Report of Foreign Bank and Financial Accounts FINCEN Form 114

FBAR Penalties vs Offshore Voluntary Disclosure Program Penalties

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There is a great confusion among international tax attorneys and Offshore Voluntary Disclosure Program (OVDP) applicants with respect to the OVDP Offshore Penalty and how it differs from the FBAR penalties. I already described in another article the OVDP penalties. In this article, I would like to compare and contrast some of the major features of the OVDP Offshore Penalty with the FBAR penalties.

FBAR Penalties

FBAR is one of the most unforgiving forms on the planet. The penalties associated with delinquent FBARs can be terrifying.

At the apex of the penalty structure are the criminal penalties that are imposed in association with a willful violation of the FBAR filing requirements under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. Section 1001. The criminal penalties may be up to 10 years in jail and $500,000 in fines.

Willful (i.e. where a person willfully fails to report an account or account identifying information) civil penalties equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Note, that a penalty in this case applies to each violation which is defined as each undisclosed account per year.

Even where the violation is non-willful, a person may be subject to a civil penalty of $10,000 per violation. Again, note that this is a penalty per violation – i.e. per each unreported account per each year.

For the purposes of this article, it is also important to note that the penalties apply only to “foreign financial accounts”. This term is defined broadly to include various types of accounts which are not normally associated with the word “account” (for example: a precious metals storage or a life insurance policy with a cash-surrender value). Nevertheless, the FBAR penalty would not apply to real estate or a business interest; it would apply only to foreign financial accounts – i.e. the balances on the foreign financial accounts and the number of these accounts constitute the primary penalty base for the calculation of the FBAR penalties.

OVDP Offshore Penalties

In contrast to traditional FBAR penalties, OVDP Offshore Penalty may mean a completely different penalty range and penalty base.

Offshore Penalty Range

Unlike the FBAR penalties, OVDP Offshore Penalty is a limited penalty – i.e. there is a certain penalty that you have to pay by virtue of participating into the program. It is very important to understand that most individual circumstances, willfulness, non-willfulness and reasonable case have virtually no impact on the calculation of the Offshore Penalty.

There are three tiers of the OVDP Offshore Penalty. First, there is a 5% penalty tier. There are various possibilities how one would be entitled to such a favorable treatment; a detailed discussion of the 5% penalty possibilities is described elsewhere on sherayzenlaw.com.

Second, there is a 12.5% penalty tier. An OVDP applicant would be entitled to this penalty tier only if, during each of the years covered by the OVDP, the taxpayer’s penalty base (see below for detailed explanation of what “penalty base” means) is less than $75,000.

Finally, if neither 5% nor 12.5% penalty tiers apply, the default penalty of 27.5% of the penalty base will apply.

Penalty Base

As important as the penalty range, it pales in comparison to the determination of the OVDP Offshore Penalty base, because these calculations can be vastly different from the FBAR penalties.

First, the Offshore Penalty is imposed only once on the highest amount of the penalty base during the Voluntary Disclosure period (i.e. years covered by the OVDP which sometimes can be quite tricky to figure out).

Second, the base for the Offshore Penalty includes a wide variety of assets including foreign bank accounts, the fair market value of assets in undisclosed offshore entities, and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income. The general rule is that the offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset.

This means that the Offshore Penalty may include such assets as business ownership interests, stocks, artwork, automobiles, patents, trademarks, and (very important) real estate. Even ownership of U.S. businesses acquired with tainted funds may be open to the Offshore Penalty.

In other words, the penalty base of the OVDP Offshore Penalty may include a much greater variety of assets in addition to the assets already covered by the FBAR.

Penalty Differences Between FBARs and OVDP Should Influence Your Voluntary Disclosure Options

Given the tremendous differences in the range of penalties and the calculation of the penalty base, it is highly important (and I cannot stress this point enough) to properly analyze the potential tax liabilities under both methods before making the decision on whether to enter the OVDP or pursue a reasonable cause (so-called “noisy” or “modified”) voluntary disclosure. It is highly important that the client understands the differences in the calculations and the potential risks of pursuing either option.

