Report on Miami FATCA Conference

On January 30 and February 1,  I chaired a FATCA conference in Miami which was put on by a company called Marcus Evans out of London which is a for profit business.  The conference was attended by a diverse group of banking officers, in-house tax counsel to large multi-national corporations, bank and financial institution compliance officers, a wide range of Information Technology people, tax managers, and tax practitioners.  There was a large group from Canada and South America. The focus of the conference was strictly on FATCA from the standpoint of complying financial institutions.  Most of the participants did not even know about and individual’s duty to file FBAR's, Foreign Asset Statements (form 8938) and there was very little talk about privacy concerns, fears about the dangers of an emerging international banking data base system, or how Canadian politicians were doing in shaking their lap dog image as pawns of the US government.

These folks were all hard-working, serious, responsible business men and women who were on their way up in their companies. They are motivated by the knowledge that they will be evaluated by their managers in terms of how quickly and effectively they can bring their companies into compliance so that they do not miss a beat on January 1, 2014,  when every foreign bank in the world (absent an IGA in place) is supposed to have a system in place to enable them to turn over the names and socials of their American depositors once they enter the  FATCA Portal to Mordor which the IRS will open up in July of 2013.

Discussion topics included, how to enlist the support of internal corporate constituencies and steakholders for the massive internal changes which companies are now working out to implement FATCA; questioning the reliability of existing data bases which companies will use to cough up the names of their Americans; what happens if the IRS is not pleased with a company’s FATCA readiness by the time the FATCA effective dates kick in; what are the FATCA reporting obligations for correspondence banks; and a major topic of conversation was the relationship between the way the FATCA statutes are supposed to work and the emerging world of intergovernmental agreements between “FATCA friendly” countries and the United States.

The overriding sense of the conference concerned how to use FATCA as a business and growth opportunity. All over the world, there is a race between mega-corporations, giant financial institutions, CPA firms and business leaders to get ready for FATCA and position themselves and their clients into the best posture possible over their competitors to ensure that FATCA spells financial success.

Many readers of this blog will be disappointed to hear this report. The people around the world who stand to profit from FATCA are not thinking much about government intrusions into the private lives of the world citizens.  That is the furthest thing from their minds.  These folks were all good students, in effect, knowing full-well that there was a new body of rules and regulations on the table which they needed to learn and master.

In the FATA compliance world, we are seeing the free enterprise/free market system at work. This is all about Adam Smith and the profit motive and how that shapes what we see in the world around us. In the business world, FATCA is all about supply and demand: supplying talented and capable experts to satisfy an enormous demand on the part of the world’s financial institutions who are determined to not be left at the station when the FATCA train starts to move this summer.

Steve@mopsicktaxlaw.com

www.Mopsicktaxlaw.com

 

The Bank Leumi Story: Another “Bait And Switch” Or Is It Good News For Some OVDI Practitioners And Taxpayers?

Last week, in a move many practitioners found shocking, the Internal Revenue Service informed selected tax attorneys that some of their clients who had been accepted into its offshore voluntary disclosure initiative with once-secret offshore accounts in Bank Leumi, have “upon further review” been disqualified from the OVDI program.  The notices may potentially affect many American taxpayers who had undisclosed accounts at Bank Leumi le-Israel Ltd., Israel’s largest bank.

On Monday March 4, 2013, Bank Leumi made an announcement which disclosed management’s concern over the expenses it will have to incur to comply with a current IRS investigation into the Bank’s practices. Presumably, that expense also contemplates a potential fine for the Bank. The Leumi matter is strikingly reminiscent of the recent Swiss bank cases which were given much publicity.

What is going on here? First, we do not know whether ALL pending, Bank of Leumi OVDI applicants who have received preliminary clearance got a letter. If not, then how many did get a letter and on what basis? Until we find out, most articles on this topic are pure speculation, including this one.  We do know that the letter is essentially a one-liner which simply says “you are disqualified from the program.” We don’t know whether those who got a disqualifying letter received it because they refused “to out the names” of their private bankers,  failed to cooperate in some other way with the investigation, or just out and out lied in their OVDI applications.  If this is the reason for the letters then there is not much else to talk about here. And before anyone concludes that the sky must be falling, remember that the Internal Revenue Manual says, the 

voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. IRM Part 99.5.11.9 (12-02-2009) Voluntary Disclosure Practice.

