your income tax return (IRS Form 1040, due April 18, 2017).
This year, 2017, is the first year that the deadline for the FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is the same as the deadline for submission of income tax returns (1040s), for calendar year 2016. The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, foreign financial accounts, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2016. The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products. Recent authority also extends the FBAR to on-line gambling/gaming accounts. If you participated in the IRS Offshore Voluntary Disclosure Program (OVDP), Streamlined procedures or submitted retroactive FBARs, you should ensure ongoing compliance by timely submitting the 2016 FBAR. If the accounts existed at any point during 2016, then the FBAR must be submitted by April 18, 2017. Note that the FBAR is now known as FinCEN Form 114, and must be filed electronically. This year, also for the first time, a taxpayer may obtain an automatic extension to file the FBAR. The extended due date is the same as one’s extended income tax deadline (October 15, 2017).
If you have not yet filed an application for the OVDP or submitted a Streamlined application, or if your application is pending at the IRS, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2016 tax returns and FBAR.
You may request an extension for filing your income tax return by filing IRS Form 4868. Note that this is an extension to file the tax return, not pay tax due. You still need to pay your tax liability by April 18, 2017, while you have until October 15, 2017 to file your tax return and FBAR. This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR, Form 8938, etc.
Conclusion
Please ensure that your offshore assets are tax compliant by adhering to the ongoing reporting and tax requirements. If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2016 FBAR, please feel free to contact us.
In the latest step by the IRS to address taxation issues in the digital on-line economy, the IRS has filed its first enforcement against convertible virtual currency, targeting tax abuse of “Bitcoin” transactions. On November 20, 2016, a Federal Court in California authorized the IRS to issue a “John Doe” summons to Coinbase, Inc., a web-based global digital currency wallet and platform. The IRS has in the past successfully used the John Doe summons to obtain information from financial institutions (e.g., UBS, HSBC and Cayman Islands banks) for a broad class of U.S. clients who are not individually named but who the IRS has reason to believe have utilized the financial institution to improperly evade tax. The John Doe summons seeks records from 2013 through 2015 for any Coinbase user with a US address, telephone number, e-mail domain, etc., and all records related to disbursement of funds to any user. In 2014, the IRS issued Notice 2014-21 describing how various income recognition and other US tax principles apply to virtual currency transactions. In that Notice, the IRS clarified that virtual currencies are “property” subject to income tax, capital gains tax, etc.
Omission of income from virtual currency transactions or failure to file, especially in relation to offshore transactions or use of foreign accounts, could result in criminal charges related to tax evasion, filing a false tax return and failure to file the FBAR (FinCen Form 114). Additional charges can include conspiracy to defraud the government. Even innocent or negligent non-compliance can subject a taxpayer to the assessment of tax, interest and severe civil penalties. Taxpayers have a limited time period remaining to voluntarily disclose virtual currency accounts and transactions, to correct prior non-compliance, avoid criminal prosecution and usually receive more lenient treatment than in a criminal or civil enforcement proceeding or audit.
Once the IRS obtains information on Coinbase’s users, the IRS will follow with civil tax audits, FBAR audits and criminal investigations. Other virtual currency platforms, such as Localbitcoins, Kraken and ItBit may receive similar summonses for transactions with Bitcoins and its more recent competitor Ethereum. The IRS offers opportunities to come into compliance before the IRS obtains information about unreported assets (virtual or actual) and income, including the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures for taxpayers to disclose digital currency transactions, income and accounts. A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving open tax issues. Time is of the essence to voluntarily report such information before the IRS obtains information pursuant to John Doe summonses, FATCA (the Foreign Account Tax Compliance Act), TIE (Tax Information Exchange) Agreements, etc. Anyone who has income as a result of transactions through Coinbase, Inc. or any other virtual or digital platforms, or unreported virtual or digital currency assets, should contact Rubinstein & Rubinstein, LLP immediately for a consultation.