Foreign Account Tax Compliance Act

FATCA Tax Lawyers: Six More Agreements to Implement FATCA

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On December 19, 2013, the U.S. Department of the Treasury announced that the United States has signed bilateral agreements with six additional jurisdictions to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). The six jurisdictions are: Malta, the Netherlands, The Islands of Bermuda, and three UK Crown Dependencies – Jersey, Guernsey, and the Isle of Man.

Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. With these most recent agreements, the United States has signed 18 FATCA intergovernmental agreements (IGAs), has 11 agreements in substance, and is engaged in related discussions with many other jurisdictions.

In general, FATCA seeks to obtain information on accounts held by U.S. taxpayers in other countries. It requires U.S. financial institutions to withhold a portion of certain payments made to foreign financial institutions (FFIs) who do not agree to identify and report information on U.S. account holders. Governments have the option of permitting their FFIs to enter into agreements directly with the IRS to comply with FATCA under U.S. Treasury Regulations or to implement FATCA by entering into one of two alternative Model IGAs with the United States.

FATCA Tax Lawyers: Model 1 IGAs Signed by Fix Jurisdictions

Malta, the Netherlands, Jersey, Guernsey, and the Isle of Man signed Model 1 IGAs. Under these agreements, FFIs will report the information required under FATCA about U.S. accounts to their home governments, which in turn will report the information to the IRS. These agreements are reciprocal, meaning that the United States will also provide similar tax information to these governments regarding individuals and entities from their jurisdictions with accounts in the United States.

In addition to these FATCA agreements, protocols to the existing tax information exchange agreements with Jersey, Guernsey, and the Isle of Man were also signed.

FATCA Tax Lawyers: Bermuda Signs Model 2 IGA

Unlike the other jurisdictions, Bermuda signed Model 2 IGA meaning that Bermuda will direct and legally enable FFIs in Bermuda to register with the IRS and report the information required by FATCA about consenting U.S. accounts directly to the IRS. This requirement is supplemented by government-to-government exchange of information regarding certain pre-existing non-consenting accounts on request.

FATCA Tax Lawyers: Tax Shelters Are No Longer Information Shelters

The fact that Bermuda, Jersey, Guernsey, and the Isle of Man (all of which are considered to be offshore havens) signed FATCA is a fact that is indicative of a general trend that I have emphasized since the appearance of FATCA – there are no reasonable safe havens for non-compliant U.S. taxpayers outside of few important jurisdictions, such as China. Even Russia has declared its intention to sign FATCA. More importantly, the jurisdictions that are generally regarded as tax shelter or low-tax jurisdictions are likely to allow the IRS to impose its will on their banks.

“FATCA continues to gather momentum as we work with partners worldwide to combat offshore tax evasion,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. “This large number of signings in one week alone sends a strong signal to tax evaders everywhere: international support for FATCA is growing.”

FATCA Tax Lawyers: Implications of Recent Agreements for Non-Compliant US Taxpayers

These developments continue to support the argument that non-compliant U.S. taxpayers worldwide need to urgently consider their options with respect to the voluntary disclosure of their foreign financial accounts and other foreign assets. Each new jurisdiction that signs FATCA is going to turn over the information about the non-compliant accounts to the IRS in one way or another. In such circumstances, procrastination with a voluntary disclosure may result in a dramatic reduction of available disclosure options and increase the chances of a criminal prosecution by the IRS.

Contact Sherayzen Law Office for Help with Your Voluntary Disclosure of Offshore Assets

If you have undisclosed foreign financial accounts or any other assets subject to U.S. reporting, contact Sherayzen Law Office. Our experienced international tax law firm will thoroughly analyze your case, review the available options and implement a customized plan of your voluntary disclosure (including the preparation of any required legal documents and tax forms).

Do I need an Accountant or Attorney for Form 8938 Offshore Assets Disclosure?

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A lot of taxpayers are still confused about whether they need an attorney or an accountant to file delinquent Forms 8938. As I explain below, Form 8938 is an essentially legal disclosure form and its voluntary disclosure should be handled by an experienced international tax attorney.

