Navigating Foreign Waters: Discussion on the US Laws for Foreign Accounts Compliance

Transcription

1 Navigating Foreign Waters: Discussion on the US Laws for Foreign Accounts Compliance Presented by: Parag P. Patel, Esq., Tax Attorney Managing Director Patel Law Offices 33 Wood Ave. South Suite #250 P.O. Box 81 Iselin, NJ USA

2 US Tax Law Basics U.S. taxpayer must report and pay tax on worldwide income Who is U.S. taxpayer? Citizen Green card holder Anyone who meets the Substantial Presence test Generally >183 days (Mostly) independent of immigration status 2

3 US Person s Tax and Disclosure Requirements Ownership or signature authority over a foreign bank account Form 114 (Formerly TD F ) Report of Foreign Bank and Financial Accounts ( FBAR ) Receipt of large gifts from foreign persons (including inheritances from foreign estates) IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Ownership interest in a foreign corporation IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations Ownership interest in a foreign partnership IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships

4 US Person s Tax and Disclosure Transfers of certain interests in a foreign partnership Requirements IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships Transfers to a foreign trust IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Distributions from a foreign trust IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts Transfers of assets to a foreign corporation IRS Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation Officers and directors of certain foreign corporations IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations

5 US Person s Tax and Disclosure Ownership interest in and transfer of certain foreign disregarded entities Requirements IRS Form 8858 Information Return of U.S. Persons With Respect To Foreign Disregarded Entities U.S. citizens who renounce their citizenship and certain lawful permanent residents who abandon immigration status; IRS Form 8854 Initial and Annual Expatriation Statement Annual return of activities of a foreign trust with a U.S. owner IRS Form 3520 A Annual Information Return of Foreign Trusts with a U.S. Owner U.S. resident aliens who have specified foreign financial assets in a foreign country IRS Form 8938 Statement of Specified Foreign Financial Assets

6 Punitive Penalties IRS/TREASURY FORM Form 114 Electronically Filed (Formerly TD F ) Report of Foreign Bank and Financial Accounts ( FBAR ) POTENTIAL PENALTY EXPOSURE FOR FAILURE TO FILE AND REPORT INTERNATIONAL TRANSACTION US$10,000 for each failure to file 50% of the account balance for failure to file or US$100,000; civil penalty Up to $500,000 and up to 10 years in prison; criminal penalty IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships Up to 25% of the value of the tax free gift or inheritance received from the foreign person US$10,000 for each failure to file; up to US$50,000 in total penalties US$10,000 for each failure to file

7 Punitive Penalties IRS/TREASURY FORM IRS Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRS Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts IRS Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations POTENTIAL PENALTY EXPOSURE FOR FAILURE TO FILE AND REPORT INTERNATIONAL TRANSACTION US$10,000 for each failure to file Up to 35% of the value of the transfer of properties to the foreign trust (even if the transfers are income taxfree) Up to 35% of the value of the distributions of properties received from the foreign trust (even if the distribution is not subject to income tax) 10% of the value of the property transferred up to US$100,000 maximum US$10,000 for each failure to file

8 Punitive Penalties IRS/TREASURY FORM POTENTIAL PENALTY EXPOSURE FOR FAILURE TO FILE AND REPORT INTERNATIONAL TRANSACTION IRS Form 8858 Information Return of U.S. Persons With Respect To Foreign Disregarded Entities US$10,000 for each failure to file IRS Form 8854 Initial and Annual Expatriation Statement Various IRS Form 3520 A Annual Information Return of Foreign Trusts with a U.S. Owner 5% of the gross value of the trust assets (even if there is no taxable income) IRS Form 8938 Statement of Specified Foreign Financial Assets US$10,000 for each failure to file

9 Foreign Asset Reporting Requirements: Setting the Stage

10 The Foreign Account Tax Compliance Act: Background and Goals

11 What is FATCA? The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts. ( FATCA was enacted in 2010 by Congress to target noncompliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. (

12 Two Primary FATCA Requirements Foreign financial institutions are annually required to report directly to the U.S. government information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS annually on Form 8938.

