India has become one of the latest countries to sign on to the Foreign Account Tax Compliance Act (FATCA) and report data from Indian financial institutions to the IRS. FATCA was passed by the US Congress in 2010. Over one hundred foreign countries have agreed to participate, including former “tax havens” such as Cayman, Liechtenstein and Switzerland. The agreement by so many foreign countries to share information with the IRS represents yet another example of the elimination of foreign bank secrecy.
Continue Reading
No Hiding Behind Fifth Amendment if the IRS Wants Your Foreign Bank Records
Everyone has heard of “taking the fifth” in order to avoid making self-incriminating statements. However, there are exceptions to the Fifth Amendment right, and these exceptions require a person to provide self-incriminating bank documents to the IRS. For example, if a US taxpayer is under IRS audit for not reporting foreign bank accounts, and the IRS requests or subpoenas the foreign bank statements, “taking the fifth” would not be allowed. The taxpayer is required to hand the incriminating bank statements over to the IRS. The statements would then be used by IRS prosecutors to build a case against the taxpayer for tax fraud.
Continue Reading
Foreign Accounts: the Best Way Toward US Tax Compliance, and Assessing Eligibility for the Streamlined Disclosure Program
Many people with offshore financial accounts want to become US tax compliant, but they don’t know the best way forward. A quick Internet search reveals information on filing FBAR forms, making a voluntary disclosure of the accounts to the IRS, or a “streamlined disclosure”. There is a lot of information on the Internet and in the media, much of it frightening, including the end of bank secrecy, banks telling the IRS about American clients, and criminal prosecution of American taxpayers with undeclared foreign assets. People want to bring their foreign assets into IRS compliance, but the choices to do so are daunting and unclear. The best path forward to tax compliance will depend on the background facts.
Continue Reading
Ongoing U.S. Tax Compliance for Offshore Accounts
Whether you have been properly reporting your foreign assets to the IRS regularly, or have entered the IRS Offshore Voluntary Disclosure Program (OVDP) and/or submitted FBARs for past years in order to make your foreign assets tax compliant, you must ensure ongoing tax compliance. With the April 15 income tax deadline just around the corner, we offer the following primer on ongoing tax compliance for offshore accounts.
1. “Check the Box” on IRS Form 1040, Schedule B
If you maintained a foreign financial account at any time during 2014, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7. This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, a financial account in a foreign country. Even if you closed the account during 2014, you must still “check the box” if you maintained the account during any part of 2014. If you received a distribution from, or were the grantor of, or a transferror to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file IRS Form 3520/3520A.
2. Report Foreign Income
In addition to “checking the box” on IRS Form 1040, beneficial owners of a foreign account must report all income (including interest, capital gains and dividends) realized during 2014 in the foreign account, on IRS Form 1040. If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies) for tax year 2014. If you received a rental income from foreign real estate, you must declare it. You may be eligible to deduct real estate expenses and real estate taxes. In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid. Even so, all foreign income should be declared.
3. IRS Form 8938
IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign assets (including interests in offshore trusts and corporations, bonds, mutual funds, annuity and insurance policies). IRS Form 8938 is due with your annual tax return (usually April 15, unless you obtain an extension). Our prior guidance on Form 8938 may be found here.
4. Additional Forms for Entities (Foreign Trusts, Corporations, etc.)
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2014 you received assets from such a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A. If you had an interest in a foreign corporation that is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is due. These forms are usually due with your income tax return (IRS Form 1040, due April 15, 2015).
5. The FBAR – due June 30, 2015
The FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), must be filed by June 30, 2015 for calendar year 2014. The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, any foreign financial account, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2014. If you had a foreign account at any point during 2014, then the FBAR must be submitted by June 30, 2015. Thus, even if you closed the account sometime during 2014, you must still file an FBAR. The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products. Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically. There are no extensions for the FBAR, even if you obtain an extension to file your annual income tax returns (e.g. Form 1040). Our prior FBAR guidance may be found here.
