Ordinary Business Care and Prudence Standard | International Tax Lawyer

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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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Streamlined Disclosure Attorney Madison | FATCA OVDP Lawyer

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In today’s world connected through an invisible network of new technologies, a great number of persons prefer to choose an attorney based on his qualities rather than his state of residence. The residents of Madison, Wisconsin, similarly search for such an attorney, especially in the area of Streamlined compliance procedures by utilizing the search words: Streamlined Disclosure Attorney Madison.

The question is whether an attorney in Minneapolis falls within the search for Streamlined Disclosure Attorney Madison. Furthermore, is there an ethical problem? – i.e. does a Minnesota attorney’s license extend to help clients in Madison with respect to Streamlined Compliance Procedures? Let’s answer all of these questions in this article.

Streamlined Disclosure Attorney Madison Search Includes Attorneys Who Reside in Another State

The answer to the first question is “yes’ – the search for Streamlined Disclosure Attorney Madison includes an attorney whose residence is in Minneapolis as long as this attorney offers his services in Madison to help clients with international tax law issues.

There can be no doubt that an attorney in Minneapolis is objectively (i.e. setting aside the personal qualities and the level of competence that naturally differ from attorney to attorney even within Madison) qualified to provide services in Madison. On the technological side, the improvements in modern communications technology with online video conferences and email, combined with the traditional express mail, have completely eliminated the logistical and administrative differences between a local attorney in Madison and an attorney from Minneapolis who offers his Streamlined Compliance Procedures services in Madison.

On the legal side, the difference never even existed. While there are still many local Madison legal issues concerning local and state law where local attorneys hold a decisive advantage over out-of-state attorneys, this is not the case when it comes to Streamlined Compliance Procedures. This is because Streamlined Compliance Procedures is a purely federal law with zero Madison or even Wisconsin influence. In fact, these procedures constitute an IRS program within the regulatory framework of the much larger US international tax law.

This means that a search for a Streamlined Disclosure Attorney Madison is really a search for an international tax attorney who deals with the Streamlined Compliance Procedures and helps clients in Madison. There is no requirement that the Streamlined Disclosure Attorney Madison actually resides in Madison.

Streamlined Disclosure Attorney Madison Search Applies to Any US International Tax Attorney Without Any License Limitations

The answer to the second question – whether there are any license limitations for a Minnesota attorney to offer international tax services related to Streamlined Compliance Procedures to clients in Madison – is clear from the discussion above: no, there are no attorney license limitations in this case.

Again, the search for Streamlined Disclosure Attorney Madison is a search for an international tax attorney for a specific US international tax law issue. In fact, a search for Streamlined Disclosure Attorney Madison can be easily replaced by a search for a broader category of International Tax Attorney Madison. There is simply no specific local input from City of Madison or the State of Wisconsin, and, theoretically, any attorney licensed to practice in the United States can practice federal tax law.

Of course, in practice, only highly specialized international tax attorneys are competent enough to practice in the area of US international tax law. The number of such attorneys is extremely small; this means that the persons who search for a Streamlined Disclosure Attorney Madison must necessarily broaden their search to attorneys who reside in other states in order to have a real chance for choosing the right Streamlined Disclosure Attorney Madison.

Sherayzen Law Office Offers Services Related to Streamlined Compliance Procedures and Can Be Your Streamlined Disclosure Attorney Madison

Sherayzen Law Office is an international tax law firm that specializes in all types of offshore voluntary disclosure, including Streamlined Compliance Procedures. Our professional tax team, headed by Mr. Eugene Sherayzen, is highly experienced in helping US clients around the globe with their US international tax issues, including voluntary disclosure of foreign accounts and other foreign assets. This why Sherayzen Law Office should be considered as a top candidate when you search for Streamlined Disclosure Attorney Madison.

Contact Us Today to Schedule Your Confidential Consultation!

International Business Transactions | Business Tax Lawyer Minneapolis

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Despite their apparent diversity and complexity, international business transactions can be grouped into three categories: export of goods and services, licensing and technology transfer and foreign investment transactions.

International Business Transactions: Export of Goods and Services

The first category of international business transactions consists of exports involving a sale of a commodity, manufactured goods or services to a purchaser in a foreign country. Such exports may be done pursuant to a single or series of contracts (first type of export of goods and services) or under a more permanent arrangement (second type of export of goods and services), such as: branch office, sales subsidiary, designated foreign representative, distributor, et cetera.

The first type of exports of goods and services are usually “arms length transactions” whereas the second type often involves related-party transactions. The latter sub-type may often draw the attention of the IRS due to high potential of abuse through tax avoidance measures as well as transfer pricing.

In addition to import tax considerations, exporting goods and services also entails a number of legal considerations and documents, such as the sales contract, insurance, transportation documents (e.g. bill of lading), payment mechanisms (e.g. letters of credit), export and import licenses, et cetera. Even the very establishment of a permanent export structure (franchise, subsidiary, et cetera) may raise an avalanche of legal issues that must be resolved in order for the business structure to work.

