Foreign Life Insurance Policies – FBAR Reporting

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Foreign Life Insurance Policies are very popular around the world, especially in India, Germany and France (Assurance Vie accounts). Yet, very few U.S. taxpayers (especially H-1B holders and U.S. permanent residents) are aware of the fact that these policies may be subject to numerous and complex IRS tax reporting requirements in the United States. In this article, I would like to generally discuss the FBAR requirements applicable to foreign life insurance policies.

I will not be discussing here the requirements for a qualified foreign life insurance policy, because it is mostly irrelevant since the great majority of foreign life insurance policies would not be qualified policies.

Types of Foreign Life Insurance Policies

Before we start exploring which foreign life insurance policies (also known as Life Assurance Policies) are subject to the FBAR requirement, it is important to distinguish three general categories of foreign life insurance policies.

In the order of rising complexity, the first category of foreign life insurance policies consists of simple, straightforward life insurance policies with no cash surrender value, no income payments and no income accumulations. The taxpayer simply makes the required premium payments and he expects a fixed-amount payout at death.

The second category of foreign life insurance policies has a cash-surrender value, but no income. The taxpayer pays a premium and expects a certain payout when the policy is surrendered or matures. The cash surrender value grows over time mostly through premiums and bonuses which would be paid out when the policy is surrendered. There is also a potential death benefit.

Finally, the third category of foreign life insurance policies has a cash-surrender value with investments and/or income. There is a large variety of investment life insurance policies. The most common arrangement, though, is where the taxpayer pays a relatively large initial premium which is invested in foreign mutual funds; the growth in mutual funds will usually determine the cash-surrender value. Oftentimes, the cash-surrender value in these policies is tax-free if certain requirements are met (for example, Assurance Vie policies in France or certain life insurance policies in India).

In some cases (for example, in Malaysia), an investment foreign health insurance policy may be tied into a life insurance policy.

FBAR – FinCEN Form 114

FinCEN Form 114 – Report of Foreign Bank and Financial Accounts (commonly known as FBAR) is the most important US tax information return. FBAR must be filed by a US tax resident if the aggregate value of foreign financial accounts (in which this US person has financial interest and/or over which this US person has signatory authority) exceeds $10,000 at any time during the calendar year. The 2015 FBAR must be received by the IRS by June 30, 2016 without any extension possible; however, starting the reporting for the calendar year 2016 (i.e. 2016 FBAR) the FBARs are due on April 15 with an extension possible.

The importance of FBAR stems from the draconian FBAR penalties. Unlike many other information returns, FBAR imposes penalty not only on the willful non-filing, but also on the non-willful failure to file the FBAR. The willful FBAR penalties range from criminal penalties with up to 5 years in prison to up to $100,000 penalty per account per year. The FBAR statute of limitations is six years, which means that up to six years maybe subject to a penalty (though, usually it would be 2-4 years).

Foreign Life Insurance Policies and FBAR Reporting

Foreign life insurance policies must be reported on the FBAR if they have a cash-surrender value. Therefore, foreign life insurance policies that fall into categories two and three described above are always reportable. Investment foreign life insurance policies promoted by national governments (such as Assurance Vie accounts in France) are reportable even if they are considered to be held by a foreign trust (such as Superannuation Accounts in Australia).

The first category of foreign life insurance policies I listed above (i.e. life insurance policies without any cash-surrender value) are not likely to be reportable, but there are exceptions.

The determination of whether your foreign life insurance policies are reportable on the FBAR should be made by an international tax attorney; I strongly discourage any attempt by US taxpayers to make this determination without legal assistance.

Foreign Life Insurance Policies and Other Reporting Requirements

It is important to note that other US reporting requirements may apply to foreign life insurance policies. Examples include FATCA Form 8938, PFIC compliance, foreign trust reporting, et cetera.

Contact Sherayzen Law Office for Help With Foreign Life Insurance Policies

If you have foreign life insurance policies, contact Sherayzen Law Office for assistance as soon as possible. Foreign life insurance policies can be extremely complex and the US reporting requirements associated with them vary from country to country. Sherayzen Law Office has accumulated tremendous experience in dealing with foreign life insurance policies from Australia, Canada, New Zealand, Europe and Asia. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

First Conviction of Non-Swiss Financial Institutions For Tax Evasion Conspiracy

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On March 9, 2016, the IRS announced the first conviction of Non-Swiss Financial Institutions for tax evasion conspiracy. At Sherayzen Law Office, we have been predicting now for years that the IRS would expand its prosecution of financial institutions far beyond the Swiss borders, specifically pointing to tax shelters such as Cayman Islands. Now that our strategic analysis has been confirmed, it is important to analyze this first conviction of Non-Swiss Financial Institutions and its impact on U.S. taxpayers with undisclosed foreign accounts.

