IRS Pursuit of Mizrahi Bank Clients Gains Steam

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It is well-known that the IRS is in hot pursuit of U.S. taxpayers with undisclosed bank accounts in Mizrahi Bank. There have been a number of victories that the IRS has scored against Mizrahi Bank clients. The latest example of this is the case of Monajem Hakimijoo who plead guilty on February 13, 2014.

According to court documents, Mr. Hakimijoo, a U.S. citizen, and his brother maintained an undeclared bank account in Israel at Mizrahi Bank in the name of Kalamar Enterprises, a Turks and Caicos Islands entity they used to conceal their ownership of the account. Mr. Hakimijoo and his brother used the funds in the Kalamar account as collateral for back-to-back loans obtained from the Los Angeles branch of Mizrahi Bank. Although Mr. Hakimijoo and his brother claimed the interest paid on the back-to-back loans as a business deduction for federal tax purposes, they failed to report the interest income earned in their undeclared, Israel-based account as income on their tax returns. In total, Mr. Hakimijoo failed to report approximately $282,000 in interest income. The highest balance in the Kalamar Enterprises account was approximately $4,030,000.

As further described in the release by the U.S. DOJ, in March 2013, Mr. Hakimijoo was scheduled to be interviewed by Justice Department attorneys and IRS special agents. Prior to the interview, Mr. Mr. Hakimijoo, through counsel, provided the attorneys and special agents with copies of his amended tax returns for 2004 and 2005. When asked if the amended tax returns had been filed with the IRS, Mr. Hakimijoo indicated that the returns had been filed. Shortly thereafter, the IRS determined there was no record of the amended returns being filed with the IRS. When Mr. Hakimijoo was asked to provide copies of cancelled checks to prove that the taxes reflected on the amended returns had been paid, none were provided.

Points of Interest of the Mr. Hakimijoo Case

Several features are prominent in this case. First, the Mizrahi Bank account in question was not in Switzerland, but Israel itself. This is one more example of the IRS interest in countries other than Switzerland. Israel is an obvious target, but it appears that it will not take long for the IRS to expand into the neighboring country of Lebanon.

Second, it seems incredible that Mr. Hakimijoo would engage in such reckless conduct as to gamble on the IRS not finding out that he has not filed the amended tax returns. Equally puzzling is the fact that the guilty plea did not involve any type of a false statement charge.

Finally, unfortunately for Mr. Hakimijoo, the facts of his case were greatly influenced by the use of an entity to conceal the ownership of the Mizrahi Bank account.

U.S. Taxpayers with Undisclosed Accounts in Israel Should Do Some Type of Voluntary Disclosure

Mr. Hakimijoo is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with concealing undeclared bank accounts in Israel that were used to obtain back-to-back loans in the United States. It is unlikely that the IRS will relent its pursuit at this point given the wealth of information that has been collected through the IRS voluntary disclosure programs as well as the Swiss voluntary disclosure program for banks.

The biggest lesson for U.S. taxpayers with undisclosed accounts in Israel and Mizrahi Bank specifically is that the IRS will not limit itself to Switzerland. Hence, there is a great urgency for these taxpayers to commence the analysis of their voluntary disclosure options as soon as possible. Some options may still be open if these taxpayers come forward now; these options may be closed once the taxpayer is subject to an IRS investigation.

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

If you are a U.S. person who has (or had at any point since 2007) undisclosed bank or financial accounts in Israel and any other foreign country, you should contact Sherayzen Law Office as soon as possible for professional help. Our experienced international tax law firm has helped taxpayers throughout the world with their voluntary disclosures and we can help you.

Call Us to Schedule Your Confidential Consultation NOW!

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

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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, Ltd. 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!

Filing an Extension for US Taxpayers Residing Outside of the United States

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As is commonly known, US taxpayers who file on a calendar year basis have a filing due date of April 15th. In general, if a tax is owed, it should be paid by the due date of your tax return, without regard to any extension of time for filing the return. Most US taxpayers who reside in the United States are aware that they can obtain a tax return filing extension. But what if you are one of the numerous US taxpayers residing outside of the United States when a tax return is due? Can an extension be filed, and if so, will any penalties be applied if the tax owed is not paid on time? Will interest be owed on the unpaid tax?

This article strives to answer these questions and explain different types of extensions that the IRS may grant for US taxpayers who are not in the country when their returns are due.

Extension Options for US Taxpayers Residing Outside of the United States

In general, there are four possible types of extensions the IRS may grant for US taxpayers who are out of the country: an automatic two-month extension, an automatic six-month extension (in reality, this is a four-month extension), an additional extension for taxpayers residing outside of the United States, and an extension of time to meet tests (also for the US taxpayers residing outside of the United States).

The information contained in this article is intended for general knowledge, and does not constitute tax or legal advice. If you have further questions, please contact the experienced US-International tax law firm of Sherayzen Law Office, Ltd.