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14 Jurisdictions that have signed agreements: Model 1 IGA Algeria ( ) Angola ( ) Australia ( ) Azerbaijan ( ) Bahamas ( ) Barbados ( ) Belarus ( ) Belgium ( ) Brazil ( ) British Virgin Islands ( ) Bulgaria ( ) Cambodia ( ) Canada ( ) Cayman Islands ( ) Colombia ( ) Costa Rica ( ) Croatia ( ) Curaçao ( ) Cyprus ( ) Czech Republic ( ) Denmark ( ) Estonia ( ) Finland ( ) France ( ) Georgia ( ) Germany ( ) Gibraltar ( ) Guernsey ( ) Holy See ( ) Honduras ( ) Hungary ( ) Iceland ( ) India ( ) Ireland ( ) Isle of Man ( ) Israel ( ) Italy ( ) Jamaica ( ) Jersey ( ) Kosovo ( ) Kuwait ( ) Latvia ( ) Liechtenstein ( ) Lithuania ( ) Luxembourg ( ) Malta ( ) Mauritius ( ) Mexico ( ) Montserrat ( ) Netherlands ( ) New Zealand ( ) Norway ( ) Philippines ( ) Poland ( ) Portugal ( ) Qatar ( ) Romania ( ) St. Kitts and Nevis ( ) St. Vincent and the Grenadines ( )

15 Continued Singapore ( ) Slovak Republic ( ) Slovenia ( ) Spain ( ) South Africa ( ) South Korea ( ) Sweden ( ) Turkey ( ) Turks and Caicos Islands ( ) United Arab Emirates ( ) United Kingdom ( ) Uzbekistan ( ) Model 1 IGA Anguilla ( ) Antigua and Barbuda ( ) Bahrain ( ) Cabo Verde ( ) China ( ) Dominica ( ) Dominican Republic ( ) Greenland ( ) Grenada ( ) Guyana ( ) Haiti ( ) Indonesia ( ) Malaysia ( ) Montenegro ( ) Panama ( ) Peru ( ) St. Lucia ( ) Saudi Arabia ( ) Serbia ( ) Seychelles ( ) Thailand ( ) Turkmenistan ( ) Ukraine ( ) Model 1 IGA Greece ( ) Kazakhstan ( ) Trinidad and Tobago ( ) Tunisia ( )

16 Continued Model 2 IGA Austria ( ) Bermuda ( ) Chile ( ) Hong Kong ( ) Japan ( ) Moldova ( ) San Marino ( ) Switzerland ( ) Model 2 IGA Armenia ( ) Iraq ( ) Nicaragua ( ) Paraguay ( ) Taiwan ( ) Model 2 IGA Macao ( )

17 Globalization of FATCA ( GATCA ) By Common Reporting Standards ( CRS ) All 34 OECD member countries, as well as Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa endorsed the Declaration on Automatic Exchange of Information in Tax Matters released at the May 2014 OECD Meeting. The Declaration commits countries to implement a new single global standard on automatic exchange of information ( CRS or GATCA ) by Under GATCA jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.

18 FATCA Part One: Obligations of Foreign Financial Institutions (FFIs)

19 What Does FATCA Require of Foreign Financial Institutions (FFIs)? FATCA requires Foreign Financial Institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to: Identify U.S. accounts, Report certain information to the IRS regarding U.S. accounts, and Withhold a 30 percent tax on certain U.S.-connected payments to nonparticipating FFIs and account holders who are unwilling to provide the required information. Registration take places through an online system which opened January 1, FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

20 The Hunt for Americans Indicia Test: How to Identify US Accounts If any one of the below indicators is identified, account may be US account: US citizenship or US residence (or outside target country for CRS) US place of birth US address including US PO boxes US telephone number Repeating payment instructions to pay amounts to a US address or an account maintained in the US Current Power of Attorney or signatory authority granted to a person with a US address If Care of or Hold mail address which is the sole address for the account holder

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22 How Deep to Search? Type of individual accounts Due diligence summary Other accounts (<$50k USD) Not required to be reviewed, identified or reported Low value account (>$50k USD) Review of electronically searchable data required by the reporting entity for Indicia. High value account (<$1M USD) Review of electronically searchable data required by the reporting entity for any Indicia, paper record search (if necessary) and findings of the relationship manager (if applicable).