Contact Sherayzen Law Office for Professional Help With the Disclosure of Your Foreign Financial Accounts

If you have undisclosed foreign financial accounts or other offshore assets, contact Sherayzen Law Office for legal help. Our experienced international tax law firm will thoroughly analyze your case, calculate your potential tax liabilities, present you with a range of options, and implement your voluntary disclosure plan (including preparation of all tax forms and legal documents).

FATCA Online Registration System – FATCA Lawyer Minneapolis

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On August 22, 2013, the Internal Revenue Service announced the opening of a new online registration system for financial institutions that need to register with the IRS under the Foreign Account Tax Compliance Act (FATCA).

Financial institutions that must register with the IRS to meet their FATCA obligations can now begin the process of registering by creating an account and providing required information. Financial institutions will also be able to provide required information for their branches of operation and other members of their expanded affiliate groups in which the financial institution is the lead organization.

The registration system, designed to enable secure account management, is a web-based application with around-the-clock availability.

Within a secure environment, the new registration system enables financial institutions to:

•establish online accounts;
•customize home pages to manage accounts;
•designate points of contact to handle registrations;
•oversee member and/or branch information; and
•receive automatic notifications of status changes.

Financial institutions are encouraged to become familiar with the system, create their online accounts and begin submitting their information. Starting in January 2014, financial institutions will be expected to finalize their registration information by logging into their accounts, making any necessary changes and submitting the information as final.

As registrations are finalized and approved in 2014, registering financial institutions will receive a notice of registration acceptance and will be issued a global intermediary identification number.

The IRS will electronically post the first IRS Foreign Financial Institution (FFI) List in June of 2014, and will update the list monthly. To ensure inclusion in the June 2014 IRS FFI List, financial institutions will need to finalize their registrations by April 25, 2014.

IRS Serves Summons on FirstCaribbean International Bank’s US Wells Fargo Account

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The Department of Justice issued a release on April 30, 2013 that a federal court in San Francisco has entered an order authorizing the Internal Revenue Service (IRS) to serve a “John Doe” summons seeking information about U.S. taxpayers who may hold offshore accounts at Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB) through their correspondent account at Wells Fargo N.A. A John Doe summons enables the IRS to obtain information about possible violations of US tax laws by U.S. taxpayers whose identities are unknown. This specific summons directs Wells Fargo to produce records identifying U.S. taxpayers who have accounts at FCIB and other banks that used FCIB’s correspondent account.

The order was signed by Senior District Judge Thelton E. Henderson, and allows the IRS to identify U.S. taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used the Wells Fargo correspondent account.

This article will briefly explain the IRS John Doe summons. It is not intended to constitute tax or legal advice

Correspondent Accounts

According to the DOJ, “A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers.” The IRS can obtain all of this desired information through a John Doe summons issued to the U.S. bank holding the correspondent account.

Canadian Imperial Bank of Commerce’s FirstCaribbean International Bank

FCIB is based in Barbados and has branches in 18 Caribbean countries, according to the declaration of IRS Revenue Agent Cheryl R. Kiger, filed in support of the court petition. These countries include the British Virgin Islands, Dominica, Cayman Islands, Bahamas, and Barbados, among others. FCIB does not have any U.S. branches; however, it does maintain a U.S. correspondent account at Wells Fargo Bank N.A. Wells Fargo, headquartered in San Francisco, CA is the fourth largest bank in the U.S. by assets, and the largest bank when ranked by market capitalization, according to Wikipedia.

Per Agent Kiger’s declaration, the IRS discovered that U.S. taxpayers were using FCIB to help them escape detection of their offshore accounts by the IRS and to not pay U.S. federal income tax on money held in such offshore accounts. According to the DOJ release, after reviewing information submitted by more than 120 FCIB customers who enrolled in the IRS’s Offshore Voluntary Disclosure Program, the IRS determined that many FCIB customers in the John Doe summons class, “[M]ay have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.”