Automatic Two-Month Extension for US Taxpayers Residing Outside of the United States

Taxpayers are allowed an automatic two-month extension to file their return and pay federal income taxes owed if they are US citizens or resident aliens, and on the regular due date of the return, they are either US taxpayers residing outside the United States and Puerto Rico or their post of duty is outside the US and Puerto Rico (or if they are in military or naval service on duty outside the US and Puerto Rico).

In order to qualify for this extension, taxpayers must attach a statement to their returns demonstrating which of these two circumstances they meet. Note though, that even if taxpayers are granted this extension (or any extension detailed in this article), they will still have to pay any interest on any tax liability owed by the regular due date of their return (April 15th for calendar year taxpayers).

Automatic Six-Month Extension for US Taxpayers Residing Outside of the United States

In addition to the automatic two-month extension, US taxpayers who are not able to file their returns on time by the due date can generally get an automatic six-month extension of time to file. The two-month and the six-month extensions start at the same time; so, in reality, this is a merely four-month additional extension for US taxpayers residing outside of the United States.

It is important to emphasize that this additional automatic extension however does not extend the time to pay.

In order to get this automatic extension, the taxpayer must file Form 4868 or use the IRS efile system showing a correctly-estimated tax liability based on all available information. However, if a taxpayer intends for the IRS to figure his or her tax, or is under a court order to file by the regular due date, they may not be eligible for this extension

Additional Extension of Time (Two-Months) for US Taxpayers Residing Outside of the United States

In addition to the six-month extension, a taxpayer who is out of the country can also request a discretionary two-month additional extension of time to file his or her tax return (to December 15 for calendar year taxpayers) by sending the IRS a letter detailing the reasons why the additional two-month extension is necessary. The letter needs to be sent by the extended due date (October 15 for calendar year taxpayers) to the Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0045 address. Check irs.gov for any mailing changes and updates.

Note that taxpayers will not receive any notification from the IRS unless their requests are denied. In addition, taxpayers who have an approved extension of time to file Form 2350 (described below) will not be able to request the discretionary two-month additional extension.

Extension of Time to Meet Tests for US Taxpayers Residing Outside of the United States

In general, a taxpayer cannot get an extension of more than six months (or eight months if you count the additional extension of time for taxpayers residing outside of the United States). However, an exception may exist if a taxpayer is outside the US and meets certain requirements. A taxpayer may be granted an extension of more than six months to file a tax return if time is needed to meet either the bona fide residence test or the physical presence test in order to qualify for either the foreign earned income exclusion or the foreign housing exclusion or deduction (see IRS rules for specifics of the exclusion or deduction).

Taxpayers should request an extension of time to meet tests if all three of the following factors are applicable: 1) They are US citizens or resident aliens, 2) they anticipate meeting either the bona fide residence test or the physical presence test, but not until after their tax return are due, and 3) their tax homes are in foreign countries throughout the period of bona fide residence or physical presence, whichever applies.

In general, if a taxpayer is granted this extension it will typically be 30 days beyond the date on which either the bona fide residence test or the physical presence test can reasonably be expected to be met. (If a taxpayer has moving expenses that are for services performed in two years, the extension may be granted as long as an until after the end of the second year).

To apply for this extension, Form 2350 (“Application for Extension of Time To File US Income Tax Return”) will need to be filed by the due date for filing a taxpayer’s return. The IRS notes, “Generally, if both your tax home and your abode are outside the United States and Puerto Rico on the regular due date of your return and you file on a calendar year basis, the due date for filing your return is June 15.” Note that if a taxpayer meets either test, but happens to file a tax return before the test is actually met, the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction can subsequently be claimed on a Form 1040X.

Contact Sherayzen Law Office for Professional Help with Your Tax Returns as a Taxpayer Residing Outside of the United States

If you are a US taxpayer who is residing outside of the United States, contact Sherayzen Law Office for professional help with your US compliance. In additional to preparing your US tax return, we will do a thorough overview of your other potential US tax compliance requirements (such as PFICs, FBARs, Form 8938, et cetera) so that you remain in full compliance with US tax laws.

Contact Us to schedule a Confidential Consultation!

Liquidating a Corporation and IRS Form 966

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If you have a corporation that you have liquidated, or plan to liquidate, you need to be aware of the requirements of the IRS Form 966. Form 966 (“Corporate Dissolution or Liquidation”) must be filed by corporations (including for corporations filing Form 1120, 1120-L, 1120-IC-DISC, 1120S, and farmer’s cooperatives) if they have adopted a resolution or plan to dissolve the corporation, or to liquidate any of its corporate stock.

This article will explain the basics of Form 966; it is not intended to constitute tax or legal advice. Please consult an experienced tax attorney if you have further questions. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs.

Filing Form 966

Under Internal Revenue Code Section 6043(a) and applicable regulations, Form 966 must be filed with the IRS center where the corporation or farmer’s cooperative filed its income tax return within 30 days after the resolution or plan is adopted to dissolve the corporation or liquidate any of its stock. If the original resolution or plan is amended or supplemented after Form 966 has been filed, required companies must file another Form 966 within 30 days after the amendment or supplement was adopted. The IRS notes that this additional form will be sufficient if the “[D]ate the earlier form was filed is entered on line 11 and a certified copy of the amendment or supplement is attached. Include all information required by Form 966 that was not given in the earlier form.”

