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.

IRS Will Be Closed Five Extra Days in 2013; Filing and Payment Deadlines

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On May 15, 2013, the Internal Revenue Service announced additional details about the closures planned for May 24, June 14, July 5, July 22 and August 30, 2013.

Due to the current budget situation, including the sequester, all IRS operations will be closed on those days. This means that all IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed on those days. IRS employees will be furloughed without pay. No tax returns will be processed and no compliance-related activities will take place.

Taxpayers needing to contact the IRS about their returns or payments should be sure to take these furlough dates into account. In some instances, this may include taxpayers with returns or payments due soon after a furlough day, such as the June 17 deadline for taxpayers abroad and those making a second-quarter estimated tax payment as well as the September 3 deadline for truckers filing a highway use tax return.

No Impact on Tax-Filing and Tax-Payment Deadlines, but No Confirmation of Receipt

Because none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing deadlines. The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down.

Similarly, tax-payment deadlines are also unaffected. The only tax payment deadlines coinciding with any of the furlough days relate to employment and excise tax deposits made by business taxpayers. These deposits must be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), which will operate as usual.

Impact on Providing Documents to the IRS

IRS states that it will give taxpayers extra time to comply with a request to provide documents to the IRS. This includes administrative summonses, requests for records in connection with a return examination, review or compliance check, or document requests related to a collection matter. No additional time is given to respond to other agencies or the courts.

Where the last day for responding to an IRS request falls on a furlough day, the taxpayer will have until the next business day. If the last day to respond is Friday, May 24, for example, the taxpayer will have until Tuesday, May 28 to comply (Monday, May 27 is Memorial Day).

Some Services Will Continue to Function

Some web-based online tools and phone-based automated services will continue to function on furlough days, while others will be shut down. Available services include Withholding Calculator, Order A Transcript, EITC Assistant, Interactive Tax Assistant, the PTIN system for tax professionals, Tele-Tax and the Online Look-up Tool for those needing to repay the first-time homebuyer credit. Services not available on those days include Where’s My Refund? and the Online Payment Agreement.

Additional Furlough Days Possible

At a later date, the IRS may possibly announce one or two additional furlough days if necessary.

Fifth Protocol to the Canada-US Income Tax Treaty

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The Fifth Protocol to the Canada-US Income Tax Convention (also known as the Canada-US Income Tax Treaty) was signed in 2007 and ratified by the U.S. Senate the following year, making significant changes to the then existing treaty.

This article will briefly explain some of the major Fifth Protocol (“Protocol”) changes to the US-Canada Income Tax Treaty (“Treaty”). It is not intended to constitute tax or legal advice, and it does not cover every change to the Treaty.

Cross-border taxation can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Treaty Article XI- Withholdings on Interest

One substantial change to the Canada-US Tax treaty was the elimination of withholding tax on cross-border interest payments to unrelated parties. According to the Protocol, “[I]nterest means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums or prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the Contracting State in which the income arises.” It should be noted however that “interest” under this definition does not include dividends.

Taxpayer Migration – Protection Against Double Taxation

Under the previous rule, the US and Canada were allowed to tax residents on all of their capital gains without any provisions made for the fact that a country may have leveled a pre-departure tax on emigrants. The Protocol addressed this concern by allowing such individuals to “[E]lect to be treated for the purposes of taxation in the other Contracting State, in the year that includes that time and all subsequent years, as if the individual had, immediately before that time, sold and repurchased the property for an amount equal to its fair market value at that time.” (See Article 8 of the Protocol).

Mandatory Arbitration

For US and Canadian residents subject to certain unresolved double-taxation issues between US and Canadian revenue authorities within a specified time period, the Protocol changed the existing Treaty to allow taxpayers to require that the revenue authorities of the two countries enter a binding arbitration. While the arbitration procedure is mandatory for revenue authorities once compelled by a taxpayer, the decision of whether to do so is entirely optional for the taxpayer. A taxpayer must have filed a tax return with at least one of the two countries to utilize the election.

“Limited Liability Companies” (LLCs) and Other Hybrid Entities

LLCs and certain other hybrid entities face different tax treatment in the US and Canada. In general, in the US, such entities are treated as pass-through vehicles, whereas in Canada, they are treated as corporations (please see Department of Finance Canada for more information about Canadian taxation). Prior to the Protocol, a reduced withholding tax rate was not available to such entities because an entity must be taxable as a “resident” in at least one of the two countries in order to benefit from the Treaty. According to the Department of Finance Canada, under the Protocol changes, “Income that the residents of one country earn through a hybrid entity will in certain cases be treated by the other country (the source country) as having been earned by a resident of the residence country. On the other hand, a corollary rule provides that if a hybrid entity’s income is not taxed directly in the hands of its investors, it will be treated as not having been earned by a resident.”

