FATCA at Home: Crackdown on Foreigners’ Accounts in U.S. banks

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As the IRS engages in negotiations with foreign governments to implement FATCA (Foreign Account Tax Compliance Act) overseas, there is a rising pressure from some countries for reciprocity – the implementation of FATCA-like disclosure of foreign clients’ U.S. accounts to those clients’ home governments.

FATCA Background

FATCA was enacted in 2010 and set to begin taking effect at the end of 2013. FATCA is the mother of many new international tax requirements. One of the most unique features of FATCA (and most relevant for the purposes of this article) is requiring foreign banks to disclose information about the accounts of U.S. persons to the IRS. The goal of this provision is, of course, to expose U.S. persons who are trying to avoid the payment of U.S. taxes through undisclosed offshore accounts.

IRS Engages In Negotiations With Foreign Governments to Implement FATCA

In order to effectively implement FATCA requirements, the Department of the Treasury has to secure the cooperation of foreign governments (especially since disclosure of information required by FATCA may constitute a violation of some countries’ privacy laws). This is why the IRS is engaged in negotiations with a broad range of foreign governments (actually, over 50 foreign jurisdictions) to implement the information reporting and withholding tax provisions of FATCA.

The Department of the Treasury pursues the policy of concluding a series of bilateral tax agreements based on the model treaty developed by the Treasury.

The Treasury Department has already concluded a bilateral agreement with the United Kingdom, Ireland, Denmark and Mexico. Additional jurisdictions with which Treasury is in the process of finalizing an intergovernmental agreement and with which Treasury hopes to conclude negotiations by year end include: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.

Jurisdictions with which Treasury is actively engaged in a dialogue towards concluding an intergovernmental agreement include: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden. Treasury expects to be able to conclude negotiations with several of these jurisdictions by year end.

The jurisdictions with which Treasury is working to explore options for intergovernmental engagement include: Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia, and South Africa.

Push for Reciprocity from Foreign Governments

As the implementation of FATCA begins, however, the ancient Roman principle of “quid pro quo” seems to have become the theme of the IRS negotiations with foreign governments. It appears that some countries, possibly including France, Germany and China, are demanding reciprocity in the disclosure – i.e. if their banks have to disclose to the IRS the foreign accounts of U.S. persons, then U.S. banks should also disclose U.S. accounts of foreign nationals.

U.S. Positively Responds to Reciprocity Requests

It appears that the general trend in the Obama administration is to agree with the foreign governments and engage in partial or even full reciprocity. The Department of the Treasure spokesman stated that: “the United States is committed to a policy of transparency and equivalence, where appropriate, in furtherance of international cooperation to combat offshore tax evasion.”

Actually, according to an October 2012 letter to members of Congress from the Assistant Secretary for Tax Policy, Mark Mazur, the completed FATCA pacts already include commitments “to pursue equivalent levels of reciprocal automatic exchange in the future.” Moreover, the United States appears to have already shared some taxpayer information with foreign countries with which it has a tax treaty or a formal information-sharing agreement. The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts.

Mexican Nationals Maybe Impacted First, but Europeans May Follow Soon

Despite the impression that reciprocity is mainly a demand of the European government, it appears that Mexican nationals may be the first to feel the impact of disclosure, especially since, as mentioned above, the IRS already started disclosing bank interest payments to some foreign governments, including possibly Mexico.

However, while Mexicans may be the first affected by the reciprocity disclosures, it appears that it will be only a matter of time before the European nationals will be affected. This particularly concerns the French and German nationals.

2012 OVDP: The Voluntary Disclosure Period

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One of the most critical aspects of the 2012 Offshore Voluntary Disclosure Program (2012 OVDP) are the rules pertaining to the voluntary disclosure period – i.e. what years are involved in calculating the Offshore Penalty and for how many years back should the tax returns be amended (with the corresponding consequences for the additional tax due with interest and penalties). These rules have been greatly expanded and elaborated since 2011 OVDI.