International Business Transactions: Licensing and Technology Transfers

The second category of international business transactions involves licensing of intellectual property rights and technology transfers. In reality, the technically-correct classification of international business transactions would place licensing and technology transactions as a variation on the export transactions. However, there are important distinctions between the first and the second categories of international business transactions that justify the classification of licensing and technology transfers as a separate category of international business transactions.

The basic idea behind the licensing and technology transfer transactions is not complex: instead of manufacturing a particular product in its home country and then exporting it to foreign countries, the company that owns the intellectual property rights licenses the actual science and the know-how behind the manufacturing process to a foreign firm so that it can manufacture the goods in the foreign country. In return, the company that owns the IP rights receives either a specified payment or a certain percentage based on annual gross sales or production volume.

The advantage of this type of export transaction is the relative ease with which the owner of IP rights can increase earnings without the need to set up a foreign distribution and services network. Moreover, the costs and risks of such a sales distribution network shift to licensee instead of the owner of the IP rights.

The technology transfer and IP licensing, however, carry significant risks of their own. First of all, there is a significant danger that the foreign licensee will master the new technology to directly compete with the IP owner. We have recently seen such an example with many “clean energy” Chinese companies. Second, there is a risk that the transferred technology may be simply stolen in a country where the IP rights are not property protected. Here, the problem is not only the appearance of an eventual competitor, but also of lost license fees. Finally, the licensee may improperly use the technology and create substandard goods, thereby damaging the reputation of the IP owner.

While these risks may be mitigated with proper business planning, one must be very careful about technology transfers and IP licensing, especially in the industries where technologies and know-how change at a slower pace.

International Business Transactions: Foreign Investment Transactions

The final major type of international business transactions consists of foreign investment transactions. This category, in turn, consists of two sub-categories: direct foreign investments and portfolio foreign investments.

Direct foreign investment usually implies an establishment or acquisition of a production capacity or a permanent enterprise, such as a factory or hotel, in the United States. In the United States, any equity investment of ten percent or more is classified as direct foreign investment. Usually, the foreign investor would directly participate in the management of this enterprise. Of course, the direct foreign investment can be done by a US investor investing directly in a foreign country and a foreign investor investing directly in the United States.

There are two types portfolio foreign investments. The first type consists of investments in debt instructions, such as bonds and debentures. The second type consists of an equity investment in which an investor does not have any management role.

There are many advantages to engaging in foreign investment transactions; I will just point out four such advantages here. First, an investor is investing directly into a foreign enterprise which is considered to be a “local” company, thereby avoiding the complications of exporting goods and services. Second, an acquisition of an already established company with its business network, established workforce and reputation, may facilitate a rapid growth in the sales of the produced goods or services. Third, unlike the first category of international business transactions, the host country may be very interested in a direct foreign investment, because it creates jobs and helps the local economy. Hence, an investor may benefit from government incentives, especially free economic zones which levy low to no tax. Finally, in the case of a portfolio investment, investors have limited exposure due to a diversified portfolio and limited equity stake in a single enterprise.

There may be, however, serious disadvantages to foreign investment transactions; I will mention here only three potential problems. First, a direct foreign investment exposes an investor to potential political and economic changes in the host country. For example, expropriation is a significant risk in South American countries. Second, a direct foreign investment implies an international corporate structure that may be very complex, expensive and require extensive tax and business planning. Finally, a portfolio investor without a management role is at the mercy of the company’s management, which may significantly affect the value of his investment.

International Business Transactions: Hybrid Investments

The classification of international business transactions that I provided above is an ideal one. In reality, hybrid investments (i.e. investments that have the features of more than one category of international business transactions) are widespread. One can easily find examples of portfolio investors who control an enterprise through a management agreement.

Serious Illness as Reasonable Cause | International Tax Lawyer

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We are continuing our series of articles on Reasonable Cause. Today, we will discuss whether a serious illness can establish a reasonable cause for abatement of the IRS penalties. It is important to note that this discussion of serious illness as a reasonable cause is equally applicable to death and unavoidable absence of the taxpayer (in fact, the Internal Revenue Manual (IRM) discusses all three circumstances – death, serious illness and unavoidable absence of taxpayer – at the same time in providing guidance on reasonable cause).

Serious Illness Can Constitute a Reasonable Cause

IRM 20.1.1.3.2.2.1 (11-25-2011) expressly states that serious illness can be used as a Reasonable Cause Exception: “death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late… .” In this context, “immediate family” means spouse, siblings, parents, grandparents, or children.

In the business context, a reasonable cause may be established if death, serious illness or other unavoidable absence occurred with respect to a taxpayer (or his immediate family) who had the sole authority to execute the return, make the deposit, or pay the tax. The same rule applies to corporations, partnerships, estates, trusts and other legal vehicles for conducting business.