Conclusion
Whether your foreign assets have always been in U.S. tax compliance, or whether the OVDP and/or submission of retroactive FBARs allowed you to bring your foreign assets into tax compliance, you must continue to be tax compliant going forward. Please ensure that your offshore assets continue to remain tax compliant by adhering to the ongoing reporting and tax requirements.
If you have any questions or would like our assistance in preparing the 2014 FBAR, please contact us.
April 15, 2015 Income Tax Deadline also Includes Foreign Assets, Offshore Trusts, and Income
As we approach the April 15, 2015 deadline for submission of income tax returns to the IRS, readers should be reminded that the U.S. Internal Revenue Code taxes world-wide income. Thus, if you are a U.S. taxpayer and you have income from foreign sources, for example: interest earned in a foreign bank account, foreign stock dividends, interest on foreign bonds, rents from foreign real estate, even income from foreign retirement plans, offshore trusts, etc., you must declare this income to the IRS.
In addition, if you have “a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country”, then you must answer the questions on IRS Form 1040, Schedule B, Part III. These questions also refer you to the FBAR Form, Report of Foreign Bank and Financial Accounts, FinCEN Form 114. The FBAR for 2014 is due June 30, 2015.
In addition, IRS Form 8938, Statement of Specified Foreign Financial Assets, is due with income tax returns by April 15, 2015. Form 8938 is due even if the same foreign assets are reported on different IRS forms, such as Form 3520 for foreign trusts, Form 5471 for foreign corporations, and the FBAR form.
The following are examples of foreign assets that are subject to reporting on Form 8938:
- foreign bank accounts;
- foreign brokerage and securities accounts;
- stock of foreign corporations and interests in foreign LLCs and partnerships;
- interests in a foreign entity such as a trust or foundation;
- ownership of foreign financial instruments, such as bonds and promissory notes;
- ownership of foreign investment instruments and contracts issued by a foreign entity, including foreign annuity policies and insurance policies;
- interests in a foreign investment fund, hedge fund, mutual fund and private equity fund.
The Foreign Account Tax Compliance Act (FATCA), passed by Congress in 2010, is already in effect between the U.S. and many countries, and will soon come into effect world-wide. Under FATCA, foreign financial institutions (FFIs) will soon begin to report to the IRS regarding US owners of foreign assets. If the IRS has obtained information about foreign assets, and a taxpayer hasn’t filed the 8938 form reporting those assets, this would likely trigger an audit and penalties. It is imperative to file Form 8938 before the IRS first learns of the asset from an FFI.
We can assist in determining whether you are subject to Form 8938, and can answer your questions regarding US tax compliance for foreign assets. Contact us for a confidential consultation.
For our prior guidance on IRS Form 8938, please read our article here.
For a helpful comparison between Form 8938 and the FBAR, please click here.
Learn about Voluntary Disclosures of Foreign Accounts and Assets from an International Tax Lawyer
Asher Rubinstein, an international tax lawyer, will be a featured speaker at a Bloomberg webinar on March 18, 2015 titled, “Offshore Voluntary Disclosure: A Brief Guide to the Various IRS Programs and Other Ways of Becoming (and Remaining) Tax Compliant”.
This webinar will begin with a discussion of the recently revised Offshore Voluntary Disclosure Program (the “2014 OVDP”) as well as the new Streamlined Offshore Procedures Programs, the Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures. In addition, the webinar will discuss other methods sometimes used by Taxpayers to become tax compliant (and the viability of these methods), such as Quiet Disclosure, Prospective Compliance and Expatriation. The webinar will also discuss several hypothetical fact patterns dealing with several areas of law that often present practitioners with uncertainty, such as how to report Foreign Retirement Accounts.
If you are interested in tuning in to this webinar, please contact us for a discount code.
Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, by Asher Rubinstein, published in Tax Notes International
Asher Rubinstein’s article, Israel Is Becoming the IRS’ Strictest Enforcer of FATCA, has been published in Tax Notes International, Volume 75, Number 6 (August 11, 2014).
