IRS Prioritizes Combating Offshore Tax Cheating | Offshore Tax Lawyer

On March 20, 2018, the IRS announced that offshore tax cheating – i.e. hiding money and other assets in unreported foreign accounts – remains on the IRS “Dirty Dozen” tax scams for the year 2018.

Offshore Tax Cheating: What is the “Dirty Dozen” List?

The IRS uses the “Dirty Dozen” list to describe various scams that a taxpayer may encounter and which form the focus of the IRS enforcement efforts. Some of these schemes peak during the tax filing season.

Illegal scams can lead to significant penalties and even possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

What is Offshore Tax Cheating?

In its most basic form, offshore tax cheating is a long-running scheme that uses foreign accounts to hide money in order to avoid paying US taxes. The taxpayers then use debit cards, credit cards or wire transfers to access the hidden accounts. More complex schemes include the usage of foreign corporations, foreign trusts, employee-leasing schemes, private annuities, insurance plans and other third-parties to conceal the real US owner of foreign accounts.

The most modern offshore tax cheating scheme has involved cryptocurrencies traded overseas and exchanged into a foreign currency by using an offshore account. The IRS has already begun addressing tax evasion based on virtual currencies, but we have not yet seen a fully-developed IRS enforcement in this area.

Offshore Tax Cheating is the Long-Standing Focus of the IRS

The IRS warns that taxpayers should be wary of these schemes, especially given the continuing focus on this issue by the IRS and the Justice Department.

In fact, since mid-2000s, offshore tax cheating has been one of the primary targets of the IRS. The IRS already conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Every investigation yields important information that is used to learn about noncompliance patterns and commence other investigations. Some of these investigations may focus on bankers and financial advisors who helped set up a scheme that led to offshore tax cheating.

Offshore Voluntary Disclosure as a Way to Settle Prior Tax Noncompliance

If a taxpayer participated in scheme that the IRS may characterize as offshore tax cheating, he should consider doing a voluntary disclosure as soon as possible. It is very likely that the IRS will consider tax noncompliance associated with such a scheme as willful. Hence, the Offshore Voluntary Disclosure Program (“OVDP”) may be the primary choice for such taxpayers.

In fact, according to the IRS, more than 56,400 disclosures were made through various versions of OVDP since 2009. The IRS collected more than $11.1 billion from the OVDP during that time period.

Additionally, more than 65,000 taxpayers who claimed that they were non-willful in their prior tax noncompliance participated in the Streamlined Compliance Procedures. As I stated above, however, a taxpayer should be very careful about participating in the Streamlined Compliance Procedures if he participated in a scheme that the IRS may classify as offshore tax cheating.

OVDP Will Close on September 28, 2018

Taxpayers who wish to participate in the OVDP should consult Sherayzen Law Office as soon possible. The IRS recently announced that the OVDP will close on September 28, 2018.

Contact Sherayzen Law Office if You Wish to do an Offshore Voluntary Disclosure That Involves a Scheme Classified as Offshore Tax Cheating

If you participated in a scheme that the IRS may classify as offshore tax cheating, you should contact Sherayzen Law Office to explore your voluntary disclosure options as soon as possible.

Sherayzen Law Office is a leading international tax law firm that specializes in offshore voluntary disclosures, including OVDP and Streamlined Compliance Procedures. We have helped hundreds of US taxpayers around the world to bring their US tax affairs into full compliance with US tax laws, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Uruguay-US Social Security Agreement Sent to Congress | Tax Lawyer

On March 19, 2018, President Trump sent the Uruguay-US Social Security Agreement to the US Senate. This is an important step toward the final ratification of the treaty that promises to benefit the citizens of both countries.

Uruguay-US Social Security Agreement: What is a Social Security Agreement?

A Social Security Agreement (also called a Totalization Agreement) is essentially a treaty between two countries that eliminates the burden of dual social security taxation for individuals and businesses who operate in both countries.

Typically, the potential for this type of double-taxation arises when a worker from country A works in Country B, but he is covered under the social security systems in both countries. In such situations, without a Social Security Agreement, the worker will have to pay social security taxes to both countries on the same earnings. A Social Security Agreement, on the other hand, allows the worker (and employers) to pay social security taxes only in one country identified in the treaty.