And further under Disqualifying Factors 9.5.11.9.5 (12-02-2009), the IRM advises that a taxpayer could be disqualified if he has “any reason to believe that the IRS has obtained information concerning [his] tax liability.” With all the publicity in and outside of Israel about FATCA and Bank Leumi itself, this factor alone could be cited by the IRS as authority for the disqualifications.  But that said, recall that UBS was in the news for suspected subornation of filing false tax returns for years while individual small time minnows with UBS accounts were being accepted by the dozens on a daily basis into the Program. One could argue that in the Leumi case, IRS CID must be on to some really big targets for investigation and apparently it is going to take some time to sort it out.  Apart from that, it is nothing short of reckless to predict that the IRS’s action last week signals a broad based criminal attack on all the Leumi minnows who might be inclined to seek the OVDI “comfort letter” by entering the program. 

We note that an OVDI voluntary discloser signs up to tell the whole truth if asked, about the conduct of any bankers who may have counseled them about how to hide their foreign bank accounts from the IRS.  At the same time, it may be safe to assume that upper IRS management believes it is unseemly at best, for the IRS to use some poor guy’s case as a stalking horse just because his name was placed on his parent's account for their convenience anticipating their senility. Arguably, in the eyes of DOJ prosecutors, tightening up the Bank Leumi project until all the criminal targets have been identified just makes things neater and easier to deal with.  There is a wide-spread, long-standing IRS enforcement policy which favors the full development of all criminal matters before most civil proceedings are allowed to proceed. This reflects the conventional wisdom that nothing ticks off a DOJ prosecutor in Washington more, than having to inherit a file for prosecution after a bunch of revenue agents and office auditors have put their fingerprints all over the file.

Remember, the Criminal Investigation Division, working closely with IRS and DOJ attorneys have been enjoying a treasure trove of juicy low-hanging fruit since OVDI came in in 2009.  The IRS doesn’t want any really bad guys connected to Leumi to slip through the cracks. That said, if your client has an unreported account at Leumi and was contemplating entering the Program, practitioners would be well-advised to not jump to the conclusion that OVDI is no longer an option. It may be a good idea for a Bank  Leumi client with FBAR disclosure issues to file for preliminary clearance anyway even in light of the recent developments.  In the “vanilla” fact patterns where experience teaches that the front line OVDI operatives are beginning to exercise some discretion and good judgment, a Bank Leumi American client contemplating a disclosure should request preliminary clearance any way to see if the IRS takes the bait. If they do, they are well on their way to laying a foundation for a “bad faith” argument against the IRS in the highly unlikely event that a taxpayer who got a disqualifying letter ends up the object of a criminal investigation.  Unless of course the file shows a pattern of lies and deception when the taxpayer first entered the program or that he refused to cooperate once it got under way.

What to do?  Do the menacing “you’re disqualified” faxes  mean that all previously undisclosed Leumi  accounts held by American citizens are now going to be assigned to a special agent for a two year criminal investigation?  Would a quiet disclosure be a good idea here to stay under the radar?  What are these people supposed to do now?

First, it is highly unlikely that a broad based criminal investigation will be commenced against those who received preliminary clearance unless they refused to cooperate with the IRS as required under the program or their application is false or fraudulent.  It certainly is clear that the IRS is unlikely to spend the resources or desire to investigate the typical case where thousands of “accidental” second and third generation Americans living in Israel had no clue about the requirement to file FBAR's.  Nor is the IRS interested for criminal purposes, in the thousands of Israelis who are recent immigrants to the United States as well as the many Israeli green card holders who are now working in the United States, but were never told they might have to file an FBAR with the US Department of Treasury to disclose their Israeli accounts.

Quiet Disclosure? If it was a bad idea before the Leumi dis-invitation OVDI mass mailing, it is probably not a good idea now. Some people will try it on their own but a practitioner licensed to practice before the IRS is well-advised to avoid any connection between his advice and a silent side door entry into compliance after the Service not only announced it doesn't like quiet disclosures but also, that they want to take a closer look at some of the Bank Leumi customers and transactions.

