Monday, December 30, 2013


We have spoken before about the agonizing decision many people are facing today about what to do about their secret foreign accounts.  This article applies especially to those who are getting on in years and may be inclined to just blow off foreign account/asset reporting under the Bank Secrecy Act and FATCA and let their wives and children worry about it when they are gone. Let’s say your estate is big enough to require the filing of a U.S. Estate Tax return. Although most of your assets are in U.S. real estate, stocks and other investments, you have somehow managed to tuck away a little stash in a European bank which you hoped to dip into in your golden years to enjoy some of the finer things in life.

It is clear that four years after its enactment in 2010, FATCA is getting closer  to full implementation even though it could take the IRS another five years to absorb and figure out what to do with the mega data it is about to start receiving on an ongoing basis. This will happen either directly from financial institutions unlucky enough to be based in a country which has yet to have its act together in getting an IGA (Intergovernmental Agreement) with Uncle Sam, or the lucky ones in “FATCA friendly” countries who get to  rely on their own governments to deal with the IRS to “out” their American clients.

Even the most naïve and wishful thinking people are starting to realize that doing nothing is not an option. The IRS is going to get your foreign account information sooner or later. It is already happening as Switzerland and a host of other countries are rolling over, so as not to miss out on any future business involving U.S. source income.

Just to be clear, here is what happens when you die with enough money to require the filing of an Estate Tax return: hardly anyone these days who is about to receive even a small part of a seven-figure estate is silly enough to try to file it on their own. That means you probably need both a lawyer and an accountant whose first job is to “marshal” the assets of the estate. Today, this inevitably leads to the heirs’ discovery that Dad had a secret honey pot in Switzerland.

For some, the first instinct is to try to enlist the accountant or attorney into a plan to keep Dad’s little secret and just not declare the foreign assets on the Estate Tax return. You can forget that idea. Only the most reckless and unethical practitioner would risk their right to practice before the IRS or even their personal freedom with anything that resembles a conspiracy to deceive Uncle Sam.

Why not simply not tell the estate’s attorney about the foreign assets? Another bad move. Assume the Estate Tax return is filed, audited and the IRS doesn’t find out about the foreign account. What are you going to do with the money? Try to withdraw it yourself and split up the money with your brothers and sisters? Thousands of people have already learned that banks abroad are starting to give Americans a really hard time with the simplest of transactions, such as closing foreign accounts  without some dialogue about whether any withholding is called for or whether the bank is being drawn into some unwitting plot to avoid the Bank Secrecy Act.

For some who now understand that doing nothing is not an option, all kinds of creative plans are being concocted to move in the opposite direction: have their wife and adult children agree to take further action to conceal the foreign nest egg through the use of nominees, fake trusts or corporations, or converting their cash to gold and storing it in a European vault somewhere. Here is where people start to move out of the realm of just-take-your-medicine and agree to pay a 27.5% tribute to Uncle Sam as part of the Offshore Voluntary Disclosure Program, and into the world of cases which really gets the attention of the IRS’ Criminal Investigation Division. Here the risk is a three year criminal investigation and the possibility of prosecution and/or devastating penalties plus jail time. We have written many times that in the world of taxation, the dividing line between civil penalties and criminal prosecution is one of degree. It is one thing to simply have an account in Switzerland which is just sitting there, but quite another to take affirmative steps to further conceal the foreign money through paper transactions, deceptive schemes, suborning others to take part, or doing anything at all which puts people in the position of continuing the lie and cause them to file false returns and reports in the future.

The point here is very simple. The IRS is receiving plenty of applications on behalf of decedent’s estates to enter the Offshore Voluntary Disclosure Program. There are more than a few families who are wondering what on earth Dad was thinking when he set up the secret account in the first place. There are many heirs right now who are not the least bit happy about having to engage specialists in foreign tax issues and private investigators to clean up the mess caused by someone’s incredibly bad investment strategy.

But more importantly, people who may not be around five or ten years from now when the government finds out what they had overseas should think of the position in which they are placing their loved ones because of their own unwillingness to face the reality of the post-modern digital world.

Monday, December 9, 2013


My apologies to the readers of the IRS Report Card for not writing for so long. The reality of FATCA’s upcoming start dates has finally started to sink in with Americans abroad and recent immigrants to the US.

There are so many issues on the table now both for individuals, the IRS, the Department of Treasury, and financial institutions, as well as tax practitioners, professors, and students.