Social Security Agreements are authorized by Section 233 of the Social Security Act. Right now, only 26 Totalization Agreements are in force between the United States and another country: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom. Uruguay may become the 27th country to have a Social Security Agreement with the United States.

Uruguay-US Social Security Agreement: Recent History

The Uruguay-US Social Security Agreement has had a very favorable history so far. In fact, it may set the record for the fastest treaty ever negotiated by Uruguay. The countries first agreed to pursue a Social Security Agreement between them in May 2014, when the then Uruguayan president Jose Mujica was in Washington.

Amazingly, already in May of 2015, after just two rounds of talks held over a six-month period, the countries finished the negotiations of the Uruguay-US Social Security Agreement. Typically, it takes anywhere between two to three years to negotiate a Totalization Agreement.

On January 10, 2017, the Uruguay-US Social Security Agreement was signed in Montevideo. The United States was represented by its ambassador Mr. Kelly Kinderling. Uruguay was represented by its Foreign Minister Jose Luis Cancela and Labor and its Social Security Minister Ernesto Murro.

On October 3, 2017, the Uruguayan Senate approved the pending Uruguay-US Social Security Agreement, thereby completing the first part of the necessary ratification process. By sending the treaty to Congress for the required 60-day review period, President Trump started the US ratification process.

Uruguay-US Social Security Agreement: Benefits

According to Uruguay, the Uruguay-US Social Security Agreement will benefit some 60,000 Uruguayans working in the United States and up to 6,000 Americans living in Uruguay. The primary benefit is that the workers of both countries will be able to count the working years spent in both countries to be obtain eligibility for their home-country retirement, disability and survivor benefits.

Additionally, the Agreement will exempt US citizens sent by US-owned companies to work in Uruguay for five years or less from paying the Uruguayan social security taxes. Similarly, Uruguayan citizens sent to work temporarily in the United States by Uruguayan-owned companies will not need to pay social security taxes to the US government. Thus, employers in both countries will pay social security taxes only to their employees’ home countries.

Additionally, both countries hope that the Uruguay-US Social Security Agreement will boost trade between the countries. Currently, more than 200 American firms operate in Uruguay (mostly in the service sector).

Sherayzen Law Office will continue to monitor future developments with respect to this highly-beneficial treaty.

FATCA Criminal Case Filed Against Foreigners | FATCA Lawyer & Attorney

On March 22, 2018, the US Department of Justice (“DOJ”) announced that it charged four foreign residents – Panayiotis Kyriacou (resides in London, UK), Arvinsingh Canaye (resides in Mauritius), Adrian Baron (resides in Budapest, Hungary), and Linda Bullock (resides in St. Vincent/Grenadines) – with conspiracy to defraud the United States by failing to comply with FATCA. Let’s explore this new FATCA criminal case in more detail.

Legal Basis for FATCA Criminal Case

The legal basis for this FATCA criminal case is the allegation that the defendants conspired to defraud the United States by obstructing the IRS administration of the Foreign Account Tax Compliance Act (“FATCA”).

FATCA was passed into law in 2010. One part of this highly complex law requires foreign financial institutions (“FFIs”) to identify their US customers, collect the information about foreign accounts held by these US customers as required by FATCA (“FATCA Information”) and send FATCA Information to the United States. The DOJ alleges that the defendants in this case intentionally conspired to obstruct the collection and reporting of FATCA Information to the IRS.

Facts of the FATCA Criminal Case As Alleged by the DOJ

The indictment alleges that the defendants agreed to defraud the United States by opening foreign bank and brokerage accounts without collecting FATCA information that should have been reported to the IRS. The indictment describes two specific schemes, both of which were uncovered by the DOJ through an undercover agent.

The first scheme is called the Beaufort Scheme, because Canaye and Kyriacou both worked at Beaufort Management as a general manager and an investment manager respectively. The indictment alleges that, between August 2016 and February 2018, these two defendants conspired to defraud the United States by failing to comply with FATCA. The DOJ states that it obtained the proof of the existence of this conspiracy through an undercover agent (the “Agent”).