Please click here for a PDF of the article.
With Israeli Bank Accounts Under IRS Scrutiny, Israel is Becoming the IRS’ Most Severe Enforcer of FATCA
In recent years, there has been increasing cooperation between the taxation authorities of many governments. For example, when Germany purchased bank account information from bank employee “whistle blowers”, Germany shared this information with other European and North American governments, which resulted in tax investigations of people in various countries. The Foreign Account Tax Compliance Act (“FATCA”), passed by the U.S. Congress in 2010 and coming into effect this year, provides for foreign governments and foreign financial institutions to share information with the IRS regarding U.S. taxpayers with accounts in foreign countries. Dozens of foreign countries and thousands of foreign banks have signed on to FATCA. According to one recent report, a staggering 77,000 foreign financial institutions have agreed to cooperate and share information with the IRS, under FATCA. The reach of the IRS is now truly global creating a challenge for a foreign asset attorney.
On May 1, 2014, Israel announced that it had reached a FATCA agreement with the U.S. The agreement is a “Model 1” agreement, by which Israeli banks will provide the required information to the Israeli government, which in turn will provide it to the U.S. government. The FATCA agreement is reciprocal, meaning that the U.S. can report to Israel regarding Israeli owned U.S. accounts.
Israel’s eagerness to accede to FATCA was apparent long before the May 1 official announcement. In 2012, the Association of Banks in Israel urged Israel’s central bank, the Bank of Israel, to ask the Israeli government to reach a FATCA agreement with the U.S. Earlier in 2014, even before the signing of the FATCA agreement with the U.S., the Bank of Israel ordered Israeli financial institutions to begin to implement FATCA procedures, including appointing an officer to oversee FATCA compliance, identify U.S. customers, make U.S. customers sign IRS declarations (such as IRS Form W-9) and expel any clients unwilling to do so. While some foreign governments faced criticism for “caving in to” U.S. pressures to sign FATCA, Israel appears to have needed very little persuasion; in fact, Israel seems to have backed FATCA, and the reach of the IRS into Israeli banks, willingly and eagerly.
Further, Israel appears to be unique among countries in its vigilance to uphold and enforce FATCA within its own borders. The Israeli Ministry of Finance has drafted proposed regulations which would impose criminal penalties upon Israeli financial institutions (including banks, brokerage houses and insurance companies) that do not comply with their FATCA reporting obligations. Individual employees at these financial institutions who knowingly assist clients in avoiding FATCA disclosures could face jail sentences as severe as seven years.
It should be noted that of all the foreign “facilitators” charged criminally by the U.S. Department of Justice (i.e., the foreign bankers, lawyers and other professionals who assisted U.S. taxpayers to commit U.S. tax fraud via “secret” accounts), facilitators from Switzerland comprise the largest group, followed next by Israeli bankers. With Israel’s eagerness to criminally enforce FATCA under Israeli law, it appears to some that Israel may be overcompensating to now maintain a clean banking image.
While Israel has long been known as a first world country for many industries including science and technology, Israel’s status as a “tax haven” was lesser known, but still real. As Haaretz reported, seemingly in opposition to Israel’s embracement of U.S. law:
“Israeli banks are subject to laws in Israel, and not to U.S. laws such as FATCA. Until now, Israeli banks were obliged to protect their customers’ privacy and were forbidden from providing information on account holders to any parties unless Israeli regulators explicitly stated otherwise.” (Haaretz, March 19, 2014).
While Israel’s banking privacy regime was not as well-known as that of Switzerland, Israeli banks have long been utilized by U.S. taxpayers who have not reported their accounts, nor the income earned in the accounts, to the IRS. As a result, within the last few years, Israeli banks have joined Swiss banks under the scrutiny of the U.S. Department of Justice (DOJ) and the IRS for facilitating U.S. tax fraud. The Swiss branches of Bank Leumi, HaPoalim and Mizrachi Tefahot have been the targets of DOJ criminal investigations, along with major Swiss banks such as Credit Suisse and Julius Baer. Although these three Israeli banks have been publicly named as being the targets of criminal tax investigations, it is likely that many other Israeli banks are also being investigated for offering accounts that allowed U.S. taxpayers to escape taxation.
