Attribution Rules: Introduction | International Tax Lawyer & Attorney

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One of the most popular tax reduction strategies is based on shifting an ownership interest in an entity or property to related persons or related entities. In order to prevent the abuse of this strategy, the US Congress has enacted a large number of attribution rules. In this brief essay, I will introduce the concept of attribution rules and list the most important attribution rules in the Internal Revenue Code (“IRC”).

Attribution Rules: Definition and Purpose

The IRC attribution rules are designed to prevent taxpayers from shifting an ownership interest to related persons or entities. They achieve this result through a set of indirect and constructive ownership rules that shift the ownership interest assigned to third parties back to the taxpayer. In other words, the rules disregard the formal assignment of an ownership interest to a related third party and re-assign the ownership interest back to the assignor for specific determination purposes.

For example, in the context of determining whether a foreign corporation is a Controlled Foreign Corporation, all shares owned by the spouse of a taxpayer are deemed to be owned by the taxpayer if both spouses are US persons.

Attribution Rules: Design Similarities and Differences

The IRC contains a great variety of attribution rules. All of them are very detailed and have achieved a remarkable degree of specificity. Behind this specificity, all of the rules are always concerned with the substance of a transaction rather than its form. Hence, there always lurks a general question of whether there was a tax avoidance motive when a taxpayer entered into a transaction.

In spite of the fact that they share similar goals, the rules differ from each other in design. Most of these differences can be traced back to legislative history.

List of Most Important Attribution Rules

Here is a list of the most important attribution rules in the IRC (all section references are to the IRC):

1. The constructive ownership rules of §267, which apply to disallow certain deductions and losses incurred in transactions between related parties;

2. The constructive ownership rules of §318, which apply in corporate-shareholder transactions and other transactions, including certain foreign transactions expressly referenced in §6038(e).

3. The constructive ownership rules of §544; these are the personal holding company rules which apply to determine when a corporation will be subject to income tax on undistributed income.

3a. While they are now repealed, the foreign personal holding company rules of §554 are still important. In the past, they applied to determine whether US shareholders of a foreign corporation would be taxed on deemed distributions which were not actually made;

4. Highly important Subpart F constructive ownership rules of §958, which apply to determine when US shareholders of a Controlled Foreign Corporation should be taxed on deemed distributions which are not actually made;

5. The PFIC constructive ownership rules of §1298, which apply to determine whether a US shareholder is subject to the unfavorable rules concerning certain distributions by a PFIC and sales of PFIC stock; and

6. The controlled group constructive ownership rules of §1563 which determine whether related corporations are subject to the limitations and benefits prescribed for commonly controlled groups.

This is not a comprehensive list of all attribution rules, there are other rules which apply in more specific situations.

Contact Sherayzen Law Office for Professional Help With the Attribution Rules

The rules of ownership attribution are highly complex. A failure to comply with them may result in the imposition of high IRS penalties.

This is why you need to contact the highly experienced international tax law firm of Sherayzen Law Office. We have helped US taxpayers around the globe to deal with the US tax rules concerning ownership attribution, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

2020 First Quarter IRS Interest Rates | International Tax Lawyers

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On December 6, 2019, the Internal Revenue Service (“IRS”) announced that the 2020 First Quarter IRS underpayment and overpayment interest rates will not change from the 4th Quarter of 2019. This means that, the 2020 First Quarter IRS underpayment and overpayment interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation);
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • five (5) percent for underpayments; and
  • seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. The IRS used the federal short-term rate for October of 2019 to determine the 2020 First Quarter IRS interest rates. The IRS interest is compounded on a daily basis.

2010 First Quarter IRS interest rates are important to US international tax lawyers and taxpayers. The IRS uses these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2020 First Quarter IRS overpayment interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may often arise in the context of offshore voluntary disclosures.