For both Americans abroad and recent immigrants: Millions of people are agonizing over the question, "Should I just blow it off or do I really need to take some action?" The answer is easy: Whether you take action or not is all based on your personal tolerance level for risk and uncertainty. It is your decision to make. Many people are totally comfortable with the idea that they will never get caught violating the tax laws by not reporting foreign income and accounts or for some reason don’t care if they do get caught. This is because it is one thing for the IRS to compute a tax due and owing from a delinquent taxpayer, but the IRS is years away from routine collection in the ordinary course of delinquent taxes from Americans overseas, provided there are no periodic or regular payments like Social Security payments or pension payments leaving the US for accounts abroad.

Justifiably, some people are viewing the government in general, and Congress and the Executive Branch in particular, as essentially dysfunctional. For these folks, sleeping at night is no problem at all. "My foreign accounts are none of Uncle Sam’s business and they must have bigger fish to fry compared to my situation."

There is no "legal advice" here and I make no moral judgments, nor do I address whether the overall FATCA concept is right or wrong. Nevertheless, here is what we know for sure:

1. The purpose of FATCA is to create a virtual international banking and financial database. Whether or not you do anything at all right now will not change the fact that over the next couple of years, detailed information about your foreign account is going to the IRS either directly from a foreign bank or through an Intergovernmental Agreement ("IGA") from foreign governments to the U.S. Treasury. It will be years before the IRS fully integrates the data it will receive under the IGAs, which are in the news every day now.

The reason FATCA is gaining so much momentum with governments abroad is twofold: international financial businesses and institutions do not want to miss out on future profits arising out of business with Americans; and they certainly do not want to screw up their ability to make transfers from and between other foreign financial institutions. The serious and very real privacy issues notwithstanding, the profit motive, is what is at work here plain and simple. The IGAs allow foreign financial institutions to self-certify their compliance with KYC and AML ("Know Your Customer" and "Anti-Money Laundering") rules of which the financial industry has long been well-aware. If all they have to do is turn over the names of their American account holders to stay in the game, "No problem," even if the US government reneges on the so-called reciprocity issue.

2. As inept as the government seems, they are getting better and better at accumulating and integrating databases. Of course, it is one thing to "be in" a database; quite another for a law enforcement worker to seek your name.

3. For almost all of the taxpayers who are worried about whether they are going to jail for not disclosing foreign assets or accounts, forget about it. If you get caught, chances are overwhelmingly in favor of a civil penalty and/or criminal dollar fine only, and no jail or arrest. They may finish you off financially, but in most cases the government cannot afford to assign Assistant United States Attorneys to parade you before a jury.

4. You can be sure you can find practitioners who will tell you just to forget about the fact that you have unreported foreign assets or accounts. If you get caught, and somehow it becomes a criminal case, the government will have to prove that you acted willfully and your "reliance" defense had no credibility. If your case remains civil only, "reasonable cause" reliance on the advice of a professional is something you will have to prove.

There are still return preparers who have never heard about FBARs and form 8938 (statement of foreign assets). But at this late date, it would be foolhardy to trust any return preparer who doesn’t even ask you if you have any "foreign" accounts; even if that so-called "foreign account" is with the Banco di Roma just down the street from your apartment in Rome through which you pay your rent and deposit your paychecks.

5. You can also be sure you can find practitioners who will tell you your only choice is "to go through the Program," i.e., make a voluntary disclosure under the OVDI. Everyone’s facts are different. One size does not fit all and you may have legal basis for not signing up. I am downgrading my C- to a D+ on my IRS report card for their handling of the OVDI program. While at the agents’ working level, our experience has been overwhelmingly positive with the people who are assigned to handle our clients’ cases, the failure of upper IRS management to anticipate the case loads and Congress’ mean-spirited underfunding of the IRS is absolutely inexcusable. We have been waiting for close to two years for the assignment of an agent to review our OVDI submissions.

6. There are many people at this moment who are making egregious mistakes in an attempt to cover their tracks by going "underground," starting to do in cash what was previously done in paper; attempting to "undo" gifts or other transfers; and sadly, putting pressure on family members or friends to participate in arrangements which would never occur but for the fear of getting caught up in FATCA.

For government prosecutors, the tipping point is a question of degree: The degree to which there is a pattern of, or multiple affirmative acts of, concealment or deception. No single act is controlling. It is a facts and circumstance analysis. How long has it been going on? What does the paper trail look like? Are their unwritten "agreements" or conspiracies with others? How much money is involved? How much effort was involved and how often were affirmative acts made to keep it a secret?

Coming up for practitioners: How will the government and courts litigate refund suits for unagreed FBAR-only cases? Ever hear of the Tucker Act?

Thursday, October 31, 2013


I am pleased to republish, with the permission of Tax Analysts, this excellent letter by Richard Westin. Mr. Westin comments on the issues  taxpayers  face when complying with the complex rules covering voluntary disclosures and OVDI.