23 Which Accounts? High Value Account Low Value Account Other Accounts US Reportable Others US Reportable Others US Reportable Others > USD 1 million as on 30 June 2014 or 31 December of any subsequent year > USD 1 million as on 31 December 2014 or 31 December of any subsequent year USD 50K to USD 1 million as on 30 June 2014 < USD 1 million as on 31 December < USD 50K for individual accounts as on 30 June 2014; < USD 250K for cash value insurance contract or an annuity contract, as on the 30 June, 2014; cash value insurance/ annuity contract, prevented from sale to an Indian resident

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26 What is reported by banks?: (a) the name, address, taxpayer identification number (assigned to the account holder by the country or territory of his residence for tax purposes) and date and place of birth (in the case of an individual) of each reportable person, that is an account holder of the account; (b) in the case of any entity which is an account holder and which, after application of due diligence procedures prescribed in rule 114H, is identified as having one or more controlling persons that is a reportable person,- (i) the name and address of the entity, taxpayer identification number assigned to the entity by the country or territory of its residence; and (ii) the name, address, date and place of birth of each such controlling person and taxpayer identification number assigned to such controlling person by the country or territory of his residence; (c) the account number (or functional equivalent in the absence of an account number); (d) the account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) at the end of relevant calendar year or, if the account was closed during such year, immediately before closure; (e) in the case of any custodial account,- (i) the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year; and (ii) the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder; (f) in the case of any depository account, the total gross amount of interest paid or credited to the account during the relevant calendar year; (g) in the case of any account other than that referred to in clause ( e ) or ( f ), the total gross amount paid or credited to the account holder with respect to the account during the relevant calendar year with respect to which the reporting financial institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the relevant calendar year; and

27 International Coordination and Model Intergovernmental Agreements Treasury is collaborating with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. Model 1 IGA: FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS. Model 2 IGA: A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.

28 FATCA Part Two: Obligations of U.S. Taxpayers to Report Foreign Assets Who Is Required to File Form 8938? You must file Form 8938 if: 1. You are a specified individual. AND 2. You have an interest in specified foreign financial assets required to be reported. AND 3. The aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.

29 Form 8938 Introduction

30 What is a Specified Foreign Financial Asset? Any financial account maintained by a foreign financial institution Foreign bank accounts Foreign mutual funds Foreign hedge funds Foreign private equity funds Certain foreign insurance products NOT REAL PROPERTY

31 Form 8938 Part I

32 What are the Reporting Thresholds for Domestic Taxpayers? Unmarried taxpayers living in the U.S.: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Married taxpayers filing a joint income tax return and living in the U.S.: The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. Married taxpayers filing separate income tax returns and living in the U.S.: The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

33 What are the reporting thresholds for taxpayers living abroad? Taxpayers living abroad. You are a taxpayer living abroad if: You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or You are a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days. A taxpayer living abroad must file if: You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

34 Penalties for Non-Filing of Form 8938 Failure to file Form 8938 may result in a $10,000 civil penalty as well as an additional $10,000 continuation penalty for each 30 day period after the taxpayer is notified by the IRS of the failure to file (not to exceed $50,000) Exception if failure to file is due to reasonable cause and not due to willful neglect The fact that a foreign jurisdiction would impose a civil or criminal penalty for disclosing the required information is NOT reasonable cause Criminal penalties may also apply Failure to file Form 8938 or certain assets on Form 8938 may keep the statute of limitations open for ALL items on a return until 3 years after Form 8938 is filed.

35 FBAR Reporting Requirements

36 Foreign Bank Accounting Reporting Required as part of Bank Secrecy Act since 1970s U.S. taxpayers with foreign accounts have two obligations Answer question yes on Form 1040, Schedule B, Part III (due April 15 or due date of extended return) or other applicable tax return Electronically File FinCEN 114, Report of Foreign Bank and Financial Accounts ( FBAR )

37 Foreign Bank Account Reporting Individual Income Tax Return Form 1040, Schedule B

38 Foreign Bank Account Reporting Corp Income Tax Return Forms 1120 and 1120-S

39 Foreign Bank Account Reporting Partnership Income Tax Return Form 1065

40 Foreign Bank Account Reporting Estate Tax Return Form 706

41 FinCEN 114 (FBAR) New form and instructions issued July 2013 Required to be filed annually by June 30 All forms are required to be filed electronically No extensions of deadline are available If filing on behalf of client, retain a FinCEN authorization form (Form 114a) Form TD F is now obsolete.