Post-OVDP Audits | Offshore Voluntary Disclosure Lawyer & Attorney

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A significant number of US taxpayers who went through the OVDP mistakenly believed that they were immune from the IRS post-OVDP audits concerning their post-voluntary disclosure compliance. Sherayzen Law Office has repeatedly warned in the past that these taxpayers were mistaken with respect to their exposure to potential post-OVDP audits. The recent announcement of a new IRS compliance campaign concerning post-OVDP tax compliance confirmed the correctness of Sherayzen Law Office’s analysis.

Post-OVDP Audits: OVDP Background Information

The IRS created the Offshore Voluntary Disclosure Program (“OVDP”) as an incentive for US taxpayers to come forward and disclose their prior willful and non-willful noncompliance with US tax reporting requirements concerning foreign assets and foreign income. In exchange for the voluntary disclosure, the taxpayers paid a significantly lower penalty than what they otherwise could have had to pay outside of the OVDP. Moreover, taxpayers also received protection from IRS criminal prosecution of their prior tax noncompliance.

OVDP is not just one program, but a series of programs. The initial one was created in the early 2000s, but it was a relatively small and unknown program. The first program that became influential was the 2009 OVDP. The 2009 OVDP was created on the heels of the IRS victory in the UBS case and it closed on October 15, 2009.

Then, after the passage of the Foreign Account Tax Compliance Act (“FATCA”) in 2010, the IRS created the 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”). The 2011 OVDI was a hugely popular program. Its success led to the creation of 2012 OVDP and, finally, 2014 OVDP.

The implementation of FATCA had materially altered the IRS interest in the OVDP while the number of the OVDP participants precipitously dropped due to the success of the Streamlined Compliance Initiatives (i.e. Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures). The 2014 OVDP program was closed on September 28, 2018.

Post-OVDP Audits: False Sense of Security After OVDP

Some of the OVDP participants have mistakenly treated their OVDP disclosure as a remedy capable of curing not only their past tax noncompliance, but also future compliance issues. In other words, after going through the OVDP, these taxpayers relaxed their commitment to their ongoing annual compliance. Some of them started filing their FBARs irregularly or stopped filing them altogether while others under-reported their foreign income. Still others engaged in a different conduct overseas without realizing that their new way of doing business gave rise to a different set of US reporting requirements.

Many of these taxpayers also erroneously believed that, by going through the OVDP, they were taken off the “IRS radar”. This means that they felt that the IRS was highly unlikely to audit them after their voluntary disclosure.

Post-OVDP Audits: IRS Noticed Noncompliance Among OVDP Participants

In reality, as Sherayzen Law Office had suspected, the IRS engaged in extensive analysis of the OVDP participants’ behavior after their voluntary disclosure. Of course, it was not difficult for the IRS to monitor them, because the IRS already had a full list of the OVDP participants at its disposal. Some of the data came from field audits while other information was derived from FATCA and data analysis.

As a result of its analysis, the IRS discovered the aforementioned disturbing noncompliance trends among former OVDP participants.

Post-OVDP Audits: July of 2019 IRS Compliance Campaign

After it uncovered these noncompliance trends among the former OVDP participants, the IRS announced in July of 2019 a campaign to specifically target taxpayers who went through the OVDP. As part of this campaign, the IRS will send out soft letters and conduct post-OVDP audits.

Post-OVDP Audits: Potentially Disastrous Consequences for Noncompliant Taxpayers

The targets of this IRS compliance campaign will be in a particularly difficult legal situation for two main reasons. First, during a post-OVDP audit, the taxpayers are unlikely to be able to claim non-willfulness with respect to their post-OVDP tax noncompliance because of the knowledge of US tax requirements that they acquired during their voluntary disclosures. In fact, it is difficult to see how non-willfulness can be established in any way other than claims based on new and/or extraordinary circumstances.

Second, since it is not likely that they will be able to establish non-willfulness, taxpayers will most likely face willful penalties during an IRS audit, perhaps even civil and criminal fraud penalties. The IRS is unlikely to be lenient with taxpayers who already benefitted from a voluntary disclosure and persisted in their noncompliance afterwards. In other words, a post-OVDP audit may result in disastrous consequences for noncompliant taxpayers.