Factual Background of the First Conviction of Non-Swiss Financial Institutions

The first conviction of Non-Swiss Financial Institutions concerned two Cayman Island Financial Institutions, Cayman National Securities Ltd. (CNS) and Cayman National Trust Co. Ltd. (CNT). CNS and CNT were Cayman Island affiliates of Cayman National Corporation, which provided investment brokerage and trust management services to individuals and entities within and outside the Cayman Islands, including citizens and residents of the United States (U.S. taxpayers).

According to the IRS and documents filed in Manhattan federal court, from at least 2001 through 2011, CNS and CNT assisted certain U.S. taxpayers in evading their U.S. tax obligations to the IRS and otherwise hiding accounts held at CNS and CNT from the IRS (hereinafter, undeclared accounts). CNS and CNT did so by knowingly opening and maintaining undeclared accounts for U.S. taxpayers at CNS and CNT. Specifically, and among other things, CNS and CNT opened and encouraged many U.S. taxpayer-clients to open accounts held in the name of sham Caymanian companies and trusts (collectively, structures), thereby helping U.S. taxpayers conceal their beneficial ownership of the accounts. Furthermore, CNS and CNT treated these sham Caymanian structures as the account holders and allowed the U.S. beneficial owners of the accounts to trade in U.S. securities without ever requiring these U.S. persons to submit Form W-9. CNS failed to disclose to the IRS the identities of the U.S. beneficial owners who were trading in U.S. securities, in contravention of CNS’s obligations under its Qualified Intermediary Agreement (QIA) with the IRS.

At their high-water mark in 2009, these two Non-Swiss Financial Institutions (CNS and CNT) had approximately $137 million in assets under management relating to undeclared accounts held by U.S. taxpayer-clients. From 2001 through 2011, CNS and CNT earned more than $3.4 million in gross revenues from the undeclared U.S. taxpayer accounts that they maintained.

In 2008, after learning about the investigation of Swiss bank UBS AG (UBS) for assisting U.S. taxpayers to evade their U.S. tax obligations, these two Non-Swiss Financial Institutions (i.e. CNS and CNT) continued to knowingly maintain undeclared accounts for U.S. taxpayer-clients and did not begin to engage in any significant remedial efforts with respect to those accounts until 2011 and 2012.

In or about June 2011, CNT hired a new president, who spearheaded a review of CNT’s files. In the course of that review, not a single file was found to be complete and without tax or other issues. Moreover, with respect to the structures that had U.S. beneficial owners, CNT’s files contained little, if any, evidence of tax compliance.

Guilty Pleas of these Two Non-Swiss Financial Institutions

On March 9, 2016, both Non-Swiss Financial Institutions, CNS and CNT pleaded guilty to a criminal Information charging them with conspiring with many of their U.S. taxpayer-clients to hide more than $130 million in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts. CNS and CNT entered their guilty pleas pursuant to plea agreements.

As part of their plea agreements, CNS and CNT have agreed to cooperate fully with the IRS investigation of the companies’ criminal conduct. The IRS states that, to date, CNS and CNT have already made substantial efforts to cooperate with that investigation, including by: (1) facilitating interviews of CNS and CNT employees, including top level executives; (2) voluntarily producing documents in response to the IRS requests; (3) providing, in response to a treaty request, unredacted client files for approximately 20 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT; and (4) committing to assist in responding to a treaty request that is expected to result in the production of unredacted client files for approximately 90 to 95 percent of the U.S. taxpayer-clients who maintained accounts at CNS and CNT.

In connection with their guilty pleas, CNS and CNT have also agreed to pay the United States a total of $6 million, which consists of the forfeiture of gross proceeds of their illegal conduct, restitution of the outstanding unpaid taxes from U.S. taxpayers who held undeclared accounts at CNS and CNT, and a fine.

Impact of the Guilty Pleas of Non-Swiss Financial Institutions on U.S. Taxpayers with Undeclared Foreign Accounts

The impact of the guilty pleas of these two Cayman Island Non-Swiss Financial Institutions is difficult to overstate. First, it becomes clear that the IRS feels confident that it can replicate its success in Switzerland in every offshore jurisdiction and there is no limit to their ability to uncover undeclared foreign accounts of U.S. taxpayers.