Israel’s recent willingness to implement FATCA and criminalize FATCA non-compliance as a matter of Israeli internal law, comes at the same time as Israeli banks and bankers are increasingly under the spotlight for aiding U.S. tax fraud. While Israel announced its FATCA agreement with the U.S. on May 1, one day earlier, on April 30, 2014, Israeli banker Shokrollah Baravarian, of Beverly Hills, California, was criminally charged with assisting his U.S. clients with committing U.S. tax fraud, including utilizing accounts in Israel and the Cayman Islands, and also through the use of offshore entities in jurisdictions such as Nevis and the British Virgin Islands. Baravarian was a senior vice president at Mizrachi Tefahot.
In 2013, multiple U.S. taxpayers with undisclosed foreign accounts in Israel and Israeli banks with branches elsewhere were prosecuted by the DOJ, among them: David Raminfard (who failed to disclose his Israeli account, along with a Turks & Caicos entity, and accessed his funds via “back to back” loans); Aaron Cohen (accounts in Israel and Cayman, used “back to back” loans); Moshe Handelsman (account in Israel), and Alexei Lazlovsky (account at the Luxembourg branch of an Israeli bank). In addition, in 2013, David Kalai and Nadav Kalai, two tax preparers in the U.S. with Israeli clients, were prosecuted for facilitating tax fraud through the use of undeclared accounts at Israeli banks, including Israeli banks with branches in Luxembourg. Israeli accounts appear to be second only to Swiss accounts as targets of DOJ prosecutors.
Against this background, on June 9, 2014, it was reported that Bank Leumi is in discussions with DOJ to settle the tax fraud probe, and that the bank has set aside one billion Shekel (US$300 million) to pay in settlement, in return for a deferred prosecution agreement which would avoid a formal criminal indictment against Bank Leumi. Only two weeks prior, Credit Suisse paid $2.5 billion to settle U.S. tax fraud charges. UBS paid $780 million to settle U.S. tax fraud charges in 2009, also in return for a deferred prosecution agreement. As part of its settlement with the U.S. government, UBS released the names of almost 5,000 Americans with formerly “secret” UBS accounts.
It is possible that Leumi’s settlement with DOJ will also include the release of the bank’s client’s names. Even if not (as was the case with the Credit Suisse settlement last month), the U.S. can still obtain client names via a treaty request or “John Doe” summons which are frequently approved by U.S. courts and served on foreign banks such as HSBC in India and UBS in Switzerland. John Doe summonses are also served upon U.S. banks in connection with foreign accounts. In 2013, a U.S. court approved John Doe summonses upon Bank of New York (Mellon), Citibank, JPMorgan Chase, HSBC Bank USA, and Bank of America to produce information about U.S. taxpayers with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom. Also in 2013, a U.S. court approved John Doe summonses upon the Bank of New York (Mellon) and Citibank to produce information about U.S. taxpayers who may have had unreported accounts at Zurcher Kantonalbank (“ZKB”) in Switzerland. Thus, even if the Credit Suisse and Bank Leumi settlement agreements with the U.S. government do not include the banks handing over “secret” account details, the IRS and DOJ can still readily obtain the identities of U.S. clients at foreign banks.
It should be noted that any undisclosed account in Israel, or at a branch of an Israeli bank elsewhere, is vulnerable to discovery by the U.S. government, whether via FATCA, John Doe summons or treaty request. The threshold for reporting foreign accounts to the IRS is low, only $10,000. DOJ will prosecute U.S. taxpayers with accounts of all values, not only in the millions of dollars. DOJ does not want an account owner with, e.g., “only” $50,000 offshore to feel that his or her account is “too low” for IRS scrutiny. In addition, even if a U.S. taxpayer had an undisclosed foreign account, but did not utilize foreign corporations, back to back loans, and other methods of hiding the foreign funds, the taxpayer could still be the target of an audit, investigation and civil penalties. Such civil penalties can exceed the value of the foreign account. Even if the account is depleted by such penalties, the U.S. taxpayer would still be responsible for the deficiency, and the IRS would then proceed against the taxpayer’s U.S. assets.