To the Editor:

For reasons of its own in June 2012, the IRS announced a much-needed set of streamlined filing procedures for non-resident U.S. taxpayers, to go into effect on September 1, 2012. The procedures apply to nonresident, non-filer taxpayers, including U.S. citizens who are dual citizens. In making the announcement, the government explained that there was a population of innocents abroad who could be relieved of past failures to file federal income tax returns or FBARs (Form TD F 90-22.1) who, "have recently become aware of their filing obligations and now seek to come into compliance with the law."

The idea is laudable because there are indeed large populations of people overseas who hold a U.S. passport but have never given serious thought to their duties to the IRS. For example, it is common for residents of the Bahamas to make the short trip to the United States to have their babies delivered. Likewise, many Mexicans hold U.S. passports because they are children of a U.S. citizen, but were born in Mexico. As is the case wherever a child is born abroad to a U.S. citizen, the parent can go to her closest American embassy or consulate to apply for a "Consular Report of Birth Abroad of a Citizen of the United States of America" (or CRBA) to document the claim to U.S. citizenship at birth. If the consulate or embassy concludes the claim is true, it will approve a "CRBA application" and the State Department will issue a CRBA (Form FS-240) in the name of the child. That clears the path to getting a U.S. passport. It's easy, so it's done often.

So far, so good. Now assume the flap over FBARs and the recent spate of Intergovernmental Agreements under FATCA sets off a storm of interest in the newspapers of Mexico or the Bahamas and suddenly a large population is tipped off to the situation.

The poorest will likely do nothing, given the complications they perceive. Some might learn of the Streamlined Program,1 others might not. Some will turn their backs on the issue and assume they are safe from the IRS. Yet others will look at the program and see if it might solve the problem they perhaps never thought they had. Now let's look at the demands, not from the formal side, but from the questionnaire the IRS demands the taxpayer fill out. This is where the major lumps in the program are.

If the taxpayer meets the tests below he can purge himself by filing three years of federal income tax returns (plus all the attachments) and six years of FBARs, but if the taxpayer did any of the following he is kicked out of the program:

  • Ever resided in the United States. The term "resided" is not defined. Stayed with your aunt in Miami for three weeks while your parents drove through the Southwestern United States? Sorry, even if you were only an infant at the time.
  • Ever file a U.S. tax return for 2009 or later. You say your scrupulous accountant daughter made you report your pension income a few years ago? Sorry, unless the foreign earned income exclusion applies, you are out. By the way, it does not apply. Check out reg. section 911(b)(1)(B)(i).
  • Owe more than $1,500 "in U.S. tax" on any of the returns you are filing now (going back three years)? You say you sold a tractor with a zero basis for $20,000 in 2010, and you are bankrupt now? Too bad. You seem like a crook to us. Same deal if your only income is from renting the house you had to move out of because you are broke.

These screens are too tight. Rather than bore the reader with tedious objections, I propose some questions:
  • Is it fair to not define residence? Administratively intelligent? Obtuse? Why would a short-term visit to the U.S. matter? Why would a long-term visit by a child matter? How about a residence for medical reasons? A honeymoon?
  • Does this punish the honest who file a U.S. return for a small amount of income (producing more than $1,500 in tax) while flinging open the door to people with the small courage required to "overlook" income so minor that any foreign accountant would find filing a U.S. return risible (and spooky) in the first place?
  • Why should the fact that you might have more than $1,500 in unpaid U.S. taxes you never even considered make you ineligible? Is this only for the poor? Will they simply not file in the first place?
                Richard Westin
                Oct. 9, 2013

Wednesday, August 21, 2013

Update on the Veterans Tax Assistance Project

Most of you will recall that I am working with a group of local tax practitioners to form a 501(c)(3) virtual, public interest law/accounting firm (I use this term loosely and cautiously) solely for the purpose of supplying pro bono professional tax services to qualified veterans(to be defined). This would include all forms of IRS and state controversy representation but not return preparation but we would assist with multiple years of failures to file.

I am happy to report that close to two dozen practitioners have responded with an interest in helping and even a willingness to be a board member.

For now, I am happy to report that with the help of WKBLAW in Sacramento, we have formation documents for the Veterans Tax Assistance Project and we are well on our way with the beginning of the preparation of the lengthy 501(c)(3) application to the IRS.

We are securing malpractice insurance for attorneys and we are looking for a volunteer to locate the same for accountants. We are also seeking a volunteer for web services. We need a state of the art website and everything that comes with it including post set-up maintenance. Our hope is to get volunteers for almost everything we do and while we will be doing some fundraising, it would be great if someone knew an enterprising IT business person who has the ability to provide us with something snappy and effective in exchange for plenty of honorable mention on almost everything we do.