42 FinCEN 114 (FBAR) (continued) Must register with BSA to access online filing system. To register, go to: New FinCEN Form 114 is almost identical to old Form TD F

43 FinCEN 114

44 FinCEN 114

45 FinCEN 114

46 FinCEN 114

47 Who is Required to File an FBAR? An FBAR must be filed if all of the following requirements are satisfied: The filer is a U.S. Person; The U.S. Person has a financial account; The financial account is in a foreign country; The U.S. Person has a financial interest in, or signature or other authority over, the financial account; and The aggregate account balance of all such foreign accounts exceed $10,000 (in U.S. dollars) at any time during the calendar year

48 What is a Reportable Financial Account? Account is broadly defined to include any foreign bank, securities, or other financial accounts Bank accounts include savings deposits, demand deposits, checking accounts, and any other accounts maintained with a person engaged in the business of banking Securities accounts include accounts maintained with a person in the business of buying, selling, holding, or trading stock or other securities Other financial accounts include: An account with a person that is in the business of accepting deposits as a financial agency; An account that is an insurance policy with a cash value or an annuity policy; An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions (does NOT include hedge funds) NOT REAL PROPERTY

49 What is Signature Authority? Broadly defined as the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication to the person with whom the financial account is maintained The test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account. The final regulations also exempt certain individuals with signature or other authority over, but no financial interest in, foreign accounts. NOT NOMINEE/NOT BENEFICIARY

50 FBAR Penalties for Non-Compliance Criminal penalties for willful violations: Up to 5 years imprisonment and $250,000 fine Civil penalties Non-willful violation: Up to $10,000 for each violation Willful violation: Greater of $100,000 or 50 percent of the balance in the account at the time of the violation Both civil and criminal penalties can be imposed together. Remember United States v. Zwerner (150% penalty)

51 Increasing Rates of Foreign Bank Account Reporting

52 The IRS Crackdown on Offshore Tax Evasion "Pursuing international tax evasion is a priority area for IRS Criminal Investigation, and we will continue to follow the money here in the United States and around the world. I want to commend the special agents in IRS-Criminal Investigation for all of their hard work in this area and the close cooperation with the Department of Justice. Today s guilty plea is another important milestone in ongoing law enforcement efforts to investigate the use of offshore accounts to evade taxes. People should no longer feel comfortable hiding their assets and income from the IRS. (May 19, 2014) Our focus on offshore tax evasion continues to produce strong, substantial results for the nation s taxpayers.... As we ve said all along, people need to come in and get right with us before we find you.... We are following more leads and the risk for people who do not come in continues to increase. (January 9, 2012) Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. (February 8, 2011) Tax secrecy continues to erode.... We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase. (February 8, 2011)

53 Justice Department Offshore Compliance Initiative The Tax Division s top litigation priority is the concerted civil and criminal effort to combat the serious problem of noncompliance with our tax laws by U.S. taxpayers using secret offshore bank accounts a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually. U.S. Department of Justice website

54 May 28, 2014 DOJ Press Release As this jury verdict shows, the cost of not coming forward and fully disclosing a secret offshore bank account to the IRS can be quite high. Those who still think they can hide their assets offshore need to rethink their strategy. Fmr Assistant Attorney General Kathryn Keneally

55 Example of IRS Enforcement Activity Example: Dr. Ahuja was recently convicted for tax fraud involving more than $8.7 million hidden in HSBC India. From 2006 through 2009, Ahuja failed to report to the IRS more than $1.2 million in interest income, as well as to disclose the account s existence on FBARs.

56 Bad Facts=Bad Results Dr. Ahuja took steps to hide his offshore accounts: Dr. Ahuja requested that he does not want any kind of mail at his US or India address Dr. Ahuja transferred funds abroad from his US bank account in small increments Dr. Ahuja used a relative s address in India Dr. Ahuja was convicted.

