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Ordinary Business Care and Prudence Standard | International Tax Lawyer

Ordinary Business Care and Prudence Standard is a requirement that is present, explicitly or implicitly, in all reasonable cause defenses. In this article, I would like to explain what Ordinary Business Care and Prudence Standard means and what are the main factors for analyzing whether a taxpayer met the burden of proof required under the Ordinary Business Care and Prudence Standard.

Ordinary Business Care and Prudence Standard: General Requirements

The ordinary business care and prudence standard is an objective standard. There is no precise definition of this standard, because its application is fact-dependent. Nevertheless, the standard is generally satisfied as long as the taxpayer acted prudently, reasonably and in good faith (taking that degree of care that a reasonably prudent person would exercise) and still could not comply with the relevant tax requirement. IRM 20.1.1.3.2.2 (02-22-2008) adds that “ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur”.

Ordinary Business Care and Prudence Standard: Common Factors

While the determination under the ordinary business care and prudence standard is highly fact-dependent, there are certain common factors that the IRS will take into account. IRM 20.1.1.3.2.2 (02-22-2008) specifically lists four factors that must be reviewed by the IRS, but states that all available information should be considered. Let’s explore these common factors:

1. Compliance History

The main issue here is to see if this is the first failure to comply with US tax laws by the taxpayer or whether he already violated in the past the tax law provision in question IRM 20.1.1.3.2.2 (02-22-2008) states that “the same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care”. The IRM urges the IRS agents to check at least three preceding tax years for payment patterns and the taxpayer’s overall compliance history.

If the violation was the first time a taxpayer exhibited noncompliant behavior, this will be a positive factor that will be considered with other reasons the taxpayer provided for reasonable cause. While a first-time noncompliance does not by itself establish reasonable cause, taxpayers who violated the same provision more than once will find it more difficult to establish that their behavior satisfied the ordinary business care and prudence standard.

2. Length of Time

At issue here is the time between the event cited as the reason for the initial tax noncompliance and subsequent compliance actions. IRM 20.1.1.3.2.2 (02-22-2008) requires the IRS agents to consider: “(1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.”

Obviously, if the taxpayer did not discover his noncompliance until one year later and immediately tried to remedy the situation, it will add significant force to his argument that his behavior satisfied the ordinary business care and prudence standard. On the other hand, an unexplained delay between the time the taxpayer discovered his noncompliance and the time he attempted to remedy it will have a negative impact on the overall taxpayer’s argument.

Another highly important factor that plays a crucial role in offshore voluntary disclosures is whether, after discovering his prior noncompliance, the taxpayer voluntarily complied prior to being contacted by the IRS. In a voluntary disclosure context, if the IRS initiates an examination and contacts the taxpayer first, his voluntary disclosure options may be entirely foreclosed. On the other hand, the fact that a taxpayer voluntarily contacted the IRS with his amended tax return that corrected his prior tax noncompliance may play a highly positive role in convincing the IRS that the taxpayer’s prior behavior was consistent with the ordinary business care and prudence standard.

Hence, it is highly important for the taxpayer to explain what happened during the time between his prior noncompliance and his current effort to remedy the situation.

3. Circumstances Beyond the Taxpayer’s Control

The crucial issue here is whether the taxpayer could have anticipated the event that caused the noncompliance. If he could have done it, then his case might be materially weakened. On the other hand, if the taxpayer could not have anticipated the event, then, it might play a very important role in convincing the IRS that his behavior satisfied the ordinary business care and prudence standard.

A lot of sub-factors play a very important role here: the taxpayer’s education, his tax advisors, whether he has been previously subjected to the tax at issue, whether he has filed the tax forms in question before, whether there were any changes to the tax forms or tax law (which the taxpayer could not reasonably be expected to know), and so on. The level of complexity of the issue in question is also an important additional sub-factor.

The “circumstances beyond control” factor is necessarily tied to the “length of time” factor described above, because a taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence standard generally requires that the taxpayer continue to meet the requirements, even if is he late.

4. Taxpayer’s Reason for Prior Noncompliance

The taxpayer must provide and the IRS agent must consider an actual reason for the prior tax noncompliance whatever it may be and this reason must address the specific penalty imposed. It is the combination of this taxpayer’s reason together with other factors, including the common factors described above, that will form the basis for the taxpayer’s argument that his behavior satisfied the ordinary business care and prudence standard.