Fund Raising: I have made some very preliminary inquiries for fund raising. We do not need a lot of money. Our hope is to make the Veterans Project as “virtual” an operation as possible. In addition to a web site and a dedicated phone line, and the malpractice insurance I believe our need for funds will be minimal. Ideally we may need to hire one staff person but that would be a consideration later on.

Future: I hope to have very infrequent meetings but at some time before next tax season starts we hope to have an after-hours reception/organizational meeting. As this will be a virtual “firm,” members need not be in the Sacramento area to help us and indeed, we envision members who would be willing to serve from anywhere in the world.

Providing this kind of help for veterans seems like a no-brainer for me. We can be so helpful sometimes with nothing more than a consultation or a phone call to an IRS or state office. There undoubtedly will be some matters which will require more time if not the filing and pursuit of a Tax Court matter or representation in a complex audit.

Please let us know if you can help with any of the above. 

* The flag is known as a "service flag" and is one of the most common military flags flown today at the home of a family who has another family member serving in the armed forces.

Friday, August 2, 2013

FATCA: 'Simple Premise' Gone Terribly Wrong

I am happy to repost an article by Lynne Swanson whose blog is The Maple Sandbox and Victoria Ferauge who publishes the blog, The Franco-American Flophouse. Their article, "FATCA: Simple Premise Gone Terribly Wrong" originally appeared in The Hill’s Congress Blog on July 28, 2013.

I have a deep respect for both Lynne and Victoria for their contribution and particularly their professional tone on the emotional issues which surround the FATCA debate, particularly the highly charged issue regarding the possibility of renouncing US citizenship, in part as fallout from FATCA.

I also highly commend to everyone, particularly our dear friends to the north, Victoria’s piece on the Franco American Flophouse published July 25, 2013. "On Being An American." I trashed a draft blog of my own "on being an American" which I was struggling with before the Fourth of July. I was searching for words to express the feeling Victoria captured so eloquently below which I am sure has resonated with Americans abroad.

Here is what Victoria said,

I had an epiphany the other day. I may have spent most of my adult life outside the U.S. but I was born and raised here in Seattle. No one can take away the first 20 years or so of my life. I am an American and will always be one even if I decide to forgo the pretty blue passport. Cutting ties by relinquishing/renouncing will mean cutting my ties to a political community but here's the kicker: America is so much more than that. There is a nation beyond the government and perhaps it's time to start putting the people above the state.  Yes, if I renounce I would no longer be an American citizen, but I would still be an American by culture, blood, language, and inclination. I am part of the collective memory of this country and no one on this planet (not the US Congress or the President or the home landers) can take that away from me. 

There is a 500 pound gorilla in the room which has lost the peoples’ focus in this age of surveillance and enhanced security. As Peggy Noonan noted in the Wall Street Journal on June 14, 2013: "

The price [of that enhanced security] is "a now formal and agreed-upon acceptance of the end of the last vestiges of Americans’ sense of individual distance and privacy from the government."   

American hegemony is not the issue and the government really isn’t smart enough for us to consider this mess anything close to a conspiracy.

To read the "FATCA: ‘Simple premise’ gone terribly wrong" article published in The Hill’s Congress Blog, please go to: .

Friday, July 26, 2013

Update On Current Offshore Voluntary Disclosure Practice: IRS Report Card: C-

It should be obvious to practitioners and taxpayers alike that the IRS offshore voluntary disclosure program first announced in 2009, is not for everyone. It is expensive, time consuming and sometimes nerve-wracking. But for those taxpayers and practitioners who still consider it an option, here are some miscellaneous comments and observations.

Even without the program, in this area of law enforcement one thing is pretty clear: for criminal purposes, the IRS is so overwhelmed and delighted with all the low hanging fruit it can choose from, CID and the U.S. Department of Justice have been very picky about choosing only cases with very egregious facts to make sure every prosecution is a "slam dunk" e.g., a very high probability of conviction. For CID to work an offshore case these days the conduct has to be pretty bad and almost always disclose overt acts to conceal or mislead the government about foreign assets and accounts.

How much risk is the client willing to take?At the outset, a taxpayer with offshore compliance issues will make the decision to enter the program based in part on her tolerance for risk and uncertainty. Clearly, with its promise of no criminal investigation or prosecution, no civil fraud penalty, "only" an eight year look back period, the ability to predict the exact amount of the "in lieu of" penalty and the 20% accuracy penalty, the IRS Program provides the most amount of certainty and predictability. For many, the certainty of knowing in advance exactly what the IRS is likely to do is worth paying a 27.5% tribute and the reward of being able to sleep at night and plan financially for the future.
At the opposite end of the spectrum, a very large group of "catch-me-if-you-can," "what,-me-worry?" taxpayers (and a fair amount of tax lawyers at home and abroad) are simply willing to oll the dice. This group believes the odds of the IRS finding out about their offshore shenanigans is worth the risk. For them, a good night’s sleep has never been a problem. This view persists even though it is common knowledge that once FATCA really kicks in, (it will probably take another five years) the IRS is going to start receiving the names and Socials of offshore depositors automatically through the virtual international banking data base now in its formative stages.