57 Options for U.S. Taxpayers with Undisclosed Foreign Assets

58 Divorcing Uncle Sam: Renunciation of US Citizenship or Residency (Greencard) Considerations Renunciation is an irrevocable act Lose rights and privileges of U.S. citizenship Potential tax obligations. If a U.S. personis a covered expatriate upon renunciation, he or she may be subject to a punitive tax regime including an exit tax. These consequences are discussed further below. Theoretical Possibility of being excluded from the U.S. (Yet Never Has Happened)

59 Renunciations Record Highs

60 Renunciation of US Citizenship or Residency (Greencard) Considerations Renunciation is an irrevocable act Lose rights and privileges of U.S. citizenship Potential tax obligations. If a U.S. personis a covered expatriate upon renunciation, he or she may be subject to a punitive tax regime including an exit tax. These consequences are discussed further below. Theoretical Possibility of being excluded from the U.S. (Yet Never Has Happened)

61 Immigration Aspects of Renunciation An individual who seeks to renounce their U.S. nationality must submit, among other things, the following: 1. Form DS-4079, Questionnaire: Information for Determining Possible Loss of U.S. Citizenship; 2. A Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U. S. Citizenship ; and 3. A copy of the individual's U.S. and foreign-country passports. It is upon these documents that the U.S. Department of State will base its decision regarding the renunciation. In addition, there is a current administrative fee of $2,350 USD for processing of the renunciation. The immigration process is not the end of the journey, however. A soon to be former U.S. citizen must still settle up with the IRS.

62 Tax Cost of Renunciation (Exit Tax) The adverse taxation consequences of expatriation apply only to a covered expatriate ( CE ), a person who meets ANY ONE of the following criteria: A net worth exceeding USD$2 million on the date of expatriation ( Net Worth Test ); OR Average annual U.S. income tax for the five years preceding the year of expatriation exceeding USD$160,000 (indexed to inflation) ( Tax liability Test ); OR Failure to certify full compliance with U.S. tax obligations for each of the 5 years preceding expatriation, comprising all tax and information returns and payment of all tax amounts on account of income, employment, estate, gifts, interest and penalties ( Tax Compliance Test ). Includes Greencard holders for if Greencard held for 8 of last 15 years.

63 Tax Cost of Renunciation (Exit Tax) For CEs, the exit tax is owed is on a mark-tomarket disposition of all assets, i.e. the difference between the cost basis of all assets owned and their current fair market value. The first US$660,000 is exempt and to be allocated pro rata among all the assets to which the exit tax applies.

64 Exceptions to the CE status There are two exceptions by which an individual will not be treated as a CE. 1. Individuals who currently have and have maintained dual citizenship since birth are exempt from the exit tax regime if they were a resident of the U.S. for no more than the last 10 years of the 15 tax years ending with the tax year of renunciation AND the individual must reside in the country of their second citizenship and pay taxes to that country. 2. Individuals who relinquish citizenship prior to attaining the age of 18.5 and have been residents of the U.S. for not more than 10-taxable years before the date of relinquishment. For individuals falling under an exception, they must still certify on Form 8854, under penalties of perjury, that they have been U.S. tax compliant for the past five years in order to lose U.S. citizenship on a tax free basis. Back door Covered gifts and bequests: A U.S. citizen or resident who is recipient of a gift or bequest from a CE pays the associated tax, at the highest marginal gift and estate tax rate.

65 IRS Offshore Voluntary Disclosure Program (OVDP) Over 50,000 taxpayers have come forward, and Treasury has collected $8 billion Open for an indefinite period of time until otherwise announced terms of OVDP could change at any time; Requires individuals to pay an FBAR penalty of 27.5% (compared to 25% in the 2011 program); and 8 year rolling look-back period with exclusion of compliant years

66 OVDP (continued) More stringent eligibility requirements: U.S. government receipt of taxpayer information from John Doe summons, treaty request, or similar action is disqualifying event Taxpayers who appeal foreign tax administrator s decision to release account information must notify U.S. Attorney General or be disqualified IRS may in its discretion designate certain classes of taxpayers ineligible Offshore Penalty has to be paid at the time of OVDP submission Upon acceptance by the CI, accounts statements for all foreign financial accounts have to be provided, regardless of account balance

67 OVDP Offshore Penalty: 27.5 percent Values of foreign accounts and other foreign assets are aggregated for each year and the penalty is calculated based upon highest year s aggregate value during the OVDP period. Composition of penalty base: Applies to all of the taxpayer s offshore holdings that are related in any way to tax non-compliance, including bank accounts, tangible assets such as real estate or art, and intangible assets such as patents or stock or other interests in a U.S. or foreign business Tax noncompliance includes failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset.