What Bank Leumi depositors should do?  As of this writing, it seems clear that the menacing “bait and switch” faxes to practitioners ARE NOT advising them to tell their clients to come in and get ready for a criminal investigation. CID has firm leads and targets in the Leumi investigation and the first order of business is  to explore any connection at all between a Leumi private banker under IRS scrutiny and their clients. It would be fool hardy to hit the panic button by saying the letters amount to a broad-based announcement signaling an expanded criminal investigation. The Department of Justice may need a Leumi depositor as a material witness against a Leumi private banker but there is no way CID is planning a mass prosecution of a bunch of little fish.

For those Leumi private banking clients who survive the first level of IRS scrutiny, (the preliminary clearance letter,)  who are of no interest  criminally  by the IRS  are at some point, likely to get a  a chance to show that they acted at all times upon the reasonable advice of a professional to abate any asserted FBAR penalties under the extensive and detailed FBAR Mitigation provisions of the Internal Revenue Manual, or make some other arguments in support of limited or no penalties.

Noisy Disclosure Outside The Program: Bank Leumi clients, who have still not filed, but believe that relief under OVDI was previously thought to be a good option based on all the facts and circumstances, should still consider this option.  For  those Leumi customers who are now in limbo wondering what to do if they were thinking of going into the program but are now afraid  they will be rejected, consider this scenario: if for example the facts show that a substance over form analysis leads to the conclusion that the foreign account does not really belong to the taxpayer because their name was placed on the account for testamentary planning purposes or for the convenience of their parents, FAQ 17 might provide a possible approach.  There, if no tax is due, taxpayers are advised to  prepare delinquent FBAR’s and explain with a good cover letter why they goofed up by not filing in the first place.  

If the IRS says Quiet Disclosures are bad and at the same time, announces that something is not strictly kosher at Bank Leumi, the response should not automatically be to just do nothing or try to sneak in any way through the side door, but rather prepare the requisite amount of amended returns and delinquent FBAR's and file them with a good cover letter explaining why the taxpayer finds himself in this mess in the first place.

Conclusion:  It is far from clear that the Bank Leumi’s dis-invitation Letters represent a “bait and switch” on the part of the IRS. With all the tasty and juicy low hanging fruit gathered since 2009, it is doubtful the IRS would water down it’s in terrorum message which clearly targets big fish.  It is also highly doubtful the IRS is going to dilute its message by going after some poor Chaim Yankel who just learned his name is on a bunch of his parent’s accounts.  The IRS would prefer to make a big splash by building a case against a private banker who actively suborned the filing of false tax returns by maintaining secret accounts in Israel.  The IRS also does not want to scare away the thousands of accidental Israeli-Americans living in Israel or recent immigrants to the United States from Israel.  If a practitioner is counseling a client who may be a potential candidate to make a full disclosure under OVDI despite the Leumi dis-invitation letter, some clients may be well advised to file anyway and use the opt out procedures, or in a regular audit,   argue no FBAR penalties under the Mitigation Rules. The result should be the same for “Leumi Rejects” as well as for prospective Leumi OVDI candidates whose conduct does not fit the egregious patterns of those who really need to come clean under the Program. Presumably, the Leumi Rejects will get to argue no penalties should apply under the Mitigation Rules. The same should result under a Noisy Disclosure outside the program which allows for a modified, simplified submission and hopefully the chance to meet with an agent who has the smarts and guts to say, “Wait a minute here.  One size does not fit all.”

 

Steve@mopsicktaxlaw.com

www.Mopsicktaxlaw.com

 

Living With FATCA Uncertainty: What Should A Foreign Financial Institution Do Until A Bilateral Agreement Is Signed?

I will be chairing an international conference in Miami this week on FATCA compliance. Here is an advance read on some of the issues I plan to discuss with the people who will be coming from all over the Caribbean and Latin America.