“Today’s convictions make clear that our focus is not on any one bank, insurance company or asset management firm, or even any one country,” said Acting Deputy Assistant Attorney General Goldberg of the Justice Department’s Tax Division. “The Department and IRS are following the money across the globe – there are no safe havens for U.S. citizens engaged in tax evasion or those actively assisting them.”

Second, it is evident that the IRS strategy is to first force Non-Swiss Financial Institutions to reveal information about their U.S. clients and, then, using the information provided by these institutions, pursue noncompliant U.S. taxpayers. As part of their guilty pleas, CNS and CNT are required to turn over extensive materials about their U.S. clients and these noncompliant U.S. taxpayers should be preparing to face the full wrath of the IRS.

“The guilty pleas of these two Cayman Island companies today represent the first convictions of financial institutions outside Switzerland for conspiring with U.S. taxpayers to evade their lawful and legitimate taxes,” said U.S. Attorney Bharara. “The plea agreements require these Cayman entities to provide this office with the client files, because we are committed to finding and prosecuting not only banks that help U.S. taxpayers evade taxes, but also individual taxpayers who find criminal ways not to pay their fair share. We will follow them no matter how far they go to hide their accounts, whether it is Switzerland, the Cayman Islands, or some other tax haven.”

In essence, between FATCA and the constant IRS pressure on Non-Swiss Financial Institutions, the noncompliant U.S. taxpayers are in the constant danger of discovery, which now becomes more of a question of “when”, rather than “if”.

What Should U.S. Taxpayers With Undeclared Foreign Accounts Do?

In light of this development, U.S. taxpayers with undeclared foreign accounts in Non-Swiss Financial Institutions should explore their voluntary disclosure options as soon as possible. For this purpose, they should contact an experienced international tax law firm that specializes in this field.

Contact the Experienced International Tax Law Firm of Sherayzen Law Office, Ltd. for Professional Help With Your Undeclared Accounts

If you have undeclared foreign accounts, foreign income or foreign business entities, you are encouraged to contact the international tax law firm of Sherayzen Law Office as soon as possible. Our team of experienced tax professionals specializes in this area of law, including the preparation of all necessary legal documents and tax forms. We have helped hundreds of U.S. taxpayers around the world and we can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Julius Baer Deferred Prosecution Agreement

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On February 4, 2016, the US DOJ announced that it filed criminal charges against Bank Julius Baer & Co. Ltd. (“Julius Baer” or “the company”). At the same time, the DOJ announced a Julius Baer Deferred Prosecution Agreement. Let’s explore this event in more detail.

Julius Baer Deferred Prosecution Agreement Background

Unlike many other Swiss Banks, Julius Baer could not participate in the Swiss Bank Program due to its classification as a Category 1 bank. Hence, the Julius Baer Deferred Prosecution Agreement comes as an independent agreement with the DOJ after the DOJ filed criminal charges against Julius Baer.

According to the IRS and the court documents, from at least the 1990s through 2009, Julius Baer helped many of its U.S. taxpayer-clients evade their U.S. tax obligations, file false federal tax returns with the IRS and otherwise hide accounts held at Julius Baer from the IRS (hereinafter, undeclared accounts). Julius Baer did so by opening and maintaining undeclared accounts for U.S. taxpayers and by allowing third-party asset managers to open undeclared accounts for U.S. taxpayers at Julius Baer. Casadei and Frazzetto, bankers who worked as client advisers at Julius Baer, directly assisted various U.S. taxpayer-clients in maintaining undeclared accounts at Julius Baer in order to evade their obligations under U.S. law. At various times, Casadei, Frazzetto and others advised those U.S. taxpayer-clients that their accounts at Julius Baer would not be disclosed to the IRS because Julius Baer had a long tradition of bank secrecy and no longer had offices in the United States, making Julius Baer less vulnerable to pressure from U.S. law enforcement authorities than other Swiss banks with a presence in the United States.

Julius Baer was aware that many U.S. taxpayer-clients were maintaining undeclared accounts at Julius Baer in order to evade their U.S. tax obligations, in violation of U.S. law. In internal Julius Baer correspondence, undeclared accounts held by U.S. taxpayers were at times referred to as “black money,” “non W-9,” “tax neutral,” “unofficial,” or “sensitive” accounts.