Contact Sherayzen Law Office to Contest IRS Penalties based on Reasonable Cause and Ordinary Business Care and Prudence Standard

Since 2005, Sherayzen Law Office has saved its clients millions of dollars in potential IRS penalties. If you wish to challenge the imposition of IRS penalties on your prior US domestic and/or international tax noncompliance, contact Sherayzen Law Office for professional help. We will thoroughly review the facts of your case, determine the available defense strategies to reduce or eliminate IRS penalties (including the determination of whether your case satisfied the ordinary business care and prudence standard), implement these strategies and defend your case against the IRS.

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Higher OVDP Penalties May Affect More US Taxpayers

As of August 25, 2015, and as a result of increasing number of DOJ Swiss Bank Program Non-Prosecution agreements, 2015, higher OVDP penalties (50 %) apply to US account holders of 43 banks. Between August 1 and August 20, 2015, six more banks were added to the 50% penalty list. In this article, I would like to discuss this trend of higher OVDP penalties and analyze how it affects US taxpayers with undisclosed foreign accounts.

2014 OVDP Background

The 2014 IRS Offshore Voluntary Disclosure Program (“OVDP”) is a sequel to at least six prior voluntary disclosure initiatives since 2003. In reality, 2014 OVDP most closely resembles 2012 OVDP, but there are some crucial differences between 2014 OVDP and 2012 OVDP.

2012 OVDP was a voluntary disclosure program created by the IRS to allow U.S. taxpayers with undisclosed foreign accounts to come forward and settle their US tax problems related to foreign accounts under specific terms. The biggest advantage to participating in the 2012 OVDP (and it remains the same for 2014 OVDP) was the reduction of civil penalties (especially in a willful situation) and avoidance of criminal liability.

Over the years, the offshore voluntary disclosure programs have gotten more and more demanding in terms of information that needed to be submitted by the participating taxpayers and penalties that needed to be paid. Since 2012 OVDP never considered the difference between willful and non-willful taxpayers, many international tax lawyers considered it unfair for non-willful taxpayers to participate in the OVDP.

Learning from these experiences, the IRS realized that it could get better and more widespread compliance if it is able to effectively process non-willful taxpayers while, at the same time, imposing harsher penalties on willful taxpayers. Hence, the IRS implemented dramatic changes to the 2012 OVDP; from these changes, the Streamlined Options and 2014 OVDP with higher OVDP penalties were born.

Higher OVDP Penalties under 2014 OVDP

Since most of the non-willful taxpayers were likely to follow the Streamlined options, the IRS felt that it could impose higher OVDP penalties on the more stubborn willful taxpayers, particularly taxpayers with undisclosed Swiss accounts who did not heed the IRS warnings and did not enter the 2014 OVDP timely.

From this desire, the dual-tier OVDP penalty system was born. The first tier imposes a regular 27.5% (of the” OVDP penalty base”) penalty if the foreign accounts of US taxpayers who entered the OVDP program were not held in the banks on the IRS list. Also, there was a limited opportunity to enter the OVDP at 27.5% penalty rate even the “listed” foreign bank accounts if the taxpayer filed the preclearance request prior to August 4, 2014.

The second tier imposes higher OVDP penalties of 50% if the taxpayer filed the preclearance request after August 4, 2014, and the foreign accounts were held at a bank which is on the IRS list of foreign banks/facilitators.

DOJ Swiss Bank Program and the Expansion of the IRS List of Foreign Banks/ Facilitators

Initially, the IRS List of Foreign Banks consisted of a dozen banks already under investigation as of June 18, 2014, which included such big names as UBS, Credit Swiss, Zurcher Kantonalbank, et cetera. This means that higher OVDP penalties were imposed on US taxpayers with undisclosed foreign accounts at these banks if these taxpayers did not file the preclearance request timely.

On August 29, 2013, the US Department of Justice announced an unprecedented initiative – The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (“Swiss Bank Program”) – which was intended to allow Swiss banks avoid DOJ prosecution in exchange for disclosure of their non-compliant US account holders and payment of monetary penalties. In essence, this was a voluntary disclosure program for Swiss banks similar to OVDP for US individuals (and, similarly to higher OVDP penalties, the Swiss Bank Program also had its own graduated scale of penalties).