With the publication of the Final FATCA Regulations last week, we learn the next big FATCA timeline date is July 15, 2013—the date the IRS is opening its aptly called FATCA Registration Portal—the door to the Byzantine world of compliance with the myriad duties of an IRS withholding agent. This summer starts the long awaited beginning of the creation of a virtual international banking data base by which the names and account details of American depositors in foreign banks and financial institutions are automatically updated and reported to the IRS. If things work out the way the IRS counterparts in each FATCA-friendly jurisdiction hopes, that data base will also include the names and detailed account information for people who may be avoiding taxes in their own homelands once the home countries sign a FATCA bilateral agreement with the US Department of Treasury.

For the client, the foreign financial institution whose managers are wondering what to do about FATCA, the stakes are huge. With the publication of the Final Regulations and the policy statements in the preliminary texts, it is now overwhelmingly obvious that the best interests of every government whose people do business with Americans, is to save them and their financial institutions from having to maintain an "up close and personal" relationship with the hulking IRS.

In most cases, once the bilateral agreements take effect, individual FFI agreements will become superfluous as foreign banks cough up the names of their Americans to the IRS through their respective governments and existing Competent Authority offices.

Yet despite the recent Treasury announcement that 50 countries want to talk to the US about a bilateral agreement, the Treasury website which was updated last week, only shows three countries who have signed so far (Denmark, the U.K. and Mexico) and six others who have agreed to FATCA–friendly press releases.

If every foreign financial institution abroad with American customers were to sign up on July 15 for their fair share of FATCA abuse, the IRS FATCA Portal computers would pop their fuses. Even the IRS realizes it would be a daunting challenge to manage an ongoing reporting relationship with every bank in the world and that it would be a lot easier if the IRS could collect the data it wants on Americans from one source in each country as opposed to thousands of banks all over the world.

But the reality is, for most countries, this is unlikely to happen in time for the FATCA effective dates. Once they kick in, the IRS will have no choice but follow the law and start demanding a 30% haircut from all US source income flowing out of the United States, until each country signs up. Until they do, both the impending FATCA effective dates and the inaction or delays of foreign governments are in effect, leaving foreign financial institutions no choice but to enter the Portal to Mordor.

Bank and financial managers all over the world are now in a very tough spot. What to do by July 15 if their governments have yet to sign on to FATCA?

One could easily argue that whatever you think of FATCA or your position on the debate over US overreaching, if you have American clients and plan to do business with Americans in the future, the smart business decision is to enter the menacing Portal this summer.

Here’s why:
1. Simply registering as an FFI now does not irrevocably commit an institution to the full rigors of the Regulations. It is better to establish a pattern of cooperation with the IRS from the beginning. The rules on FFI withholding are likely to change in some ways, a dozen times between now and full implementation. Signing up in July is only the beginning. It is a long way off before there will be any withholding despite the well expressed intentions of the Final Regulations.
2. Each country’s FATCA dynamic is changing almost daily. It could be argued that a good defensive position is to start the registration process, if bilateral goals fall through. The name of the game is to take measures to mitigate FATCA uncertainty as we speed toward the FATCA implementation dates. The chances of a repeal of FATCA right now are next to nothing. Every modern financial institution in the world has a present duty to its shareholders and stakeholders to find out what FATCA compliance demands.
3. If there is uncertainty in a country about whether there is going to be a bilateral deal, or whether the deal can be made on time, it would not be hard to imagine that disgruntled shareholders of foreign financial institutions might bring legal action against current bank managers who sat on their hands while their government’s bilateral deal fell through and the IRS started withholding. One could easily envision a shareholder suit claiming damages in the amount of the 30% profits the IRS was taking from funds foreign financial institution shareholders thought was coming to them.
The great irony over the FATCA menace is while everyone is worrying about the details of withholding on pass thru payments and whether an individual company might somehow be considered "deemed compliant," the U.S. Treasury has pulled off something like a "bait and switch" public relations coup! Consider what has happened in the last 12 months: on the very same day the IRS announced Proposed Regulations previewing some of the most invasive, horrendous, and burdensome provisions of the Internal Revenue Code, (February 8, 2012) it also announced with great fanfare, a pledge of cooperation from the G-5 who are eager to get a piece of the action. In effect the US is saying to the world, "here is a preview of how miserable we are going to make your lives once FATCA kicks in. Want to avoid this pain? Just get your governments moving on a bilateral agreement and we will leave you alone."
   The IRS is as frightened of FATCA as we are. Top level IRS managers and worker bees are sweating out twelve to fifteen hour days, seven days a week trying to figure out how they are going to administer this thing.