But once a decision has been made to apply to the Program, there are problems for the taxpayer and practitioners. We get a few days’ turn around for our requests for Preliminary Clearance and liberally granted extensions to file the complete package. That said, once that package is fully submitted, there can be a long wait before an agent is assigned to actually work the case, request additional information, and prepare the final closing agreement setting forth the terms of the settlement and amount of the Monster Penalty.

IRS gets a barely passing grade:The current OVDI program was a great idea when it was first announced in 2009 because it brought forth thousands of people who were gladly willing to pay a then, 20% penalty on the value of the assets, and almost a guarantee of no civil fraud penalty. Those folks were happy to get away with clearly criminal conduct at whatever the cost.
The problem in 2013 is that the process is bogged down with so many applicants and a lack of IRS staffing.

In the beginning our office was serving clients who really needed to do something fast because in some cases, had the IRS come to them first, they could have easily been the subject of a two to three year criminal investigation followed by a negotiated plea bargain with the possibility of sometime "at camp."

Today, many of the cases do not show the overt criminal conduct of concealed assets and income. Often, the challenge now is to analyze the facts sufficiently to see if there is any way to avoid the onerous, expensive and time consuming OVDI process while at the same time exercise due diligence and follow all the rules under Circular 230 and other standards by which tax practitioners are measured.

Handling of current OVDI cases by IRS:

These cases are assigned all over the country without regard to the practitioner’s place of business but that’s ok because they do not want to meet with you if they can help it.

Exercise of discretion by first line agents:
The IRS FAQ’s and the agents assigned make it clear that they are not permitted to deviate from the one-size-fits-all approach of the OVDI procedures. Any wrinkles that arise in the processing of a case are supposed to be worked out after invoking the "opt out procedures" which clients and practitioners are loathe to invoke. After waiting for months to get to the front of the line, many people do not want to invest another six months of attorney’s fees and delay to test the waters. Next it is widely known that under opt out, both the IRS and the practitioner are swimming in uncharted waters. The IRS has intimated that they could "throw the book" at people who dare to knock this chip off its shoulder but so far, there is no anecdotal evidence that they have carried out that threat.
Interestingly, I learned from an IRS manager in Mississippi that whether or not a new and different opt out agent is assigned depends in part on the discretion of the local manager who may elect to have the original agent assigned work the opt out.

Minority discounts on valuations of fractional interests of foreign financial assets:

In one scenario which is not uncommon, the taxpayer owns a fractional interest in foreign real estate and the issue is whether the agent is willing to allow a minority interest or lack of marketability discount for purposes of the penalty base. At 27.5%, the consequences can be expressed in six figures. We believe the initially assigned agent should have the discretion to allow the discount and that we should not have to opt out to get it. The taxpayer is paying the 27.5% tribute on the value of the assets he owns. To compute the penalty on a full one fourth of a piece of real estate the client owns with his three brothers is overreaching because his share is not worth that much. If the original agent without any opt out is comfortable allowing the client to submit a proper real estate appraisal for the entire property, it should not take another level of review (opt out) to determine its correct value considering a proper minority discount.

Owners in name only:

Another issue, common with many applicants from India and the subcontinent is where the client’s family back home put their names on accounts, sometimes not even advising the son or daughter that they have done so. In India, because of the difficulty of navigating their version of probate, a common practice is for the parents, early on, to put their childrens’ names on all their accounts including their business accounts to avoid Indian probate.
We recently had a very capable international agent in San Francisco where we were able to prove with excruciating detail, that despite the US kids’ obligation to file an FBAR under such circumstances, they were even less than mere nominees and the agent allowed us to fully exclude those accounts from the penalty base. In effect in that case, we were able to have the OVDI agent apply the mitigation provisions of the FBAR Manual, something presumably reserved for strictly opt out cases.

The choice to enter the program must be made by the client and we often hear from potential clients that all they want to do is to just start filing prospectively and take their chances simply because they cannot afford the cost and time of the lengthy OVDI process. It is pretty clear that practitioners cannot simply advise a client to just go ahead and do that. That said, those that choose to disclose their off shore shenanigans by simply starting to file are relying on their perceived risk of criminal prosecution. They figure if the IRS had the choice to go criminally on someone who just started filing vs. someone who continues to do nothing, they will probably choose the latter.