The Agent first approached Kyriacou in 2016, who opened bank accounts for the agent without doing any FATCA compliance. In July 2017, Kyriacou introduced the Agent to Canaye and advised that Canaye could assist with the Agent’s stock manipulation scheme schemes. In January 2018, Canaye and Beaufort Management opened six global business corporations for the Agent. The Agent’s name did not appear on any of the account opening documents.

The second scheme is called the Loyal Scheme because it involved Baron, the Loyal Bank’s Chief Business Officer. During their meetings, the Agent explained to Baron that he was a US citizen and described his stock manipulation schemes, including the need to bypass FATCA. In July and August of 2017, the Undercover Agent met with Baron and Bullock, Loyal Bank’s Chief Executive Officer. During the meeting, the Undercover Agent described how his stock manipulation deals operated, including the necessity to bypass FATCA. In July and August 2017, Loyal Bank opened multiple bank accounts for the Agent. At no time did Loyal Bank request or collect FATCA Information from the Undercover Agent.

It should be remembered that the charges in the superseding indictment are merely allegations, and the defendants are presumed innocent unless and until proven guilty.

This FATCA Criminal Case Reflects IRS Commitment to FATCA Enforcement

While not the first FATCA criminal case, the present case is definitely at the beginning of the future series of FATCA cases against US taxpayers and foreigners. The IRS stressed that this FATCA criminal case reflects the commitment of the IRS and the DOJ to combat offshore tax evasion and enforce FATCA worldwide.

Sherayzen Law Office will continue to monitor IRS enforcement of FATCA, including this FATCA criminal case.

OECD Harmful Tax Practices & FDII | International Tax Law Firm

The Organization for Economic Co-operation and Development (“OECD”) has detailed base erosion and profit-shifting (“BEPS”) rules. Among these rules are the OECD rules for countering harmful tax practices (“OECD Harmful Tax Practices Rules”). The 2017 Tax Cuts and Jobs Act introduced a new tax concept in the US Internal Revenue Code – foreign-derived intangible income (“FDII”). FDII has become a hot topic in international tax law, especially with respect to whether FDII constitutes a violation of the OECD Harmful Tax Practices Rules.

OECD Harmful Tax Practices Rules and Preferential Tax Regimes

The OECD Harmful Tax Practices Rules require that a preferential tax regime of any OECD nation satisfies the “substantial activities requirement”. In particular, the Intellectual Property income regimes must incorporate the “nexus approach” that limits the entitlement to the preferential tax regime based on the amount of the qualifying research and development costs incurred.

European Position: FDII May Violate OECD Harmful Tax Practices Rules

The Europeans started questioning the FDII’s compliance with the OECD Harmful Tax Practices Rules almost immediately. The main reason for their concern is that the FDII regime does not adopt the nexus approach while allowing US corporations to deduct 37.5% of their deemed intangible income generated abroad by the usage of the US Intellectual Property. The end-result of the FDII rules is the reduction of the effective tax rate on the FDII to a bit over 13%.

The Europeans question whether this result and the FDII rules in general are in conformity with BEPS’ minimum standards and the EU blacklist criteria.

US Position: FDII Does Not Violate OECD Harmful Tax Practices

The Department of the Treasury officials adopted a position exactly opposite to the Europeans (which is not surprising at all). The United States believes that the FDII rules only superficially resemble harmful tax practices, but, in reality, they are very different from traditional preferential tax regimes.

The United States urges the Europeans to consider the FDII tax regime in the context of the overall tax reform that is intended to equalize minimum tax rate that applies to foreign activities of a US corporation regardless of whether the income is earned directly by the US corporation or through it subsidiary (which would be classified as a CFC).

In other words, the FDII rules have a different purpose and effect when one looks at the broader context. They are designed to take away a tax incentive to transfer IP out of the United States into a low-tax foreign subsidiary . Therefore, according to the Department of the Treasury, the FDII tax regime will not create any harm that the OECD Harmful Tax Practices Rules were designed to prevent.

FDII Compliance With the OECD Harmful Tax Practices Rules Will Continue to Be in Dispute

The FDII rules’ compliance with the OECD Harmful Tax Practices Rules will continue to be a matter of debate and conflict between the United States and the EU countries. Additionally, there are very strong objections from the Europeans to the FDII rules from the WTO perspective. This conflict will likely grow into a formal legal dispute between the two economic giants.