Contact Sherayzen Law Office for Professional Help With Post-OVDP Audits

Given the particularly dangerous nature of a post-OVDP audit, a taxpayer subject to this type of an IRS audit must retain an experienced international tax attorney as soon as he is notified about the commencement of the audit. Failure to do so may severely damage the taxpayer’s ability to defend against subsequent IRS penalties.

This is why you need to contact Sherayzen Law Office as soon as possible. We are a highly-experienced international tax law firm that has helped hundreds of US taxpayers to resolve their past noncompliance with US tax laws, including in the context of an IRS audit. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

The Norman Case: Willful FBAR Penalty Upheld | FBAR Lawyers Miami

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On November 8, 2019, the Federal Circuit Court of Appeals (the “Court”) upheld the decision of the Court of Federal Claims to uphold the IRS assessment of a willful FBAR penalty in the amount of $803,530 with respect to Ms. Mindy Norman’s failure to file her 2007 FBAR. The Norman case deserves special attention because of its facts and circumstances and how the Court interpreted them to uphold the willful FBAR penalty.

The Norman Case: Facts of the Case

Ms. Norman is a school teacher. In 1999, she opened a bank account with UBS bank in Switzerland. It was a “numbered account” – i.e. income and asset statements referred to the account number only; Ms. Norman’s name and address did not appear anywhere on the account statements. Between 2001 and 2008, the highest balance of the account ranged between about $1.5 million and $2.5 million.

The Court described how Ms. Norman was actively engaged in managing and controlling her account. She had frequent contacts with her UBS banker in person and over the phone; she decided how to invest her funds and she signed a request with UBS to prohibit investment in US securities on her behalf (which could have triggered a disclosure of the existence of the account to the IRS). In 2002, she withdrew between $10,000 and $100,000 in cash from the account. In 2008 she closed the account when UBS informed her that it would cooperate with the IRS in identifying noncompliant US taxpayers who engaged in tax fraud; it should also be noted that the IRS presented into evidence UBS client contact records which stated that Ms. Norman exhibited “surprise and displeasure” when she was informed about the UBS decision.

Sometime in the year 2008, Ms. Norman signed her 2007 US tax return which, it appears, contained a Schedule B which stated (in Part III) that she had no foreign accounts. Moreover, she signed this return after her accountant sent her a questionnaire with a question concerning foreign accounts.

Also in 2008, Ms. Norman obtained a referral to an accountant. It appears that the accountant advised her to do a quiet disclosure, filing her amended returns and late FBARs. The quiet disclosure triggered the subsequent IRS audit.

The Court found that, during the audit interview, Ms. Norman made numerous false statements, including denying the knowledge of the existence of her foreign account prior to 2009. She also submitted a letter to the IRS re-affirming her lack of knowledge about the existence of this account.

Then, after retaining an attorney, Ms. Norman completely reversed herself in her second letter, stating that she did in fact know about the existence of the account. She further explained that her failure to timely file her FBARs occurred due to her belief that none of the funds in the account were hers and she was not a de-facto owner of the account.

The Norman Case: Penalty Imposition and the Appeals

It appears that the false statements and radical shifts in claims about what she knew about her account completely damaged her credibility with the IRS agent in charge of the audit. Hence, the IRS found that Ms. Norman willfully failed to file her FBAR and assessed a penalty of $803,530.

Ms. Norman paid the penalty in full and filed a complaint with the Court of Federal Claims requesting a refund. The Court of Federal Claims sustained the penalty; hence, Ms. Norman appealed to the Federal Circuit Court of Appeals. The Court upheld the penalty imposition.

The Norman Case: Issues on the Appeal

Ms. Norman raised three issues on the appeal: (1) the Court of Federal Claims erred in finding that she willfully violated the FBAR requirement; (2) a 1987 Treasury regulation limits the FBAR willful penalty to $100,000; and (3) a penalty so high violates the 8th Amendment. The Court did not consider the 8th Amendment argument for procedural reasons.