With last week’s announcement of a six month extension of time for compliance with some of the FATCA Regs., one can easily imagine that the automatic exchange of information agreements the Treasury is currently negotiating with dozens of countries all over the world will be further delayed much beyond the announced implementation dates. Nevertheless, the FATCA train has already left the station. Banks and foreign financial institutions are spending billions of dollars to get FATCA Friendly.

FATCA is not going to happen on schedule but it is coming. Clients have to make up their minds. It’s always better to voluntarily disclose compliance irregularities before the IRS comes knocking. The trick is exactly how to do it.

While FATCA creeps toward the starting gate, there appears to be scant progress on two fronts sorely in need of attention: (1) the plight of Americans abroad whose local bank is no more a "foreign financial institution" to them than the corner McDonalds is an English fish and chips joint to us, and (2) the hapless recent immigrant who was never told in citizenship class that as American taxpayers, they now had to register their worldwide assets with Uncle Sam in addition to report the income. The collateral damage of these two unintended FATCA consequences, particularly the former, account for the bulk of the internet chatter on this example of the gross tax injustice FATCA on Americans abroad.

The problem seems to be that of the five to seven million estimated Americans living abroad, few seem to vote. Add that to a Congress which for all practical purposes is frozen in place with no effective direction and leadership and the result is a broad based sense of frustration and disdain. Unfortunately there appears to be little hope any time soon of any attention to this problem.

Next blog: FATCA Reform or Repeal: Wishful Thinking or a Likely Prospect.

Tuesday, July 16, 2013

Renewing Your US Passport? BEWARE — – State Department Turns Over Your Social Security Number & Location to the IRS

For this post, I am happy to republish a recent blog by Virginia La Torre Jeker, J.D. ( my able colleague on the ACA Professional Tax Advisory Council who writes about increased efforts on the part of the State Department to check with the IRS before they issue a passport.

Noncompliant US taxpayers living abroad are getting nervous. If an informant seeking a hefty IRS reward, or FATCA doesn’t rat them out first, then the State Department will. This can happen when the noncompliant taxpayer renews his US passport.

Traditionally, the functions of the US Treasury and the Department of State were completely separate. However, we are seeing a continued erosion of this distinction as troubling economic times continue. The US passport renewal form mandates that the applicant supply his Social Security Number (SSN) if he has one.

This is authorized by Internal Revenue Code Section 6039E, enacted in 1986. The legislative history to that section makes clear that over 25 years ago Congress was aware that US persons residing overseas were not filing US tax returns even though required to do so. Congress intended to increase tax compliance of US citizens living outside the United States through its enactment of this tax provision. The IRS has continued to drag its feet in promulgating Treasury Regulations that can offer more guidance. Recently, the IRS has renewed its interest in the topic. In January of 2012, the IRS withdrew old proposed Regulations that had been issued in 1992 and issued new ones dated January 26, 2012. We are still waiting for these Regulations to be finalized over one year later!

Regardless of how slow the IRS is moving on the Regulations project, make no mistake about it, the statutory provision is being enforced. A $500 penalty applies for failure of a passport applicant to provide the SSN, unless reasonable cause can be established. In addition, the State Department MUST turn over to the IRS some damning information from the application – the statute mandates that it must provide your SSN and foreign residence information to the Department of Treasury. If you refuse to submit the SSN, the State Department MUST still provide your identifying information to the IRS indicating you have refused to give the information. So, you lose either way - whether you reveal your SSN on the passport form or refuse to do so, the IRS will be made aware of you and can commence its investigation into your tax compliance history.

SOLUTION? Get into tax compliance now – at least before you need to renew your US passport.

Delinquent taxpayers should seek qualified tax advice from a US taxation attorney and discuss the risks and tax issues associated with the various options to remedy their situation. They should learn about the IRS Voluntary Disclosure programs and working under attorney-client privilege (which is not available with an accountant) and then arrive at the best solution given their particular facts.

Various options are available to remedy the situation. For example, some taxpayers decide to file the late tax returns and / or FBARs by a so-called “quiet filing” or “quiet disclosure”. This choice carries its own set of risks. Other taxpayers decide to enter a Voluntary Disclosure program. Other taxpayers may qualify for a “Streamlined” correction of delinquent filings. All of the possible options should be thoroughly examined with a US tax attorney.

by Virginia La Torre Jeker J.D.,. Find out more about Virginia La Torre Jeker J.D., here.

Wednesday, June 12, 2013

IRS, FATCA, NSA, And The International Banking Conspiracy

IRS? CIA? FBI? Most kids in school know what these acronyms mean. But NSA? What’s that? National Security Agency? What do they do? Although it has been an 800 pound gorilla in the room for quite some time, it is only now, with the recent disclosure and intimation of extensive domestic spying on Americans, that the pundits are now talking about yet another vast government institution which inspires fear and fantasies about Big Brother.