More than one hundred Swiss banks decided to participate in the DOJ Swiss Bank Program and complied with December 31, 2013 filing deadline. Starting March of 2015, the Swiss Bank Program entered its final stage in which the DOJ and the Swiss banks entered into individualized Non-Prosecution Agreement.

As these banks enter into the Non-Prosecution Agreements, the IRS adds each bank to the IRS List of Foreign Banks. This directly results in higher OVDP penalties for US taxpayers who owned foreign accounts at the “listed” banks and did not file the OVDP preclearance requests prior to the relevant Non-Prosecution Agreement.

As of August 26, 2015, this list consists virtually exclusively of Swiss banks and includes 43 foreign banks:

UBS AG
Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
Wegelin & Co.
Liechtensteinische Landesbank AG
Zurcher Kantonalbank
swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
BSI SA (effective 3/30/15)
Vadian Bank AG (effective 5/8/15)
Finter Bank Zurich AG (effective 5/15/15)
Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
MediBank AG (effective 5/28/15)
LBBW (Schweiz) AG (effective 5/28/15)
Scobag Privatbank AG (effective 5/28/15)
Rothschild Bank AG (effective 6/3/15)
Banca Credinvest SA (effective 6/3/15)
Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
Berner Kantonalbank AG (effective 6/9/15)
Bank Linth LLB AG (effective 6/19/15)
Bank Sparhafen Zurich AG (effective 6/19/15)
Ersparniskasse Schaffhausen AG (effective 6/26/15)
Privatbank Von Graffenried AG (effective 7/2/15)
Banque Pasche SA (effective 7/9/15)
ARVEST Privatbank AG (effective 7/9/15)
Mercantil Bank (Schweiz) AG (effective 7/16/15)
Banque Cantonale Neuchateloise (effective 7/16/15)
Nidwaldner Kantonalbank (effective 7/16/15)
SB Saanen Bank AG (effective 7/23/15)
Privatbank Bellerive AG (effective 7/23/15)
PKB Privatbank AG (effective 7/30/15)
Falcon Private Bank AG (effective 7/30/15)
Credito Privato Commerciale in liquidazione SA (effective 7/30/15)
Bank EKI Genossenschaft (effective 8/3/15)
Privatbank Reichmuth & Co. (effective 8/6/15)
Banque Cantonale du Jura SA (effective 8/6/15)
Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA (effective 8/6/15)
bank zweiplus ag (effective 8/20/15)
Banca dello Stato del Cantone Ticino (effective 8/20/15)

Possible Future Scenario: Higher OVDP Penalties for Non-Swiss Bank Accounts?

Given the success of the Swiss Bank Program, I expect that this experience maybe applied by the IRS in another country and even worldwide. If this happens, higher OVDP penalties may affect a larger percentage of US taxpayers with undisclosed foreign accounts outside of Switzerland. Israel, Singapore, the Caribbean islands (e.g. the Cayman Islands) and other tax shelter and low-tax jurisdictions are all good candidates for the expansion of the Swiss Bank Program.

Impact on US Taxpayers

Given the continuous expansion of the IRS List of Foreign Banks (as a result of Swiss Bank Program Resolutions), more and more US taxpayers are likely to be affected by the higher OVDP penalties. Moreover, in light of the potential expansion of the Swiss Bank Program to other countries, it is very likely that higher OVDP penalties will commence to impact more US taxpayers with non-Swiss foreign accounts. Finally, there is a possibility that the almost worldwide implementation of FATCA may lead to higher OVDP penalties in the future.

Thus, in light of these developments, US taxpayers with undisclosed foreign accounts should contact an experienced international tax attorney to review their offshore voluntary disclosure options. Failure to do so may lead not only to higher OVDP penalties down the road, but also to the total loss of the possibility of doing a voluntary disclosure (for example, if the IRS commences an investigation) and imposition of willful FBAR penalties.

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

This is why you should contact the experienced legal team of Sherayzen Law Office lead by the founder of the firm – Eugene Sherayzen, Esq. Mr. Sherayzen is a highly experienced international tax attorney who has helped hundreds of US taxpayers worldwide to bring their US tax affairs in full compliance with US tax laws. He can help you!