Contact Sherayzen Law Office for Help with US-Canada Cross-border Tax Issues

If you have any questions regarding US-Canada tax treaties or you have not filed your Forms 8891, contact the experienced tax firm of Sherayzen Law Office for help.

Subpart F Active Financing Income Exceptions and Look-Through Rule Extended

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The recent American Taxpayer Relief Act of 2012 passed by Congress and signed by the president on January 2, 2013 extended the temporary exceptions for “active financing income” from subpart F foreign personal holding company income, foreign base company services income, and insurance income. The same act also extended the subpart F look-through rule of IRC Section 954(c)(6).

This article will briefly explain the active financing exception to the subpart F rules and the look-through rule of Section 954(c)(6) and detail the extensions of such provisions provided for by the American Taxpayer Relief Act of 2012. The article is not intended to convey tax or legal advice.

IRS Subpart F rules and the IRC sections covering Controlled Foreign Corporations involve many complex tax and legal issues, so it is advisable to seek an experienced attorney in these matters. Sherayzen Law Office, Ltd. can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Active Financing Income Exception to Subpart F Rules

IRC Section 954(h) provides for a special exception from IRS subpart F rules for “[I]ncome derived in the active conduct of banking, financing, or similar businesses.” In general, a controlled foreign corporation (“CFC”) will be treated as being predominately engaged in the active conduct of banking, financing, or similar businesses if more than 70% of the gross income of the CFC is derived directly from the, “[A]ctive and regular conduct of a lending or finance business from transactions with customers which are not related persons.”

The active financing exception was originally included in the Taxpayer Relief Act of 1997; the same act also modified Passive Foreign Investment Company (“PFIC”) rules to eliminate overlap between Subpart F and PFIC provisions as a special one-year exception (President Clinton vetoed this provision under the Line Item Veto Act, but it was reinstated after the US Supreme Court ruled that the Line Item Veto Act was unconstitutional). IRC Section 954(h)(3) was later amended by the American Jobs Creation Act of 2004 (Public Law 108-357) to provide for the temporary exception, and the Tax Increase Prevention and Reconciliation Act of 2005 subsequently extended the exception for tax years ending in 2007 and 2008. The Middle Class Tax Relief Act of 2010 further extended the active financing exception through 2011. Under the new American Taxpayer Relief Act of 2012, the exception was retroactively extended through the end of 2013.

Subpart F Look-Through Rule of IRC Section 954(c)(6)

IRC Section 954(c)(6)(A) (“Look-thru rule for related controlled foreign corporations “) provides that, in general, “For purposes of this subsection, dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation which is a related person shall not be treated as foreign personal holding company income to the extent attributable or properly allocable (determined under rules similar to the rules of subparagraphs (C) and (D) of section 904(d)(3)) to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States.” Treatment of other types of equivalent interest is also addressed in the section.

The Look-Through Rule was part of Tax Increase Prevention and Reconciliation Act of 2005 and originally applied to tax years beginning after December 31, 2005, and before January 1, 2009. Certain parts of the original look-through rule were subsequently modified by later acts, and the rule itself was extended through the end of 2011 by the Middle Class Tax Relief Act of 2010. Under the new American Taxpayer Relief Act of 2012, the rule now applies to foreign corporation tax years beginning after December 31, 2005, and before January 1, 2014.

Filing and Payment Extension for Suffolk County and other Victims of Boston Marathon Explosions

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On April 16, 2013, the Internal Revenue Service announced a three-month tax filing and payment extension to Boston area taxpayers and others affected by April 15, 2013 explosions. This relief applies to all individual taxpayers who live in Suffolk County, Mass., including the city of Boston. It also includes victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax preparers were adversely affected.

“Our hearts go out to the people affected by this tragic event,” said IRS Acting Commissioner Steven T. Miller. “We want victims and others affected by this terrible tragedy to have the time they need to finish their individual tax returns.”

Under the relief announced today, the IRS will issue a notice giving eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013.

Note, however, by law, interest, currently at the annual rate of 3 percent compounded daily, will still apply to any payments made after the April deadline.

The IRS will automatically provide this extension to anyone living in Suffolk County. If you live in Suffolk County, no further action is necessary by taxpayers to obtain this relief. However, eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, 2013, and identifying themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated.

Eligible taxpayers who need more time to file their returns may receive an additional extension to Oct. 15, 2013, by filing Form 4868 by July 15, 2013.