Form 8938 Requires Legal Disclosure

It is important to understand that Form 8938, more than any other form except the FBAR now Form 114 (formerly TD F 90-22.1), requires a legal disclosure of specified foreign assets. The form does not involve any accounting calculations of tax liability or even knowledge of US GAAP (something that other information tax returns, like Forms 5471 or 8865, may require). The taxpayer simply needs to disclose his ownership of specified offshore assets according to the instructions of Form 8938.

Failure to File Form 8938 Is a Legal Issue

Since Form 8938 is a legal disclosure form, the failure to file the form and the penalties associated with the form constitute a legal problem that should be handled by an international tax attorney, not an accountant.

This is even more the case because the strategy with respect to handling Form 8938 and the explanation of the reasonable cause require advocacy – a critical skill which is a part of an attorney’s basic training, which accountants are not trained in.

Clients need an advocate to deliver their position to the IRS in a clear manner. Clients need an advocate to be able to interpret the law, not simply assume that what the IRS agent is saying is the only true version of the law. Finally, clients need an advocate to defend their interests with skill and persuasion.

Tax attorneys are advocates, in addition to performing calculations. Despite the seeming confusion over the role of the two professions, an attorney’s entire approach is likely to be radically different from that of an accountant simply because attorneys are trained to think and act in a completely different manner.

Contact Sherayzen Law Office for Legal Help with Your Voluntary Disclosure of Specified Foreign Assets

If you have undisclosed offshore assets that should have been disclosed on Form 8938, contact Sherayzen Law Office. Our experienced international tax firm will thoroughly analyze your case, estimate your potential Form 8938 penalties, identify all non-compliance issues, and develop a comprehensive approach to your offshore voluntary disclosure.

Accountants Beware: Offshore Disclosure with Form 8938 is a Legal Issue

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In an earlier article, I already explained why the FBAR disclosure is a legal issue. In terms of their lineage, Forms 8938 are very similar to the FBARs. While the FBARs are the creation of Bank Secrecy Act, Form 8938 is a creation of a legislation of a similar nature – FATCA (Foreign Account Tax Compliance Act).

The intent of both laws is similar – to produce legal disclosure of foreign assets by U.S. taxpayers. Notice that I am talking about legal disclosure, not an accounting calculation.

While the penalties associated with failure to file Form 8938 are not as severe as those of the FBAR, they are still substantial and have legal and tax repercussions. Where non-compliance is such that it requires voluntary disclosure, the issues associated with Form 8938 take on a new importance that requires the full protection of the attorney-client privilege and complex legal advocacy.

This is why it is so important for the accountants to avoid committing malpractice and recognize that an offshore disclosure that involves filing delinquent Forms 8938 is a legal issue that should be left to international tax attorneys who are trained and experienced in this area of law.

Contact Sherayzen Law Office for Legal Help with Your Voluntary Disclosure of Offshore Assets

If you have undisclosed offshore assets, contact Sherayzen Law Office . Our experienced international tax law firm will thoroughly analyze your case, estimate your potential FBAR penalties, identify all non-compliance issues, and develop a comprehensive approach to your offshore voluntary disclosure.

Application of Offshore Penalty to Business Ownership Interests

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In another essay, I previously discussed the possible inclusion of the business ownership interests in the calculation of the OVDP (2012 Offshore Voluntary Disclosure Program) Offshore Penalty.  In this article, I would like to explore in more depth the application of the Offshore Penalty to ownership of business interests.

OVDP Offshore Penalty

It is a requirement of the OVDP that the taxpayers who enter the program pay the Offshore Penalty. This penalty is imposed in lieu of all other penalties that may apply to the taxpayer’s undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period. The default penalty rate is 27.5% (in limited cases, the penalty is reduced to 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.

The Offshore Penalty calculation includes business ownership interests related to tax noncompliance. 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.

Business Ownership Interests Are Included in the Offshore Penalty; Limited Exceptions

As I previously discussed, the Offshore Penalty is much broader than simply the FBAR penalty. Among other items, the Offshore Penalty encompasses ownership interest in businesses related to income tax non-compliance or acquired by tainted funds (i.e. funds that were subject to U.S. tax but on which no such tax was paid; the definition also includes funds derived from illegal sources such as criminal and terrorist activities).