The general rule is that the voluntary disclosure period for the applicants to the 2012 OVDP involve the most recent eight tax years for which the due date has already passed. Critically important is to realize that the eight year period does not include current years for which there has not yet been non-compliance. For example, for taxpayers who submit a voluntary disclosure prior to April 15, 2012 (or other 2011 due date under extension), the disclosure must include each of the years 2003 through 2010 in which they have undisclosed foreign accounts and/or undisclosed foreign entities.

For the fiscal-year taxpayers must include fiscal years ending in calendar years 2003 through 2010. For taxpayers who disclose after the due date (or extended due date) for 2011, the disclosure must include 2004 through 2011.

For disclosures made in successive years, any additional years for which the due date has passed must be included, but a corresponding number of years at the beginning of the period will be excluded, so that each disclosure includes an eight year period.

For taxpayers who establish that they began filing timely, original, compliant returns that fully reported previously undisclosed offshore accounts or assets before making the voluntary disclosure, the voluntary disclosure period will begin with the eighth year preceding the most recent year for which the return filing due date has not yet passed, but will not include the compliant years. For example, in hypothetical where a taxpayer who historically filed income tax returns omitting the income from a foreign investment account, but who began reporting that income on his timely, original tax and information reporting returns for 2009 and 2010 without making a voluntary disclosure, and who filed a voluntary disclosure in January 2012, the voluntary disclosure period will be 2003 through 2008.

Understanding the rules of the voluntary disclosure period allows a taxpayer to plan the time of his disclosure according to his circumstances. Of course, such a benefit is only available in cases where there is sufficient time for such planning.

Contact Sherayzen Law Office for Help with 2012 OVDP

If you have undisclosed foreign account or foreign entities and you plan to enter the 2012 OVDP, you should contact Sherayzen Law Office for help with your voluntary disclosure. Our experienced international tax firm will thoroughly analyze your case, assess your FBAR liability as well as other applicable penalties, identify the options available in your case, and work with you every step of the way until your voluntary disclosure is finished.

2012 OVDP and Domestic Voluntary Disclosure

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Sometimes a taxpayer who enters 2012 OVDP also has undisclosed domestic tax liability and the question arises with respect to how to handle this additional liability.

As was the case with the 2009 OVDP and the 2011 OVDI, the 2012 OVDP is available to taxpayers who have both offshore and domestic issues to disclose. The Voluntary Disclosure Practice requires an accurate and complete disclosure. Consequently, if there are undisclosed income tax liabilities from domestic sources in addition to those related to offshore accounts and assets, they must also be disclosed in the 2012 OVDP.

Therefore, when applying for the 2012 OVDP, the taxpayer should indicate on the Offshore Voluntary Disclosure Letter that he is also making a domestic voluntary disclosure.

However, these domestic tax liabilities are not going to be covered by the same IRS agent who will be in charge of your 2012 OVDP. Rather, such voluntary disclosures will go through the traditional IRS voluntary disclosure program and another agent will be assigned to the case to deal specifically with domestic issues. This further means that there is a separate application process for acceptance into the traditional IRS voluntary disclosure program in addition to applying to the 2012 OVDP.

Contact Sherayzen Law Office for Legal Help with Domestic and Offshore Voluntary Disclosures

If you have undisclosed offshore accounts and foreign income in addition to undisclosed U.S.-source income, contact Sherayzen Law Office for help. Our experienced international tax firm will thoroughly review your case, determine your options with respect to foreign and domestic voluntary disclosures, prepare all of the necessary legal documents and tax forms, and vigorously represent your interests during your negotiations with the IRS.

Gift and Estate Tax Impact of the American Taxpayer Relief Act of 2012

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One of the most dramatic effects of the American Taxpayer Relief Act of 2012 (ATRA) was felt in the area of gift and estate taxes.

Pre-ATRA Situation

In 2012, the estate and gift tax exemptions, indexed for inflation, were set at $5,120,000 each (up from $5,000,000 in 2011). Moreover, in 2012, the surviving spouse could use the unused exemption of a deceased spouse (this is called “portability”). Finally, the gift tax exemption was the same as the estate tax exemption, so taxpayers could make lifetime gifts that fully utilized their exemptions. In some situations, these gifts would shift the gifted assets’ future appreciation and income out of the donors’ taxable estates. The maximum tax rate for transfers in excess of the exemption was 35 percent.