The Norman Case: Recklessness as part of Willfulness

At the heart of the dispute over the imposition of the willful penalty was whether the IRS can use recklessness in its determination of willfulness. It is important to point out here that the IRS imposed the willful penalty even though it could not prove that Ms. Norman actually knew about the existence of FBAR. Rather, it relied on recklessness in its imposition of the willful FBAR penalty.

In the appeal, Ms. Norman argued that one can only violate the FBAR requirement if one has the actual knowledge of the existence of the form. She adopted a strict interpretation of willfulness as the one found in the Internal Revenue Manual (“IRM”): “willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.”

The Court, however, did not agree with this interpretation. First of all, it pointed to the well-established law that the IRM is not binding in courts. The courts in several circuits have determined that recklessness should be considered as willfulness. Second, the IRM itself stated that actual knowledge of FBAR is not required for the imposition of a willful penalty. Rather, the IRM allowed for the possibility of the imposition of a willful penalty where the failure to learn about FBAR is combined with other factors, such as attempts to conceal the existence of the account and the amounts involved.

Then, the Court explained its reasoning for believing that Ms. Norman’s behavior was reckless: she opened the foreign account, actively managed it, withdrew money from it and failed to declare it on her signed 2007 tax return. The fact that Ms. Norman made contradictory and false statements to the IRS during the audit further damaged her credibility with respect to her non-willfulness claims.

The Norman Case: 1987 Treasury Regulation No Longer Valid

Ms. Norman also argued that a 1987 regulation limited the willful FBAR penalty to $100,000. The Court disagreed, because this regulation was rendered invalid by the language found in the 2004 amendment to 31 U.S.C. §5321(a)(5)(C).

The Norman Case: Most Important Lessons for Audited US Taxpayers with Undisclosed Foreign Accounts

The Norman case contains many important lessons for US taxpayers who have undisclosed foreign accounts and who are audited by the IRS. Let’s concentrate on the three most important ones.

First and foremost, do not lie to the IRS; lying to the IRS is almost certain to backfire. In the Norman case, the taxpayer had good facts on her side at the beginning, but her actions during the audit made them almost irrelevant. Ms. Norman’s false statements damaged her credibility not only with the IRS, but also with the courts. It made her appear as a person undeserving of sympathy; someone who deserved to be punished by the IRS.

Second, Ms. Norman fell prey to an incorrect advice from her accountant and did a quiet disclosure. Given how dangerous her situation was as a result of an impending disclosure of her foreign account by UBS, doing a quiet disclosure in 2008 was a mistake. Instead, a full open voluntary disclosure should have been done either through the traditional IRS voluntary disclosure option or a noisy disclosure (unfortunately, the 2009 OVDP was not yet an option in 2008).

Finally, the Norman case highlights the importance of having the appropriate professional counsel. During her quiet disclosure and the subsequent IRS audit Ms. Norman did not hire the right professional to assist her until it was too late – the damage to the case became irreversible. Instead of retaining the right international tax attorney, she chose to rely on an accountant. In the context of an offshore voluntary disclosure and especially an IRS audit involving offshore assets, relying on an accountant is almost always a mistake – only an experienced international tax attorney is right choice.

Contact Sherayzen Law Office for Professional Help With Your US Tax Compliance and an IRS Audit Concerning Foreign Accounts and Foreign Income

If you have undisclosed foreign accounts and you wish to resolve your US tax noncompliance before the IRS finds you, you need to secure competent legal help. If you are already subject to an IRS audit, then you need to retain an international tax attorney as soon as you receive the initial audit letter. As stated above, Ms. Norman paid a very high price for a failure to do so timely; you should avoid making this mistake.