For the foreign financial institutions the stakes are far too high to wait for an elected government or their own IRS bureaucracies to come to the rescue. In the Darwinian world of international finance, the survivors are going to be measured by their foresight, initiative and action well in advance of the coming new regime.

Steve@mopsicktaxlaw.com

www.Mopsicktaxlaw.com



Offshore Voluntary Disclosures Update: Where Is IRS Appeals?

<sup>As taxpayers and practitioners get ready to start a fourth year of dealing with the IRS in the area of offshore voluntary disclosures, it's fair to ask, where is IRS Appeals in all of this? For those who don't know, the IRS Appeals Division has a proud history dating back to the early 20th century as the settlement arm of the IRS compliance function.It is responsible for keeping well-over 90 % of all tax controversies from going to trial in either the U.S. Tax Court where 95% of all tax litigation takes place in this country or the various U.S. district courts in certain limited circumstances.

In a regular tax examination, if a taxpayer is unable to agree to a resolution of all the issues in an audit, the taxpayer may reach an agreement on some of the issues and elect to take the unresolved issues to an impartial IRS Appeals Officer or settlement officer. As such, the IRS representative is authorized to make an offer of settlement based on the government’s "hazards of litigation" (its chances of losing the case in court). Under existing written protocols, unresolved cases are supposed to go to Appeals because examining agents and their managers are not supposed to "settle cases" even though they do it all the time. That’s because IRS managers get more credit with their bosses for having a high "agreed case" rate. It is illegal to evaluate case managers’ performance based on revenue collected. The IRS is more focused on the number of cases closed out as "agreed," either with "no change" or a taxpayer concession on the amount of income which should have been reported or deductions taken.

Under the OVDI Frequently Asked Questions on the IRS website, the last section, "Case Resolution" which contains the so-called opt out rules (FAQ’s 49 through 53) makes a brief reference in FAQ 49 to unhappy customers having the privilege of appealing a proposed IRS penalty after the "[imposition] of all applicable penalties," but even though offshore voluntary disclosures have been in the IRS pipeline for three years now, there has been scant talk by either the IRS on its website or in public pronouncements, or in practitioner war stories on LinkedIn, about any experience so far with IRS Appeals involving voluntary disclosures.

That’s because there aren’t any OVDI cases in Appeals yet. A highly reliable source recently told me that there are presently no opt outs in Appeals and if any of them manage to work their way there, they likely will be handled as Appeals Coordinated Issues to assure consistency. An Appeals Coordinated Issue (called "ACIs") is IRS-speak for alerting all local managers to not even think about settling the case on their own because the National Office has removed all discretion from local offices on these cases. Any willingness to settle any case under OVDI will be made exclusively by National Office compliance super-managers and their staff, the highest levels the Office of Chief Counsel, and the national director of Appeals.

My source also says that unless there are unique facts, those unable to resolve their matter through the opt out procedures should not anticipate a much different experience in Appeals. He also added that an inherited account is not a unique fact.

It is suggested that the practitioner make a realistic proposal in the opt out process. There is some bad case law emerging in this area on the definition of willfulness so practitioners should be careful about what they wish for.

My source also reminds me that the Department of Justice is no longer following the UBS process of issuing John Doe summonses and waiting to see what happens. They are getting intelligence directly from many sources. Moreover, my friends in the IRS criminal investigation division are telling me they have so many leads in potential substantial criminal matters they feel like kids in a candy store.