As noted, the account holder need not have employed sophisticated methods of offshore concealment. The following examples, all much more benign, are all still subject to IRS reporting:
- Use of an account in Israel in connection with Israeli real estate (and if such real estate gives rise to rental income unreported to the IRS, then the taxpayer has a double problem);
- Use of an account in Israel in connection with the support of relatives in Israel;
- Israeli accounts that remained open following immigration to the U.S.
In addition, the following scenarios could also trigger IRS reporting requirements:
- Americans who immigrated to Israel (made Aliyah), still remain U.S. citizens and are obligated to report to the IRS their foreign accounts and Israeli income;
- Israeli children of American citizens, who may never even have visited the U.S. nor have any U.S. tax nexus, but are still subject to U.S. tax law and reporting requirements.
The tentacles of the IRS are clearly global, both in terms of the extra-territorial reach of U.S. tax law and reporting obligations, as well as the willingness of foreign governments and foreign financial institutions to join FATCA and report to the IRS. In the case of Israel and Israeli financial institutions, the IRS seems to have found ready, willing and eager partners, more so than in any other foreign country.
In light of the DOJ and IRS investigations and prosecutions of U.S. taxpayers with undeclared accounts in Israel, coupled with Israel’s eagerness to join FATCA and assist the IRS, U.S. taxpayers with undisclosed accounts at Israeli banks must take steps to come into U.S. tax compliance. There is an opportunity to come into U.S. tax compliance pre-emptively, avoid criminal prosecution and pay lower penalties than if the IRS learns about the accounts first (such as via FATCA). If you have unreported foreign assets, you must see a U.S. tax attorney with experience in offshore accounts and IRS compliance. Come speak with a foreign asset attorney, before the IRS finds you.
The Potential for the IRS to Become Even More Aggressive When Imposing Penalties for Not Filing FBARs for Foreign Accounts
As we’ve written, the law requires US taxpayers to report their ownership, signatory authority or other control over foreign financial accounts with a value in excess of $10,000. The means of reporting such accounts are (1) on IRS Form 1040, Schedule B, where a taxpayer “checks the box” that he or she has such ownership or control over a foreign account, (2) on a form known as the “FBAR”, Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (formerly TD 90-22.1), and (3) on IRS Form 8938, Statement of Specified Foreign Financial Assets.
The penalties for failure to file the FBAR are severe. If the IRS determines that the failure was “willful”, then the penalties can be as high as $100,000 per year, per account, or 50% of the value of the account for each year of non-filing of the FBAR, whichever is higher. If the failure to file the FBAR was non-willful, then the penalties are up to $10,000 per year, per account. It is thus conceivable that the penalties can exceed the value of the account itself. In such a case, the taxpayer remains obligated for the full amount of penalties, even after the funds in the foreign account are depleted by the penalties. In other words, if the penalties exceed the value of the foreign account(s), the taxpayer is still “on the hook” for the full penalty amounts.
Note that the 50% penalty per account, per year is what the law allows the IRS to impose in penalties. However, the IRS usually assesses the 50% penalty for one year only, usually the year with the highest account balance. This is true even in criminal tax fraud prosecutions, when the government prosecutes taxpayers who failed to declare their foreign accounts. In such prosecutions, the punishments which follow settlements, plea bargains and guilty pleas usually include one single FBAR penalty equal to 50% of the highest balance year, not 50% for each year which the law would otherwise allow.