Taxpayer Has the Burden of Proof to Establish that Serious Illness Constitutes Reasonable Cause for His Prior Tax Noncompliance

Stating that a serious illness can constitute a reasonable cause for abatement of the IRS penalties with respect to prior tax noncompliance is not equivalent to stating that serious illness automatically establishes a reasonable cause.

On the contrary, the taxpayer has the burden of proof to establish that serious illness did indeed constitute reasonable cause with respect to his prior tax noncompliance. In other words, serious illness may not be sufficient to establish reasonable cause for various reasons (for example, in cases where it was not actually related to tax noncompliance).

Factors Relevant to Determination of Whether Serious Illness Is Sufficient to Establish Reasonable Cause Exception

IRM 20.1.1.3.2.2.1 (11-25-2011) provides a list of recommended factors to consider in evaluating a taxpayer’s request for abatement of penalties based on serious illness, death or unavoidable absence. I somewhat modified the list to fit in all factors expressly mentioned in the IRM. Here is the non-exclusive list of factors expressly referenced in the IRM:

1. the relationship of the taxpayer to the other parties involved;

2. the dates, duration, and severity of illness (in case of death, the date of death; in case of unavoidable absence, the dates and reasons for absence);

3. how the event prevented tax compliance;

4. how the event impaired other obligations (including business obligations);

5. if tax duties were attended to promptly when the illness passed (or within a reasonable period of time after a death or absence);

6. (in a business setting) in a situation where someone other than responsible person or the taxpayer was responsible for meeting the infringed business tax obligation, and why that person was unable to meet the obligation;

7. (in a business setting) if only one person was authorized to meet the tax obligation, whether such an arrangement was consistent with ordinary business care and prudence.

This is not an all-inclusive list of factors. The IRM foresees the possibility that any other relevant factors may be considered in the analysis of whether a Reasonable Cause Exception was established based on serious illness, death or unavoidable absence.

Contact Sherayzen Law Office for Experienced Help With Establishing A Reasonable Cause Defense, Including Based on Serious Illness

There is always a risk that the IRS may reject a taxpayer’s reasonable cause argument, often simply because the argument was never properly elaborated by the taxpayer. This is why it is important to maximize your chance of success by timely securing professional legal help.

Sherayzen Law Office is a highly experienced tax law firm that has helped its clients around the world to establish various reasonable cause defenses against IRS domestic and international tax penalties. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Credit Suisse and Italy Settle Dispute Over Undisclosed Offshore Accounts

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On December 14, 2016, Credit Suisse and Italy settled their dispute over Credit Suisse undisclosed offshore accounts owned by Italian tax residents. The settlement between Credit Suisse and Italy was approved by a judge in Milan and obligates Credit Suisse to pay a total of 109.5 million euros – 101 million euros in taxes, interest and penalties; 7.5 million euros as a disgorgement of profits; and 1 million euros as an administrative penalty.

The settlement between Credit Suisse and Italy has ended an investigation by the Italian authorities into the bank’s involvement in helping Italians evade Italian taxes. The Italian government’s inquiry into the Credit Suisse’s role in Italian tax evasion appeared to be thorough and, at times, even combined with significant pressure. For example, in December of 2014, the Italian tax authorities raided the offices of a Credit Suisse’s subsidiary in Milan.

The agreement between Credit Suisse and Italy does not mean the end of the Italian tax authorities’ investigation of Italians with undisclosed offshore accounts. On the contrary, these activities will continue their relentless progress.

While a significant event, the settlement between Credit Suisse and Italy pales in comparison with the settlement between Credit Suisse and the US Department of Justice when Credit Suisse paid $2.6 billion.

Nevertheless, the settlement between Credit Suisse and Italy points to the continued global trend of increased focus on international tax compliance. The new trend really started with the IRS victory in the UBS case in 2008, gained steam with the 2009 Offshore Voluntary Disclosure Program and became worldwide with the passage of FATCA in 2010.

Countries throughout the world, including Italy, have followed the US lead in international tax enforcement. In fact, it appears that the European countries have gone further in some aspects than the United States, especially after the adoption of the Common Reporting Standard (CRS). While the United States refused to join CRS arguing that its revolutionary FATCA already achieved the same goals (and, thereby, effectively turning the United States into a tax shelter for nonresident aliens), the vast majority of the European countries adopted the CRS and applied unprecedented pressure on the financial industry to share the heretofore confidential information with various government tax authorities.

Switzerland has arguably felt more pressure than any other country in the world and has largely been forced to give up its much vaunted bank secrecy. After the US DOJ Program for Swiss Banks dealt the decisive blow to the Swiss bank secrecy laws, various European countries decided to take advantage of the Swiss banks’ defeat and swarmed into Switzerland to get their share of penalties and information regarding tax noncompliance of their own citizens. The recent settlement between Credit Suisse and Italy is just one more example of this continued European squeeze of the Swiss banks for money and information.