Latest Example of How Offshore Voluntary Disclosure Programs Help IRS Identify Other Non-Compliant US Taxpayers

Since 2009, Sherayzen Law Office has predicted that the IRS Offshore Voluntary Disclosure Programs (now closed) will produce a wealth of information that the IRS will use to identify other targets for investigation and prosecution. We further predicted the more widespread use of John Doe summons. Finally, since the Wegelin bank case began, we have repeatedly advised our clients that the IRS is likely to use the correspondent accounts opened with U.S. banks to identify non-compliant taxpayers with undisclosed foreign accounts.

Over the past four years, we have seen all of our predictions come true, and the latest move by the IRS against the FirstCaribbean International Bank is just the latest example of it.

According to Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, “The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes. This John Doe summons is a visible indication of how we are using the many tools available to us to pursue this activity wherever it is occurring. Those who are still hiding should get right with their country and their fellow taxpayers before it is too late.” Acting IRS Commissioner Steven T. Miller added, “This summons marks another milestone in international tax enforcement. Our work here shows our resolve to pursue these cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.”

Contact Sherayzen Law Office for Help With the Voluntary Disclosure of Your Foreign Bank Accounts

If you are a US taxpayer who is using foreign bank accounts to attempt to under-report US income or evade US tax laws, this summons should serve as a warning to you. The IRS will likely increase their use of enforcement mechanisms such as the John Doe summons in the near future, so you are highly advised to seek an experienced attorney in these matters.

For the U.S. taxpayers with have undisclosed financial accounts in FirstCaribbean International Bank, the time to act is now – before the IRS finds them.

This is why it’s a good idea to contact Sherayzen Law Office an experienced law firm in Offshore Voluntary Disclosures. Our international tax team can assist you in all of your tax and legal needs concerning undisclosed foreign accounts and income and help you avoid making costly mistakes.

FBAR Disclosure of Offshore Assets: the Importance of Issue Spotting

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It is terrifying that so many accountants who take on the legal issue of FBAR disclosure are not trained in issue spotting. It may be the number one of the top reasons why so many voluntary disclosures handled by accountants and even attorneys have gone so wrong.

A lot of tax professionals who are familiar with voluntary disclosures concerning foreign accounts simply concentrate on the bigger issue of FBAR penalties. However, due to this over-simplification of the voluntary disclosure, they ignore the fact that most disclosures of offshore assets involve a lot of related issues that, besides their own importance, may directly influence the FBAR disclosure strategy.

For example, I have seen cases where accountants would begin a voluntary disclosure process with respect to foreign investment accounts that contains foreign mutual funds – the issue that immediately should be spotted by the accountants as potentially involving PFICs. Unfortunately, most accountants are not even aware of the existence of PFICs and their unique place in the Internal Revenue Code. Then, without recognizing this problematic issue, these accountants would herd their clients into the IRS Offshore Voluntary Disclosure Program (OVDP) closed claiming that there was full compliance with the accounts and claiming that these accounts should be excluded from the OVDP Offshore Penalty. The end-result in such cases would often be the rejection of the exclusion based on PFIC increase in tax (i.e. the PFIC distributions were reported but incorrectly calculated – i.e. income tax non-compliance).

Obviously, how the case would turn out would ultimately depend on its particular facts, but this is an example indicate of the trend and why it is so important to engage in issue-spotting.

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

If you have undisclosed foreign assets that should have been disclosed to the IRS on the FBAR, Form 8398 or other information returns, contact Sherayzen Law Office for help.

Our experienced international tax law firm will thoroughly review your case, identify the issues involved in your case, estimate your FBAR penalties, propose a definite action plan on how to deal with your situation and implement this plan.

Call or email our experienced voluntary disclosure team NOW!