A recent case, U.S.A. v. Zwerner, may change the usual practice of the IRS asserting the 50% penalty for one year only. In Zwerner’s case, the IRS imposed the 50% penalty for each of four years of FBAR non-filing. The highest balance in Zwerner’s unreported account was $1,691,054. The FBAR penalties asserted by the IRS came to a total of $3,488,609. On May 24, 2014, a jury in Federal District Court in Florida upheld FBAR penalties of $2,241,809.
The take-away from the Zwerner case is as follows:
1. The IRS may now be emboldened to impose FBAR penalties for multiple years. As noted, previous practice was for the IRS to assert the FBAR penalty for one year only, even in criminal tax fraud cases. The IRS’ assertion of multiple year FBAR penalties in Zwerner’s case could have been seen as an outlier case. However, after the jury upheld the multiple year FBAR penalties, the IRS, and prosecutors around the country, could rely on Zwerner to assert multiple year penalties. This would be a change in IRS practice that would make the already-severe FBAR penalties even more crippling to taxpayers who did not file FBAR forms.
2. Mr. Zwerner attempted to come into tax compliance; however, he did so not through the IRS Offshore Voluntary Disclosure Program (OVDP), but via an attorney who contacted the IRS Criminal Investigations (CI) Division on an anonymous basis. Zwerner then filed amended tax returns with foreign income now reported, along with FBARs. This is known as a “quiet disclosure”, and resulted in an audit. One take-away from this case is that quiet disclosures do not work, as we’ve written before, and there is a substantial likelihood of an audit as a result of a quiet disclosure. An additional lesson is that one must proceed with extreme caution with regard to unreported offshore accounts, and utilize tax attorneys who are experienced in offshore matters, U.S. tax compliance and IRS interaction.
3. One possible negative conclusion from the Zwerner case is that coming into tax compliance by volunteering information to the IRS in an attempt to “clean up” offshore assets is risky, that the IRS will reward such positive intentions with severe FBAR penalties. However, it should be noted that Mr. Zwerner’s attempts at compliance were themselves questionable. First, his attorney came forward on an anonymous basis. Second, Zwerner’s attempt at compliance, as noted above, was a “quiet disclosure”.
Taxpayers who seek to clean up their offshore non-compliance have a more reliable method, which is the IRS Offshore Voluntary Disclosure Program (OVDP). Formally entering the OVDP subjects both the taxpayer and the IRS to a procedure and rules. Taxpayers will benefit from the IRS not referring the matter to the US Department of Justice (DOJ) for a criminal tax fraud prosecution. In addition, the penalties within the OVDP are pre-determined, usually 27.5% of the highest aggregate foreign account balance, which is in lieu of the more severe FBAR penalties (and other penalties) that would apply outside the OVDP (such as those penalties that applied to Mr. Zwerner’s quiet disclosure). In short, the OVDP would have provided Zwerner with a much better result.
4. The jury found that Mr. Zwerner was “willful” in not filing his FBARs. Further incriminating facts were that the accounts were in the name of two foundations, entities similar to trusts which are often used to create a layer between a US taxpayer and foreign assets, and further obscure the true beneficial ownership of the foreign assets. Yet, Zwerner attempted to come into tax compliance. Via counsel, he approached the IRS even before he was under audit or investigation, and when the IRS did not already know about his foreign accounts. He attempted to do good and correct his past non-compliance, and he was rewarded with staggering FBAR penalties. An additional point here is that an attempt at compliance at a later date may not negate non-compliance at an earlier date. It is the equivalent to the IRS saying “thank you for reporting the accounts and paying taxes on the income in the accounts. However, we are still going to hang you for not doing it properly initially.” Again, the penalty within the OVDP would have been lower, and would have applied instead of the much higher penalties for willfully not filing the FBARs.
5. It remains to be seen whether the jury’s award of multiple year FBAR penalties will be upheld, or whether the award violates the Excessive Fines Clause of the Eighth Amendment to the United States Constitution. The court will address this issue next. Stay tuned, as the outcome will have an effect on enforcement of FBAR penalties across the country.
Please contact us with any questions about the FBAR form, foreign assets and U.S. tax compliance.