IRS Increases Use of John Doe Summons for Unreported Offshore Bank Accounts

Some time ago, in a joint statement before the Permanent Subcommittee on Investigations Committee on Homeland Security and Government Affairs of the United States Senate for a hearing on “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Offshore Accounts”, Deputy US Attorney General James M. Cole and Assistant Attorney General, Tax Division, Kathryn Keneally detailed a number of enforcement actions targeting US taxpayers with undisclosed foreign bank accounts and the foreign banks in question.

The Internal Revenue Service and the U.S. Department of Justice utilize various tools to track and hold accountable individuals who evade their taxes and reporting obligations by sheltering money in undisclosed foreign bank accounts. One important law enforcement mechanism that has led to much success in gathering information about foreign accounts has been the use of John Doe summons. The IRS defines a John Doe summons as “[A]ny summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified.” A John Doe summons, if authorized, allows the IRS request the identities of U.S. taxpayers who may have offshore bank accounts.

If you are an individual subject to U.S. taxes and you have an undisclosed foreign bank account, you should be aware that the odds are increasing each year that the IRS will eventually determine your identity. The penalties for not disclosing a foreign bank account are severe; if you have such an account you should seek the advice of a tax attorney. The experienced international tax law firm of Sherayzen Law Office, PLLC can assist you in these important matters.

John Doe Summons and Other Enforcement Mechanisms

In a previous article, we covered the IRS John Doe summons seeking records of the correspondent account at Wells Fargo for Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB), a Barbados-based bank with branches in eighteen Caribbean countries. The IRS has been utilizing John Doe summons frequently and will likely increase its use in the future. For example, in a recent high-profile case, the federal district court for the Southern District of New York entered an order authorizing the IRS to issue a John Doe summons seeking records for Wegelin Bank’s U.S. correspondent account at the Swiss bank, UBS.

According to the joint statement, on November 13, 2013, the same court, “[E]ntered an order authorizing the IRS to issue John Doe summonses seeking records of the Zurcher Kantonalbank and its affiliates (collectively ZKB) correspondent accounts at Bank of New York Mellon and Citibank NA for information relating to U.S. taxpayers holding undisclosed accounts in ZKB.” Several days later the court also issued an order that authorized the IRS to issue John Doe summonses seeking correspondent account records held by 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 at Bank of New York Mellon, Citibank NA, HSBC Bank NA, JPMorgan Chase Bank NA, and Bank of America NA.

In the joint statement, it was also noted that the DOJ has also “[E]nforced summonses and subpoenas for records that account holders are required to maintain concerning their foreign banking activities through the successful litigation of the applicability of the ‘required record’ exception to the production privilege under the Fifth Amendment.” The statement notes that every appellate court that has reviewed the issue has, “[R]ejected the argument that witnesses can refuse to comply with a subpoena for the bank records that are required by law to be kept and presented for inspection as a condition of maintaining an offshore account.”

Impact on U.S. Taxpayers with Undisclosed Foreign Accounts

John Doe Summons constitute a very useful technique for the IRS to find non-complying U.S. taxpayers with undisclosed foreign accounts. It is important to keep in mind that the enforcement mechanisms detailed in this article are in addition to other programs, such as the Offshore Voluntary Disclosure Program and the US-Switzerland Bank Disclosure program, among others. Moreover, with the continuous expansion of FATCA enforcement, the non-complying U.S. taxpayers are now running a very high risk of detection by the IRS.

The consequences for these non-complying U.S. taxpayers can be very grave. There are extremely high civil penalties as well as potential criminal penalties that may be applied in such cases.

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

The analysis above means that, if you are a U.S. taxpayer with an undisclosed offshore bank account, you need to consider your voluntary disclosure options as soon as possible.

We can help you. At Sherayzen Law Office, Mr. Eugene Sherayzen an experienced international tax attorney will thoroughly analyze your case, estimate your potential FBAR exposure, create a plan for your voluntary disclosure and implement it (i.e. we will prepare all of the tax forms and legal documents that you need for the voluntary disclosure). We will guide you every step of the way and offer rigorous ethical representation before the IRS.

Contact Us to Schedule Your Confidential Consultation Now!