68 50% offshore penalty applies, rather than 27.5% offshore penalty: If either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore account has been publicly identified as being under investigation or as cooperating with a government investigation. See list of banks at (search facilitators ) Effective August 4, 2014

69 OVDP: Opt Out Option An opt out is an election made by a taxpayer to have his or her case handled under the standard audit process. IRS recognizes that in certain cases, the opt out option may reflect a preferred approach. That is, there may be instances in which the results under the voluntary disclosure program appear too severe given the facts of the case. Full scope examinations will occur if opt out is initiated. If issues are found upon a full scope examination that were not disclosed by the taxpayer, those issues may be the subject of review by IRS Criminal Investigation.

70 OVDP: Opt Out Option (continued) Favorable scenarios for opting out: Example 1 - Unreported Income But No Tax Deficiency Example 2 - Unreported Income and Failure to File FBAR Example 3 - Unreported Controlled Foreign Corporation Examples 4/5 - Dual citizen residing abroad with no U.S. income and fully compliant with foreign tax laws Unfavorable scenarios for opting out: Example 6 - Large Unreported Gain Example 7 Willful or Civil Fraud Penalty Warranted

71 Streamlined Filing Compliance Offshore Procedures New Game Changer: Streamlined Filing Compliance Procedures Announced June 18, 2014 New administrative program because old OVDP fishing net meant for whales was catching small fish Only authoritative source is Streamlined Filing Compliance Procedures Streamlined Domestic Offshore Procedures Streamlined Foreign Offshore Procedures Delinquent FBAR Submission Procedures Delinquent International Informational Return Submission Procedures 1

72 New Streamlined Filing Compliance Procedures: Streamline Foreign Offshore Procedure (SFOP) for NON US Residents ($0 Penalty) This program is for U.S. citizens or permanent residents if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode [see IRC 911] and the individual was physically outside the United States for at least 330 full days. These taxpayers will qualify for the $0 penalty as long as these failures resulted from non-willful conduct. Abode is generally interpreted as one s tax home. A home in the U.S. doesn t necessarily mean one s abode is in the U.S. It does NOT matter if they previously filed U.S. tax returns or not. It does NOT matter if they previously filed FBARs.

73 New Streamlined Filing Compliance Procedures: Streamline Foreign Offshore Procedure (SFOP) for NON US Residents ($0 Penalty) REQUIREMENTS: Amend prior 3 years of income tax returns (presently ) File prior 6 years of FBARs (presently ) Submit Statement of Non-Willfulness as part of Certification: Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. Careful analysis and advocacy required. NO Penalty No IRS closing letter. Return is subject to audit like any other return.

74 Streamlined Domestic Offshore Procedures Certification Procedures Taxpayer waives all defenses against and restrictions on the assessment and collection of the miscellaneous offshore penalty, including any defense based on the expiration of the period of limitations on assessment or collection; waives right to seek a refund or abatement of the miscellaneous offshore penalty. Taxpayer agrees to retain all records related to assets subject to the 5% miscellaneous offshore penalty until 6 years from the date of this certification and agrees to provide all such records to the Internal Revenue Service. 13

75 Streamlined Domestic Offshore Procedures Certification Procedure (cont.) Taxpayer must provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. If taxpayer relied on a professional advisor, name, address, and telephone number of the advisor and a summary of the advice provided must be disclosed. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts. 14

76 What is Non-willful conduct Non-willful is not used in the Internal Revenue Code. Willful is used in the Internal Revenue Code. Sections (tax crimes) proscribe a willfulness standard for attempts to evade tax and failure to file tax returns or pay tax Section 5321(a)(5)(C) provides a FBAR willfulness civil penalty In most cases involving willful violations of the tax laws, the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating. Bryan v. United States, 524 U.S. 184, 191 (1998); Cheek v. United States, 498 U.S. 192 (1991).