Washington assures us we have no reason to worry because all NSA cares about is keeping track of the mere fact that your computer has received an e mail from Kandahar. It doesn’t matter what it says, as long as the government knows you got it. Also if your search engine happened to land on a web site for a few seconds which offers recipes on how to blow people up with a few ingredients from under the kitchen sink or the garage, we need to know about that too. No one in our government is thuggish enough to presume to read the content of a private e mail message but it’s good to know at least that a few people in the States have pen pals in the quaint, ethnic hamlets in the Swat Valley in Northern Pakistan.

The timing of this latest bombshell could not be worse for Big Government. Just about the time the NSA Scandal is about to gather a real good head of steam, the IRS is going to be back on the front pages yet again, with the opening in July of the much anticipated IRS FATCA PORTAL TO MORDOR.

Finally, after all the talk, the world’s financial institutions are going to get a chance to call the U.S. Government’s bluff! This July, foreign financial institutions have the opportunity to be on the very first IRS published list of companies who are eager "to out" their American depositors, report their names to the IRS and become a full-fledged withholding agent for Uncle Sam. But what if nobody signs up?! What if a vast conspiracy of international foreign bankers agrees to humiliate the United States and ignore the IRS Portal to let them know what they really think about FATCA?

While we are on the topic of the Fantasy World of International Banking, I’ll bet the FATCA Unfriendly countries have already considered how they might use CHIPS to thwart FATCA. According to Wikipedia, The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value banking transactions in the United States, settling well over one trillion dollars a day in around 250,000 interbank payments. Together with the Fedwire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value domestic and international US dollar payments (where it has a market share of around 96%). CHIPS transfers are governed by Article 4A of Uniform Commercial Code. Since FATCA in its simplest terms is about tracking the movement of US Source Income, the FATCA Unfriendlies must surely be way ahead of the game in planning to blow the fuses at the Portal come next month.

Only the largest banks dealing in U.S. dollars participate in CHIPS; about 70% of these are non-U.S. banks. What a chance to stop FATCA in its tracks even before it gets started! Why don’t all the foreign banks which use CHIPS and Fedwire simply conspire to ignore the FATCA Portal next month? That would send a clear message to the American hegemonists and let them know that FATCA is the last straw and the last time America is going to get away with its international bullying campaign.

Las Vegas odds makers aren’t getting a lot of calls for this one but I hear the smart money is on massive compliance. What CEO of a foreign mega bank is going to want to explain to his shareholders why he sat on his hands while competitors had their FATCA applications ready at the stroke of midnight to leap through the Portal and embrace the world of Twenty First Century shared virtual international banking data bases?

Although the FATCA effective date of January 1, 2014, has been front page news in the financial sector and tax blogs for two years, the opening of the Portal this July and the publication of the FATCA Friendly FFI list this December are certain to elevate FATCA to the front page of every paper as well as the nightly news. Lead line: "IRS takes the first steps towards the creation of a virtual international banking data base with automatic exchanges of information between countries. Every foreign financial institution on the planet is to begin its first Big Data sweep of its customer data bases to hunt down suspected Americans."

Under FATCA, if a foreign bank wants to continue to do business with American firms and customers, after January 1, 2014, it must prove to the satisfaction of the IRS that it has in place a robust Know Your Customer and Anti-Money Laundering regime, and that each bank has a good audit trail documenting every effort to trace down every lead, or "indicia of a U.S. person," which might indicate there is a secret (or even "accidental") American in their midst. If they do not leap through the menacing Portal, and the IRS finds out they have been secretly harboring Americans and allowing them to engage in offshore banking without filing an annual FBAR, they will be effectively shunned by the rest of the international banking community and quarantined in a pen under a sign which says: "30% PENALTY BOX! NOT FATCA FRIENDLY!!"

This next flair up of vitriol will not be lacking in entertainment value as conspiracy theorists detail exactly how Lois Lerner of the IRS Exempt Organization Division in the IRS National Office was able to secretly feed the names of every Patriot group to her extensive contacts at NSA just to make sure they are not missing anything.

While they are at it, this might be a good time to do some more digging about the Trilateral Commission and connect those dots to NSA and the IRS through FATCA.

We have noticed under the Voluntary Disclosure procedures that it is suddenly taking 72 hours to get the routine pre-submission clearance from CID to proceed with the submission of the formal OVDI package. From 2009 until very recently, it only took 24 hours to get a fax back from CID saying that our clients were good to go. Surely this is proof of the fact that CID must now be running our client’s Socials through NSA in addition to passing them through the IRS’s super computers. What other explanation could there be for this recent obvious special targeting of certain American citizens?