All of these provisions expired on January 1, 2013. The $5,120,000 exemption was reduced to a $1,000,000 and the maximum tax rate was increased to 55 percent; the portability provision also expired. There was also a problem of the infamous “clawback” with respect to taxpayers who gifted their property using the higher exemption limits in 2012.

ATRA Changes

ATRA corrected the negative impact of the expiration of the 2012 gift and estate tax provisions. It set the permanent exemptions at $5,000,000 with one unexpected surprise – the exemption amount was indexed for inflation. This means that, for 2013, the exemption amount is $5,250,000. The higher exemption amount also renders the clawback provision harmless at this point.

Furthermore, ATRA reinstated the portability provision so that a surviving spouse can still use a deceased spouse’s unused exemption (provided that an estate tax return is filed and the portability election is properly made). However, it should be remembered that the portability is not available for a deceased spouse’s unused generation-skipping transfer tax exemption.

On the more negative side, ATRA raised the maximum tax rate from the 2012 levels to 40 percent. On the other hand, it is still a lot lower than the 55-percent tax that would have been applicable without ATRA.

With respect to charitable contributions, ATRA reinstated the exclusion from gross income for qualified charitable contributions by taxpayers over age 70 ½ of up to $100,000 distributed from an IRA through December 31, 2013. See this article for more details.

Annual Exclusion and Form 3520 Threshold Amount

For the tax year 2013, the gift tax annual exclusion increased from $13,000 to $14,000 per donee and from $139,000 to $143,000 for gifts made to a non-citizen spouse. The threshold at which gifts receivable from foreign partnerships and corporations become reportable to the IRS also increased from $13,258 to $15,102. The threshold amount for Form 3520 (with respect to value of gifts from foreign individuals and estates) remains at $100,000.

Contact Sherayzen Law Office for Help with Your Estate and Tax Planning

If you are in the process of creating your estate and/or tax plan, contact Sherayzen Law Office for help. Our experienced estate planning tax firm will thoroughly review your case, identify available options and prepare all of the required legal and tax documents to implement your plan.

Domestic and Offshore Voluntary Disclosure Ineligibility Examples

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In an earlier article, I discussed the general Offshore Voluntary Disclosure Program eligibility requirements now closed, particularly those spelled out in the Internal Revenue Manual (IRM). In this essay, I would like to provide certain examples of when a taxpayer’s disclosure fails to meet IRM 9.5.11.9 requirements. Note, these examples are not specific to offshore disclosure, but are also relevant to domestic voluntary disclosure. Finally, it is important to point out that the examples below are not taking into account other OVDP application requirements; rather, they merely describe general compliance situations.

It should be noted that these examples are for illustrative purposes only and cannot be relied upon to determine the voluntary disclosure eligibility in your specific circumstances. Whether you are eligible to participate in the OVDP is a question that must be analyzed by an international tax attorney who is experienced in this area of law.

1. A letter from an attorney stating his client, who wishes to remain anonymous, wants to resolve his tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all of the elements of IRM 9.5.11.9 have been met.

2. A disclosure made by a taxpayer who is under grand jury investigation. This is not a voluntary disclosure because the taxpayer is already under criminal investigation. The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation.

3. A disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, whose partner is already under investigation for omitted income that was skimmed from the partnership. This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation.

4. A disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently under examination. This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing examination.

5. A disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer’s double set of books. This is not a voluntary disclosure even if no examination or investigation has commenced because the IRS has already been informed by the third party of the specific taxpayer’s noncompliance. The conclusion would be the same whether or not the taxpayer knew of the informant’s contact with the IRS.

Contact Sherayzen Law Office for Legal Help With Your Domestic and Offshore Voluntary Disclosure

If you have undisclosed income and/or offshore accounts, contact Sherayzen Law Office for legal help. Our experienced tax firm will analyze your case, determine your current tax liability (including potential FBAR penalties), identify available voluntary disclosure options, prepare all of the necessary legal and tax documents, and rigorously represent your interests during your negotiations with the IRS.