Qualified subchapter S subsidiaries (see IRC Section 1361(b) (3) for definition and requirements) should not file Form 966. Instead, they should submit Form 8869 (“Qualified Subchapter S Subsidiary Election”). Likewise, exempt organizations should not file Form 966; these organizations will need to review the instructions for Form 990 (“Return of Organization Exempt From Income Tax”), or Form 990-PF (“Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation”). Additionally, in general, foreign corporations that are not required to file Form 1120-F (“U.S. Income Tax Return of a Foreign Corporation”), or any other type of U.S. tax return are not required to file Form 966.

Form 966 should also not be filed for a deemed liquidation (such as an IRC Section 338 election, or an election to be treated as a disregarded entity under IRS Regulations Section 301.7701-3).

Information Necessary for Form 966

In addition to the identifying information typically required on IRS forms (name of corporation, EIN, date of incorporation, etc.), various additional information is required to be reported on Form 966. For example, line 5 requests the type of liquidation a company has undertaken- partial or complete. On line 10, filers are required to specify the IRC Code Section under which the corporation is to be dissolved or liquidated; for instance, corporations that have completely or partially liquidated will enter “Section 331”, while a corporation completely liquidating a subsidiary corporation (that meets the requirements of section 332(b)) would enter “Section 332”. Information regarding any amendments to plans may be required on line 9 or 11, depending upon the circumstances involved.

Contact Sherayzen Law Office for Tax and Legal Advice With Respect to Liquidation of Your Corporation

If you are planning on liquidating your corporation, you should seek advice of a tax attorney. The experienced tax law firm of Sherayzen Law Office, Ltd. can help you with the entire process of liquidating the corporation with respect to both, legal and tax sides of this process. Contact Us for a Confidential Consultation!

Form 8889 for Health Savings Accounts (HSAs)

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Health Savings Accounts (HSAs) were created in 2003 as a means of addressing increasing health care costs. HSAs give individuals enrolled in high-deductible health plans (HDHPs) tax-preferred treatment for money saved for medical expenses. In general, HSAs allow for individuals to defer taxes when money is contributed (even if a taxpayer does not itemize on Form 1040 Schedule A), and money that is eventually withdrawn and used to pay for qualified medical expenses is also usually tax-free.

In this article, we will explain the basics of Form 8889 for HSAs. This explanation is not intended to convey tax or legal advice. Please consult a tax attorney if you have further questions.

Form 8889

Form 8889 is used for all of the following purposes: to report health savings account (HSA) contributions (including those made on behalf of taxpayers, and employer contributions), to report distributions from HSAs, to calculate the correct HSA deduction amount, and to calculate the amounts that taxpayers must include in income and any additional tax that may be owed if a taxpayers fails to qualify as an eligible individual. The IRS defines an HSA as, “[A] health savings account set up exclusively for paying the qualified medical expenses of the account beneficiary or the account beneficiary’s spouse or dependents.” In general, distributions received from an HSA to pay for “qualified medical expenses” (see IRS publications for the specific definition) of an account beneficiary, a spouse, or dependents are excluded from the determination of gross income.

For the 2013 tax year, Form 8889 must be filed under any of the following circumstances: if a taxpayer (or somebody on behalf of a taxpayer, such as an employer) made contributions to an HSA in 2013, if HSA distributions were received in 2013 by a taxpayer, if a taxpayer failed to be deemed an eligible individual during the applicable testing period and certain amounts must therefore be included in the taxpayer’s income, or if an interest in an HSA was acquired due to the death of the account beneficiary. The testing period begins with the month a contribution to a qualified HSA is made, and ends on the last day of the twelfth month following that month.

Subject to certain exceptions, taxpayers who fail to remain eligible individuals must include the qualified HSA funding distribution in income in the year in which they do not meet the eligibility requirement, (and this amount is also subject to a 10% Additional Tax for Failure to Maintain HDHP Coverage).

HSA Deductions

In general, the maximum amount that one can contribute to a HSA plan is dependent upon the type of HDHP coverage that an individual has (For 2013 and 2014, HDHPs require minimum annual deductibles of at least $1,250 for individuals and $2,500 for families). For individuals who have self-coverage, the maximum contribution for 2013 is $3,250, and taxpayers with family coverage, the maximum amount that may be contributed is $6,450. (For 2014, the contribution limit is raised to $3,300 for individuals HSAs, and $6,550 for family HSAs). Individuals who are at least 55 years of age as of the end of their tax year may make an additional catch-up contribution of $1,000 (and this amount will be unchanged for 2014). The maximum HSA contribution amount, however, is reduced by any employer contributions to an HSA, and contributions made to an Archer MSA, and any qualified HSA funding distributions.

In addition, any contributions made to an HSA during the month in which a taxpayer was enrolled in Medicare will not be deductible. Further, HSA contributions are not deductible if a taxpayer can be claimed as a dependent on Form 1040 by somebody else.