For this reason, contact Sherayzen Law Office for professional help as soon as possible. Our team of tax professionals headed by the highly experienced international tax attorney, Mr. Eugene Sherayzen, have helped hundreds of US taxpayers to resolve their prior US tax noncompliance issues and successfully conclude IRS international tax audits. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

New FBAR Filing Verification Submission Process | FBAR Lawyer & Attorney

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On November 19, 2019, the IRS announced changes to the current FBAR filing verification submission process. The change is technical, but not without importance.

New FBAR Filing Verification Submission Process: FBAR Background Information

FBAR is a common name for FinCEN Form 114 (formerly known as TD F 90-22.1), Report of Foreign Bank and Financial Accounts. US Persons must use this form to report their ownership of or signatory authority or any other authority over foreign bank and financial accounts as long as these accounts’ aggregate balance exceeds the FBAR filing threshold. Despite its official name, the IRS has administered the form since 2001, not FinCEN.

FBAR is one of the most important US international information returns. FBAR noncompliance may lead to the imposition of severe civil and criminal penalties. Hence, it is of absolute importance for US persons to timely and properly file this form.

New FBAR Filing Verification Submission Process: Rules Prior to November 19 2019

Prior to November 19, 2019, US persons who wanted to verify whether their FBARs were filed could obtain the relevant information for up to five FBARs by simply calling 1-866-270-0733 (the IRS FBAR Hotline) and selecting option 1. IRM 4.26.16.4.13(4). In this case, the IRS representatives would provide the verbal verification for free. The filers could make this request sixty days after the date of filing. Id.

If, however, a filer wished to request information concerning more than five forms or he wanted to obtain paper copies of filed FBARs, then he would need to do so in writing. For written verifications, there was a $5.00 fee for verifying five or fewer forms and a $1.00 fee for each additional form. Id. The IRS charged $0.15 per copy of the entire FBAR. Id. Written requests should have been accompanied by payment in accordance with IRM 4.26.16.4.13(4)(b).

New FBAR Filing Verification Submission Process: New November 19 2019 Rules

On November 19, 2019, the IRS issued a memorandum which contained interim guidance concerning the process by which the IRS would accept the requests for FBAR filing verifications. The memorandum introduced the following revisions to the FBAR filing verification process.

Effective as of the date of this memorandum, the IRS no longer accepts verbal verification requests; all requests must be submitted in writing. Hence, the existing fee structure in IRM 4.26.16.4.13(4)(b) now applies to all verification requests.

The IRS has stated that this procedural change is necessary to provide documentary evidence of all verification inquiries and IRS response to them. This new interim guidance will be incorporated into IRM 4.26.16 within the next two years from the date of issuance of the memorandum.

New FBAR Filing Verification Submission Process: Making a Proper Written Request

The written request for FBAR filing verification should include the filer’s name, Taxpayer Identification Number, and filing period(s). Tax practitioners requesting verifications for their clients must also make these requests in writing, and provide a copy of the Form 2848, Power of Attorney and Declaration of Representative, authorizing them to receive the FBAR information. The same fee structure as described above (i.e. a $5.00 fee for verifying five or fewer forms, a $1.00 fee for each additional form, and copies for an additional fee of $0.15) will continue to apply. Checks or money orders should be made payable to the “United States Treasury”.

Written requests and payments for FBAR filing verifications and copies of filed FBARs should be mailed to:

IRS Detroit Federal Building
Compliance Review Team
Attn.: Verification
P.O. Box 32063
Detroit, MI 48232-0063

In response to written requests, the IRS will send a letter stating whether the record shows that an FBAR was filed and if so, the date filed. If a copy of a paper-filed FBAR was requested, a copy will be included with IRS letter.

Contact Sherayzen Law Office for Professional Help with FBAR Compliance

The new FBAR filing verification process will be especially relevant in the context of offshore voluntary disclosures. Oftentimes, taxpayers do not have copies of their prior FBARs; and it is necessary to obtain these copies in order to properly calculate the penalty exposure as well as use them as evidence of non-willfulness (or find out if the IRS may use them as evidence of willfulness).

If you are required to file FBARs and you have not done so, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers with their FBAR compliance issues, and We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!