As of this writing we are about a year away from the time when all foreign banks are supposed to cough up the names and account numbers of their American depositors under FATCA. By then it could be too late for some who may have waited too long to enter OVDI. That said, the reality is, the government is simply too busy and too preoccupied chasing a cornucopia of real criminal tax guys with offshore shenanigans. Ironically, IRS CID simply has no time to chase after almost all the people who think they are at risk for a life of ankle bracelets or real hard time. The real challenge here for people with secret offshore accounts is to explore their potential civil penalty exposure if the IRS calls first.</sup>

^{Steve@mopsicktaxlaw.com}

^{www.Mopsicktaxlaw.com}



Commissioner Shulman Retires After Five Years of Service as Commissioner

Mention retiring Commissioner of Internal Revenue Doug Shulman and some Americans abroad see red and misdirect their anger at him over FATCA and the IRS’s new focus on FBAR-only audits and enforcement. Last week he gave his goodbye speech and listed what he considers to be his accomplishments over his five year tenure. Six of seven items listed by him are soft and gooey government "management-speak"- type things like sensitivity to the work force and the techno-challenges the IRS faces, but front and center was surely the single thing Mr. Shulman wants to be remembered for: the IRS muscle flexing in the international enforcement arena.

During Mr. Shulman’s tenure, the financial world witnessed two developments: the almost complete capitulation of the Swiss banking industry to the IRS, and what has been essentially a world-wide muted objection to FATCA itself, and the fact that for the most part, the international financial community is rolling over by spending billions of dollars to make their IT systems compatible with the reporting requirements of FATCA.

For decades, IRS management has been worried about the Service’s ability to do its job efficiently if everyone was permitted to continue to file paper returns. E-filing has helped here but the IRS still has a long way to go. In this regard, the IRS was surely bluffing when FATCA came on the scene and the agency announced that every bank in the world had to become a withholding agent for the U.S. government and enter into a separate FFI Agreement with the IRS National Office by January 2013. It would be hard to imagine Congress authorizing the IRS to hire the number of people necessary to make that happen at all.  And while that date has been pushed back more than a year, the real action with FATCA is in the area of intergovernmental agreements, or IGA's. Just yesterday, the Treasury Department boasted in a press release that it was engaged with 50 separate countries to negotiate a country by country exchange of information agreement under which there would be an automatic exchange of information between the US and each country so that bureaucrats all over the world could find out which of its respective citizens might be playing fast and loose with undisclosed bank accounts and avoiding US taxes on the one hand or foreign taxes in their own respective countries.

What Mr. Shulman is likely most proud of is the fact that under his watch, the international financial community has taken a giant leap forward to establish a virtual international banking data base available to US law enforcement agencies and "FATCA Partner" countries.

Steve@mopsicktaxlaw.com

www.mopsicktaxlaw.com



Cal CPA

Mopsick Tax Law is happy to be a co-sponsor again of the

Cal CPA ABC Mixer at the Sutter Club in Sacramento. The "ABC" stands for attorneys, bankers and CPA’s. The event was so successful this past February that our good friend Dave Motes, who has organized this event for years, decided to do it twice a year. I have co-sponsored this event for a number of years and found it to be an excellent opportunity to meet new people as well as re-connect with long standing colleagues in the Sacramento community.

Also, the Cal CPA Education Foundation invited me to speak at their

annual Tax Update & Planning Conference. I will be speaking in Burbank on November 19th, and then in San Francisco on November 20th to participate in a webcast. The topic will be due diligence in the global environment and will cover FBAR compliance, form 8938, (statement of foreign financial assets) and the duty of a return preparer to inquire regarding a client’s offshore holdings.

Steve@mopsicktaxlaw.com

www.Mopsicktaxlaw.com



Published Article On TaxIndiaInternational.com

One of the most common problems we see in our practice is the plight of recent immigrants to the United States who are never told in citizenship class that the United States taxes its citizens and residents on their word-wide income and that they have to file FBAR’s and other forms to register their foreign accounts and assets with the US government. This is an issue immigrants cannot ignore. For many, it is a ticking time bomb which will go off once FATCA kicks in next year and the year after and foreign banks start to reporting their American clients to the IRS.

Please take a look at my article, "Tax Justice For Recent Immigrants To USA- What They Don't Teach In Citizenship Class: FBARS's And Foreign Assets", that was published today on TaxIndiaInternational.com.