77 Streamline s new definition of Non-willful conduct Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. Requires dissection of definition with legal/factual analysis Reliance on professional advisor requires: disclosure of professional advisor, name, address, and telephone number of the advisor and a summary of the advice provided. Expect possible interview of professional advisor

78 Streamlined Foreign Offshore Procedures Penalty Avoidance: Eligible taxpayers who comply will not be subject to failureto-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. If returns are subsequently selected for audit under existing audit selection process, taxpayer will not be subject to the above mentioned penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. 27

79 Streamlined Domestic Offshore Procedures Streamlined Filing Compliance Procedures: Streamlined Domestic Offshore Procedures (SDOP) In summary, if taxpayer can certify that failure to file and pay tax was non-willful, then: Amend prior 3 years of tax returns File prior 6 years of FBARs Pay 5% of miscellaneous offshore penalty (asset based) No IRS closing letter. Return is subject to audit like any other return. (unless transition case from OVDP) 6

80 Streamlined Domestic Offshore Procedures Certification Procedures: Must complete and submit Form Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures Attach amended income tax returns, including all required information returns, for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed; special markings required Pay tax and interest Electronically file correct and complete FBARs for any of the last 6 years, 10

81 Streamlined Domestic Offshore Procedures Certification Procedures Pay 5% miscellaneous offshore penalty on highest of, in any single year: Highest year end account balance for any asset which should have been reported on FBAR during 6 year covered FBAR period Highest year end asset value for any asset which should have been reported on Form 8938 during the 3 year covered tax return period 11

82 Streamlined Domestic Offshore Procedures Certification Procedures (cont.) Pay 5% miscellaneous offshore penalty on highest of, in any single year: Highest year end asset value for any asset which was properly disclosed on the income tax return (Form 8938) but the associated gross income was not reported on the appropriate income tax return during the 3 year covered return period Note: No real estate Partially owned accounts shift burden of proof of partial ownership on taxpayer Year end, not highest aggregate balances are used 12

83 Delinquent FBAR Submission Procedures (if no tax due) Who is eligible: Has not yet filed FBAR Not under civil exam or criminal investigation Has not been contacted by the IRS regarding delinquent FBARs Properly reported income on U.S. tax returns (no tax due) Attach reasonable cause statement and certification Treatment No penalty imposed FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns. 28

84 Delinquent International Information Return SuDelinquent International Information Return Submission Procedures bmission Procedures For Delinquent Informational Returns - Forms 5471, 5472, 8938, 3520, 3520A, etc. Who is eligible: Has not yet filed one or more informational return Has reasonable cause for not timely filing information returns Not under civil exam or criminal investigation Has not been contacted by the IRS regarding delinquent informational returns 29

85 Delinquent International Information Return Submission Procedures Procedure: File delinquent forms with amended returns Attach reasonable cause statement and certification Treatment No penalty imposed Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns. 30

86 Risks of Quiet Disclosure FAQ 15: Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making quiet disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years. FAQ 16: The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM , the IRS may recommend criminal prosecution to the Department of Justice. Note: United States v. Michael A. Schiavo (D. Mass. 2011)

87 Concluding Thoughts Concluding Thoughts Advising the noncompliant taxpayer OVDP = still the theoretically correct answer Streamlined procedures = practical default solution Quiet Disclosure = too risky to recommend in light of above new solutions available 34

88 Other Thoughts on Advising the US person in India: luding Thoughts Estate Planning is a must! US Estate taxes still apply 40% rate on asset values > USD$5.4 million Use a foreign grantor trust as long as possible for US beneficiaries In case of Foreign Non-Grantor Trust watch out for punitive throwback tax on undistributed income Failing to plan is planning to fail. 34

89 FOR 2016 CHECKLIST OF TOP TIPS FOR PRE-USA IMMIGRATION PLANNING Leave me your business card.

90 Questions? Parag P. Patel, Esq. Patel Law Offices P.O. Box 81 Iselin, NJ USA