Sherayzen Law Office will continue to follow this new dispute between the EU and the United States.

3 Main Streamlined Domestic Compliance Disadvantages | SDOP Lawyer

In a previous article, I described the three main advantages of doing an offshore voluntary disclosure through Streamlined Domestic Offshore Procedures (“Streamlined Domestic Compliance”). Today, I would like to discuss three main Streamlined Domestic Compliance disadvantages.

Streamlined Domestic Compliance Disadvantages: Audit Risks

The first main disadvantage of Streamlined Domestic Compliance is the potential IRS audit within three years after the voluntary disclosure is completed. The audit is likely to include everything: FBARs, amended tax returns, Miscellaneous Offshore Penalty calculation and, most importantly, the determination of non-willfulness.

The potential IRS audit stands in a shark contrast to the IRS flagship Offshore Voluntary Disclosure Program (“OVDP”) which will close in September of 2018. At the end of a voluntary disclosure through OVDP, the taxpayer and the IRS sign the Closing Agreement, which (absent fraud or material mis-statements) effectively closes prior tax noncompliance issues forever.

The audit risks may be particularly important to taxpayers who are in the process of obtaining their US citizenship or US permanent residence.

Streamlined Domestic Compliance Disadvantages: Penalty Base Not Limited to Income Noncompliance

One of the main Streamlined Domestic Compliance disadvantages is the fact that the calculation of the penalty base (i.e. what assets are subject to the 5% penalty) includes assets that never produced any foreign income. Moreover, the penalty base includes a foreign asset even if the foreign income from this asset was timely disclosed on the taxpayer’s original tax return, but the asset itself was not reported on FBAR or any other international information return.

In other words, a taxpayer who participates in the Streamlined Domestic Compliance should be prepared to pay a 5% penalty even on assets that are compliant with the US income tax laws.

Again, this is contrary to the rules of the OVDP. In the OVDP, only assets that are tied to income tax noncompliance are included in the penalty base.

Streamlined Domestic Compliance Disadvantages: Danger of Superficial Analysis

Finally, the danger of superficial analysis concerning non-willfulness constitutes the third main disadvantage of the Streamlined Domestic Compliance. In reality, there are two dangers which should be placed at the opposite ends of the voluntary disclosure continuum.

The first danger is the natural bias in the self-assessment of non-willfulness. Oftentimes, a taxpayer may exaggerate the facts in his favor while selectively ignoring the facts that may establish willful noncompliance. This is very natural. It is difficult to find a person who will state outright that he was willful in his prior tax noncompliance.

Usually, this problem can be (and should be) fixed by retaining an international tax attorney to do an independent assessment of the taxpayer’s non-willfulness.

At the opposite end is the danger of concentrating on non-willfulness and ignoring the possibility of doing a Reasonable Cause disclosure. In most cases, this is not a problem because Streamlined Domestic Compliance would be a superior choice despite the 5% penalty. This, however, is not true in all cases and real opportunities are often lost by failure to explore this route.

I should state that the biggest problem that I found in my practice is the fact that some taxpayers do not consult an international tax attorney on this issue. Instead, they try to do everything themselves even though they have no specialized knowledge in this field. I strongly discourage this practice.

I believe that the involvement of an international tax attorney is essential to doing a proper offshore voluntary disclosure.

Contact Sherayzen Law Office for Professional Help with Your Offshore Voluntary Disclosure

Choosing the correct offshore voluntary disclosure path is the most important decision for a taxpayer who wishes to remedy his past noncompliance with US tax laws. Every voluntary disclosure option has its advantages and disadvantages. All essential factors must be considered.

The failure to do proper legal analysis may have highly negative legal and tax consequences. It may even put a taxpayer in a position worse than what he was prior to his attempt to do a voluntary disclosure.

This is why you need the professional help of Sherayzen Law Office. Our experienced legal team has helped hundreds of US taxpayers to do their offshore voluntary disclosures properly. We Can Help You! Contact Us Today to Schedule Your Confidential Consultation!