There are exceptions to this rule, however. Two most prominent exceptions deserve to be emphasized here. First, where a business interest was not obtained by tainted funds and there are no under-reported U.S. tax liabilities, the taxpayer is likely to be able to exclude the business interest from the Offshore Penalty.

Second, the OVDP rules carve out a limited exception for U.S. taxpayers who are foreign residents and quality for the third category of 5% penalty rate. For these taxpayers only, the IRS stated that the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.

Obviously, the determination of whether either of these two exceptions (or any other exception) applies in your individual case should only be determined by an international tax attorney experienced in the area of offshore voluntary disclosures.

Major Types of Business Ownership Interests Covered by the Offshore Penalty

The biggest category of business ownership interests covered by the Offshore Penalty includes ownership of foreign entities for which information returns, such as Forms 5471, 8865, 8858, 926 and so on, should have been filed by the non-compliant taxpayer. Most often, this category includes ownership of closely-held foreign corporation, interest in the controlled foreign partnership and contribution of property to a foreign corporation.

Notice that, even if the business entity controlled by the taxpayer is not itself tax non-compliant, but it holds the assets which are non-compliant (usually because they were purchased by using tainted funds), the entire ownership interest in the business entity may be exposed to the Offshore Penalty.

Another type of business interest that is often subject to Offshore Penalty involves business entities that are virtually indistinguishable from its owners. In situations where a business entity is an alter ego or nominee of the taxpayer, the IRS may determine that the Offshore Penalty should be applied to the underlying assets of the entity.

The most spectacular reach of the OVDP, however, is the possibility of involving domestic entities. In spite of having “Offshore” in its name, the Offshore Penalty can actually apply to ownership of U.S. businesses acquired with tainted funds. This is a critically-important consideration for non-compliant U.S. taxpayers who repatriated tainted funds back to the United States and invested them into U.S. businesses.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure of Offshore and Domestic Business Ownership Interests

Sherayzen Law Office can help you with the disclosure of any of your foreign assets, including Offshore and Domestic business ownership interests. Our international tax law firm is highly experienced in conducting offshore voluntary disclosures of business interests. We will thoroughly analyze your case, assess your tax liability as well as the liability that you would face under the OVDP, determine the available disclosure options and implement the disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).

Contact Sherayzen Law Office to schedule your consultation!

Form 8938 Penalties

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As discussed in an earlier article, Form 8938 is used by specified individuals to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount.

Similarly to most international tax forms issued by the IRS, Form 8938 has its own system of penalties. What makes Form 8938 penalties stand out are the scope of coverage, the severity of penalties, and the effect on the IRS statute of limitations.

A. Scope of Form 8938

Form 8938 is much more intrusive than the now-famous FBARs. While the threshold amount for filing the FBAR is much lower (only $10,000), the type of information requested by Form 8938 is much broader. The FBARs only require disclosure of foreign bank and financial accounts.

Form 8938, however, requires the disclosure not only of the interest held in foreign bank and financial accounts (which may also be somewhat different from the FBAR definition), but also of the interest held in foreign entities and “other foreign financial assets” – the definition of which includes an array of varies types of swaps, contracts, and stocks.

Moreover, Form 8938 directly ties assets disclosed on Forms 3520, 3520-A, 5471, 8621, 8865 and 8891 to the assets that need to be reported on Form 8938 (pursuant to the “duplication” rule, the taxpayers do not need to report on Form 8938 the assets already reported the five aforementioned forms). Therefore, Form 8938 makes it much easier for the IRS to to uncover potential issues with the other six forms (all of which have their own applicable penalty standards).

A word of caution: even if a specified foreign financial asset is reported on any of the six forms listed above, the taxpayer must still include the value of the asset in determining whether the aggregate value of the taxpayer’s specified foreign financial assets is more then the reporting threshold that applies to the taxpayer.

Finally, the IRS can use Form 8938 to analyze if the taxpayer was supposed to file the FBAR and failed to do so (or failed to do so correctly).

Thus, it becomes obvious that Form 8938, which popularly known as a “Son of FBAR”, far excels its father-FBAR in enhancing the IRS capacity to gather additional taxpayer data, use this data for deeper analysis of the taxpayer non-compliance, and imposing civil and criminal penalties on non-compliant taxpayers.