At its high-water mark in 2007, Julius Baer had approximately $4.7 billion in assets under management relating to approximately 2,589 undeclared accounts held by U.S. taxpayer-clients. From 2001 through 2011, Julius Baer earned approximately $87 million in profit on approximately $219 million gross revenues from its undeclared U.S. taxpayer accounts, including accounts held through structures.

However, the IRS noted that the behavior of Julius Baer started to change. By at least 2008, Julius Baer began to implement institutional policy changes to cease providing assistance to U.S. taxpayers in violating their U.S. legal obligations. For example, by November 2008, the company began an “exit” plan for U.S. client accounts that lacked evidence of U.S. tax compliance. In that same month, Julius Baer imposed a prohibition on opening accounts for any U.S. clients without a Form W-9.

Additionally, in November 2009, before Julius Baer became aware of any U.S. investigation into its conduct, Julius Baer decided proactively to approach U.S. law enforcement authorities regarding its conduct relating to U.S. taxpayers. Prior to self-reporting to the Department of Justice, Julius Baer notified its regulator in Switzerland of its intention to contact U.S. law enforcement authorities. This Swiss regulator requested that Julius Baer not contact U.S. authorities in order not to prejudice the Swiss government in any bilateral negotiations with the United States on tax-related matters. Accordingly, Julius Baer did not, at that time, self-report to U.S. law enforcement authorities.

After ultimately engaging with U.S. authorities, Julius Baer has taken extensive actions to demonstrate acceptance and acknowledgment of responsibility for its conduct. Julius Baer conducted a swift and robust internal investigation, and furnished the U.S. government with a continuous flow of unvarnished facts gathered during the course of that internal investigation. As part of its cooperation, Julius Baer also, among other things, (1) successfully advocated in favor of a decision provided by the Swiss Federal Council in April 2012 to allow banks under investigation by the U.S. Department of Justice to legally produce employee and third-party information to the department, and subsequently produced such information immediately upon issuance of that decision; and (2) encouraged certain employees, including specifically Frazzetto and Casadei, to accept responsibility for their participation in the conduct at issue and cooperate with the ongoing investigation.

Julius Baer Deferred Prosecution Agreement Details

Under the Julius Baer Deferred Prosecution Agreement, the bank admitted to helping U.S. taxpayers hide assets and knowingly assisted many of its U.S. taxpayer-clients in evading their tax obligations under U.S. law. The admissions are contained in a detailed Statement of Facts attached to the agreement. The agreement requires Julius Baer to pay a total of $547 million by no later than February 9, 2016, including through a parallel civil forfeiture action also filed today in the Southern District of New York.

Julius Baer Deferred Prosecution Agreement Impact on U.S. Taxpayers

The Julius Baer Deferred Prosecution Agreement signifies yet another IRS victory over the now-defeated Swiss bank secrecy system. The IRS is simply “mopping-up” the left-over issues in Switzerland as it shifts its focus to other major offshore tax havens. Yet, the Julius Baer Deferred Prosecution Agreement is still a major event that has repercussions for U.S. taxpayers with undeclared foreign accounts.

First, the Julius Baer Deferred Prosecution Agreement is likely to continue to impact former Julius Baer U.S. taxpayers who transferred their funds out of this Swiss bank to another country or another bank in the hopes of avoiding IRS detection of their prior non-compliance. Under the agreement, Julius Baer will continue to cooperate with the IRS in the identification of such noncompliant U.S. taxpayers.

Second, Julius Baer is an important Swiss bank and the fact that the Julius Baer Deferred Prosecution Agreement was reached encourages other noncompliant banks (not only in Switzerland, but other countries) to follow its example. Therefore, U.S. taxpayers who believe they are safe outside of Switzerland are now in the ever increasing danger of IRS detection.

Contact Sherayzen Law Office for Professional Help with Your Undeclared Foreign Accounts

The Julius Baer Deferred Prosecution Agreement is another reminder on how dangerous is the current tax environment for noncompliant U.S. taxpayers. Therefore, if you have not disclosed your foreign accounts, foreign assets or foreign income, please contact Sherayzen Law Office as soon as possible. Our team of tax professionals is highly experienced in handling these matters and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

No FBAR Penalty Option

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No FBAR Penalty is the result that every taxpayer wishes to achieve. Indeed, having no FBAR penalty is a realistic objective, but only in certain situations. One of such situations is currently offered by the IRS through Delinquent FBAR Submission Procedures.