It should be an interesting summer.

Thursday, May 23, 2013

The IRS Tea Party Scandal

The fallout from the IRS/Tea Party Scandal will be felt for a long time. The damage done to the IRS as an institution once revered as probably the best tax collector in the world, is only part of this disaster. The real fallout will be felt for years to come, all over the world when American taxpayers at home and abroad ask themselves each time they fill out a tax return, "Why should I file an honest tax return when the tax collector itself cannot be trusted to cut square corners with its own 'customers',?" (the in vogue management-speak moniker for the way the IRS refers to the people over whom it exercises its police enforcement authority).

The IRS mission statement says its job is to "provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all." Really? It sure doesn’t look that way.

One could easily argue that the reason for the extra careful look at applicants seeking the holy grail of tax exemption is simply because the tax man needs to be absolutely sure that an organization meets the strict standards set out in the regulations. In this case, applicants are required to prove to the IRS that its purpose and function are indeed to serve the community as a social welfare organization. The general rule of taxation assumes an organization in the business of collecting cash is doing so to promote a profit motive. As such, it is only fair that a portion of those profits be paid over to the sovereign so it can provide the people with services and protection we have come to expect in a civilized society. The theory behind tax exemption, the exception to the general rule, is that this special privilege is only to be allowed upon a detailed showing of its bona fides and assurances that money and self-enrichment are not the primary reason for its existence. Therefore, it follows that the government has a right to ask the applicant to explain exactly why and how it fits within the detailed regulations.

This distinction between the general rule of taxation and the exception is totally lost on those people who are skeptical of the tax man’s motives in the first place and see this fiasco as just another example of his true motive when it comes to who is selected for audit, whether a proposed business deal should be granted a favorable private letter ruling, or whether the IRS is going to be easy or reasonable to deal with in an audit or Tax Court case. Why bother filing an honest tax return now when it is clear that the once-respected IRS is as stupid and lacking in good judgment as government can be at its very worst? This view is foisted not only on the front line field agent but all the way to the top of the organization including the Commissioner and his vaunted legal counsel.

The IRS’s leadership failure has not only damaged the agency’s reputation but also the very cornerstone of our voluntary compliance system: allowing people to self-assess their tax liability works because in theory at least, in this age of enlightenment, a well-educated and informed citizenry can be counted on for its honesty to correctly report its income and deductions. In this land of limited government and Jeffersonian respect for the rights and privacy of the individual, this model works only when the government is perceived as worthy of its citizens’ trust. For those who have always thought the government in general, and the IRS in particular, are not to be trusted, the Tea Party Scandal has given them proof positive that the IRS and the U.S. government are the enemies of the people.

The examples of governmental mismanagement here are too numerous to list in this blog but the most glaring perhaps is the failure to anticipate and deal with the public’s perception of the Tea Party’s ordeal as politically motivated. In my 30 years of IRS experience in both the National Office and the field, politics and religion were never talked about and were never part of the enforcement mentality. There was also an unspoken recognition of the fact that nothing is secret inside the IRS.  Any conspiracy to do anything at all untoward or contrary to the sacred Internal Revenue Manual was not only wrong but nearly impossible to pull off because of the wide spread culture of "dropping a dime" on your co-workers if it deals with something that management might want to know about. The Cincinnati check lists and fact probes were not dreamed up by the local staff. They would have to have been approved, if not drafted, by IRS Counsel in Washington. The aging reports of the caseloads of the Cincinnati determination group were duly reported on up the line. If it is true that the Commissioner knew about this disaster a year ago, what took so long do the right thing?

Finally, the "tea pot" scandal is a punch below the belt to all the tax practitioners who have been doing the IRS’s bidding by telling their clients to trust the IRS and not be fearful of honestly disclosing their tax matters. People today are going to find it easy to simply ask, "Why should I?"

Those who see the scandal as justification for continued or future noncompliance are deluding themselves. The IRS is likely to circle the wagons, wait for this to blow over and get back to business as usual. Those with cases currently before the IRS should expect nothing at all in terms of the IRS using the scandal as a chance to curry favor with the public by cutting a better deal in an audit or collection matter than they would have absent this fiasco. That is not going to happen.

Nor is the scandal likely to advance the cause of flat tax, no tax, or tax reform. Whatever system we have, there will always be an IRS to run it and enforce the laws. Unfortunately, this scandal is just another example of bad government. It is the result of leadership asleep at the switch, a failure to pay attention to facts which should have been clearly visible to everyone.

Monday, March 18, 2013

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.

Wednesday, March 13, 2013

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 (12-02-2009) Voluntary Disclosure Practice.

And further under Disqualifying Factors (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.”