B. Form 8938 Penalties

Form 8938 has a severe penalty system.

1. Failure-to-File Penalty

If the taxpayer is required to file Form 8938, but fails to file a complete and correct Form 8938 by the due date (including extensions), he may be subject to a penalty of $10,000.

If the IRS discovers non-compliance and mails the corresponding notice to the taxpayer, but the taxpayer still does not file Form 8938 within 90 days after the mailing of the notice, additional penalties of $10,000 may be imposed for each 30-day period (or part of a period) of non-compliance after the expiration of the 90-day period. This additional penalty is currently capped at $50,000.

What about the situations where the taxpayer believes that the assets in question are below the threshold amount but the IRS asks the information about the assets in any case? In this case, if the taxpayer fails to respond to the IRS inquiry, the IRS has the power to presume that the taxpayer owns specified foreign financial assets with a value of more than the reporting threshold (even if it is not so in reality). Hence, the IRS can impose failure to file penalties if Form 8938 is not filed.

Common to other forms, From 8938 instructions provide for the reasonable cause exception. However, to avoid the penalties, the taxpayer must affirmatively show the facts that support a reasonable cause claim. The IRS does not consider the potential imposition of civil and criminal penalties by a foreign jurisdiction as a reasonable cause.

Keep in mind that the married taxpayers who file a joint income tax return have a joint and several liability for all IRS penalties.

2. Accuracy-Related Penalty

While Form 8938 is a purely reporting requirement, it contains a provision related to enhancing the accuracy-related penalties. If the taxpayer underpays his tax as a result of a transaction involving an undisclosed specified foreign financial asset, the IRS may impose a penalty of 40% of the underpayment.

For example, if the taxpayer does not report a foreign pension on Form 8938 and he receives a taxable distribution from the pension plan that he did not report on his income tax return, the taxpayer will be subject to the 40% penalty on the underpayment.

The same would be true with respect to any specified foreign financial asset, including ownership of shares in a foreign corporation or an interest in a foreign partnership.

3. Civil Fraud Penalty

If the taxpayer commits civil fraud which results in non-payment of penalties and involves Form 8938, the taxpayer will be subject to the civil fraud penalty of 75% of the underpayment due to fraud.

4. Criminal Penalties

In addition to civil penalties, the IRS may initiate a criminal prosecution of (and impose criminal penalties on) the taxpayers who fail to file Form 8938, fail to report an asset on Form 8938 or have an underpayment of tax.

C. Form 8938 Effect on the Statute of Limitations

Similar to other FATCA provisions (with respect to Forms 5471, 8621, 8865, et cetera), the IRS greatly extended the statute of limitations for the purposes of Form 8938. Unlike the other forms, however, Form 8938 contains a singular provision without a precedent.

The IRS sets forth this general rule in its instructions: the failure to file Form 8938 or the failure to report a required specified foreign financial asset keeps the statute of limitations open for all or a portion of the taxpayer’s income tax return. Once the correct Form 8938 is filed, the statute of limitations is subject to the common three-year rule (i.e. the IRS has three years to audit the taxpayer’s tax return and assess additional tax and penalties), subject to the aforementioned singular provision.

This provision states that, if the taxpayer does not include in his gross income an amount relating to one or more specified foreign financial assets and this amount is more than $5,000, then the statute of limitations is extend to six years after the taxpayer files a complete tax return that contains Form 8938.

Furthermore, for the purpose of the six-year extended statute of limitations provision, “specified foreign financial assets” include any such asset regardless of: (i) the reporting threshold that applies to the taxpayer, or (ii) whether this asset is excepted from reporting because it was reported on certain other forms (such as Form 5471, 8621, 8865, et cetera).

These provisions constitute an incredible increase in the IRS power to extend the statute of limitations and assess additional tax and penalties on the taxpayers.

Contact Sherayzen Law Office For Legal Help With Form 8938

Given the severe penalties that accompany Form 8938, it is very important that you properly comply with the Form’s requirements. Therefore, if you need to file Form 8938, contact Sherayzen Law Office for legal help. Our experienced international tax compliance firm will guide you through the complex web of the U.S. international tax reporting requirements and assist you in bringing your tax affairs in full compliance with the U.S. tax system.