History of the IRS Procedures Regarding No FBAR Penalty Option

There is a relatively long history behind the option that taxpayers with delinquent FBARs would be charged no FBAR penalty. It comes from the traditional link between income tax noncompliance and the imposition of an FBAR penalty. Prior to 2009 OVDP, the No FBAR Penalty option was unofficial, but very much part of the IRS tradition in situations where a taxpayer would not have any additional U.S. tax liability as a result of his voluntary disclosure of foreign accounts.

The rules for the 2009 IRS Offshore Voluntary Disclosure Programs (“2009 OVDP”) finally officially recognized the No FBAR Penalty option in the answer to Question #9. The FAQ #9 also for the first time properly stated the legal philosophy behind the No FBAR Penalty option: “The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward and resolve their tax matters.” Hence, if a taxpayer “reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process.” Rather, the taxpayer was urged to file the FBARs directly with the explanation of why the FBARs were filed late.

Both, the 2011 IRS Offshore Voluntary Disclosure Initiative (“2011 OVDI) and 2012 Offshore Voluntary Disclosure Program (“2012 OVDI) again reinforced the No FBAR Penalty with FAQ #17: “The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.”

On June 18, 2014, with the creation of 2014 Offshore Voluntary Disclosure Program (“2014 OVDP”), the IRS removed the 2014 OVDP FAQ #17 and replaced it the modern official No FBAR Penalty option called Delinquent FBAR Submission Procedures.

No FBAR Penalty Option under the Delinquent FBAR Submission Procedures

Under the Delinquent FBAR Submission Procedures, the IRS promises not to impose FBAR penalties for the failure to file the delinquent FBARs if three requirements are met: (1) the taxpayer properly reported on his U.S. tax returns (and paid all tax on) the income from the foreign financial accounts reported on the delinquent FBARs; (2) the IRS has not contacted the taxpayer previously regarding an income tax examination (civil or criminal) for the years for which the delinquent FBARs are submitted; and (3) the IRS has not previously requested from the taxpayer the FBARs for the years for the years for which the delinquent FBARs are submitted.

If all three requirements are met, the taxpayers can pursue Delinquent FBAR Submission Procedures by filings the delinquent FBARs with FinCEN directly. A statement explaining why the FBARs are filed late must be provided to the IRS.

Contact Sherayzen Law Office to Explore Your No FBAR Penalty Options

Delinquent FBAR Submission Procedures is probably one of the most popular No FBAR penalty options, but it is a limited one because it is not always possible to comply with all three of the formal requirements of the Procedures. Thankfully, these Procedures are not the only No FBAR Penalty Option offered by the IRS.

This is why, if you have undisclosed foreign accounts, you should contact the experienced international tax law firm of Sherayzen Law Office. We will thoroughly explore your case, analyze your No FBAR penalty and voluntary disclosure options, choose the disclosure route that best balances your risks and rewards, prepare all of the required legal documents and tax forms, and defend your case against the IRS. We have helped hundreds of U.S. taxpayers around the world and we can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Third Quarter of 2016 IRS Interest Rates

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The Internal Revenue Service recently announced that Third Quarter of 2016 IRS Interest Rates will remain the same for the. Third quarter begins on July 1, 2016 and ends on September 30, 2016) The Third Quarter of 2016 IRS Interest Rates:

four (4) percent for overpayments [three (3) percent in the case of a corporation];
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis; therefore, US taxpayers and tax professionals should refer to IRS announcements of IRS interest rates on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Third Quarter of 2016 IRS Interest Rates are relevant for various reasons; among these reasons, three main uses stand out. First, these are the rates that will be used to charge an interest on any tax owed by a taxpayer. Second, these rates will be used to calculate the interest rate that the IRS owes with respect to tax refunds on the amended US tax returns.

Finally, Third Quarter of 2016 IRS Interest Rates are relevant to PFIC default 1291 calculations. The PFIC tax that is levied on “excess distribution” is subject to IRS interest rates. Hence, if a PFIC’s holding period includes the third quarter of 2016, the tax attorney who calculates PFIC interest on the PFIC tax will need to use Third Quarter of 2016 IRS Interest Rates.

The IRS interest rates were stagnant at 3% for a very long time (from 2010 through first quarter of 2016). However, in the second quarter of 2016, the IRS raised the interest rates from 3% to 4% following the increase of the federal short-term rate from 0% to 1%. Sherayzen Law Office will continue to closely monitor the moves of the Federal Reserve to increase its interest rates in the future.