Offshore Voluntary Disclosure Program

Cambata Case: IRS Wins Against Former U.S. Citizen on Offshore Income

/0 Comments/in , /by

In the Cambata case, the IRS successfully demonstrated once again that renunciation of U.S. citizenship will not protect a taxpayer from being pursued for unreported income from foreign accounts. On February 3, 2016, Mr. Albert Cambata pleaded guilty to filing a false income tax return with respect to his unreported Swiss account income.

Facts Related to Mr. Cambata’s Unreported Swiss account income

According to court documents, in 2006, Mr. Albert Cambata established Dragonflyer Ltd., a Hong Kong corporate entity, with the assistance of a Swiss banker and a Swiss attorney. Days later, he opened a financial account at Swiss Bank 1 in the name of Dragonflyer. Although he was not listed on the opening documents as a director or an authorized signatory, Mr. Cambata was identified on another bank document (which the IRS obtained most likely through the Swiss Bank program) as the beneficial owner of the Dragonflyer account. That same year, Mr. Cambata received $12 million from Hummingbird Holdings Ltd., a Belizean company. The $12 million originated from a Panamanian aviation management company called Cambata Aviation S.A. and was deposited to the Dragonflyer bank account at Swiss Bank 1 in November 2006.

On his 2007 and 2008 federal income tax returns, Mr. Cambata failed to report interest income earned on his Swiss financial account in the amounts of $77,298 and $206,408, respectively. In April 2008, Mr. Cambata caused the Swiss attorney to request that Swiss Bank 1 send five million Euros from the Swiss financial account to an account Mr. Cambata controlled at the Monaco branch of Swiss Bank 3. In June 2008, Cambata closed his financial account with Swiss Bank 1 in the name of Dragonflyer and moved the funds to an account he controlled at the Singapore branch of Swiss Bank 2.

In 2012, Mr. Cambata, who has lived in Switzerland since 2007, went to the U.S. Embassy in Bratislava, Slovakia, to renounce his U.S. citizenship and informed the U.S. Department of State that he had acquired the nationality of St. Kitts and Nevis by virtue of naturalization.

Link between the Cambata Case and Swiss Bank Program

It appears that the IRS was able to focus on Mr. Cambata due to information provided by one of the Swiss Bank that participated in the Swiss Bank Program. This led to the IRS investigation that unraveled the whole scheme constructed by Mr. Cambata. Additional information might have been provided to the IRS by one of the Category 1 banks as part of a Deferred Prosecution Agreement.

This affirms what the IRS has stated in the past about its determination to continue to pursue older fraud cases based on the information it already obtained from the Swiss banks. “IRS Criminal Investigation will continue to pursue those who do not pay the taxes they owe to the United States,” said Special Agent in Charge Thomas Jankowski of the Internal Revenue Service-Criminal Investigation, Washington, D.C. Field Office. “Today’s plea is a reminder that we are committed to following the money trail across the globe and will not be deterred by the use of sophisticated international financial transactions that hide the real ownership of income taxable by the United States.”

The Global Reach of the IRS Investigations Grows

Mr. Cambata’s accounts were spread out among the local branches of Swiss banks in Monaco, Singapore and Switzerland. The funds originated from companies based in Belize and Panama (the information regarding these companies was probably obtained through John Doe summons issued in 2015).

It becomes obvious from this case that our earlier warnings about the spread of the IRS investigations beyond Switzerland were correct. The IRS now reaches far beyond Switzerland and focuses more and more on jurisdictions like Belize, Cayman Islands, Cook Islands, Monaco, Panama, Singapore and other favorite offshore jurisdictions. The Cambata case is a grave warning to U.S. taxpayers who still operate in offshore jurisdictions to hide assets from the U.S. government.

The Cambata Case is a Warning to Taxpayers Who Pursued Quiet Disclosure to Cover-Up Past Tax Noncompliance

One of the most curious aspects about the Cambata case is that the IRS never imposed any FBAR penalties or tax return penalties with respect to the later years. While it is not clear from the documents, it appears that Mr. Cambata probably did a quiet disclosure in the year 2009 and has properly filed his FBARs and tax returns ever since.

The FBAR statute of limitations probably did not allow the IRS to impose the FBAR penalties, but the IRS still ignored the quiet disclosure and pursued criminal penalties for the 2006 and 2007 fraudulent tax returns (in addition to restitution of $84,849 – presumable the tax Mr. Cambata would have owed had he filed his 2006 and 2007 returns correctly).

Therefore, U.S. taxpayers who filed quiet disclosure should heed one of the main lessons of the Cambata case – quiet disclosure will not protect you from the IRS criminal prosecution.

The Cambata Case is also a Warning to Taxpayers Who Renounced U.S. Citizenship to Hide Past Tax Noncompliance

The Cambata case also dispels another myth common to U.S. taxpayers: renouncing citizenship somehow prevents the IRS criminal prosecution for past noncompliance. On the contrary, U.S. taxpayers who renounce citizenship may draw the IRS attention because they have to certify that they are fully compliant with the tax laws of the United States.

If the IRS is able to prove that these taxpayers are not fully tax-compliant, then, as the Cambata case clearly demonstrates, the IRS can pursue criminal penalties against former U.S. citizens. It is possible that one of the chief purposes of the IRS in this case was to scare other U.S. citizens who renounced their citizenship to hide their past tax noncompliance.

Contact Sherayzen Law Office for Legal Help with Your Foreign Accounts

If you have undisclosed foreign accounts, contact Sherayzen Law Office as soon as possible. Whether your case involves complex beneficial ownership structures or you own your foreign accounts personally, our highly experienced team of tax professionals can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Streamlined Five Percent Offshore Penalty Calculation

/0 Comments/in , /by

Despite its appearances, the calculation of the Streamlined Domestic Offshore Procedures Title 26 Miscellaneous Offshore Penalty (“Streamlined Five Percent Offshore Penalty) may actually be a complex process. Moreover, the correct calculation of the Streamlined Five Percent Offshore Penalty may lead to some paradoxical conclusions, including a preference for the OVDP Penalty (now closed). Due to the complexity of the calculation of the Streamlined Five Percent Offshore Penalty, this process should be handled by an experienced international tax lawyer. Nevertheless, in this article, I will outline some of the general contours of this process for educational purposes only.

General Calculation of the Streamlined Five Percent Offshore Penalty

The calculation of the Streamlined Five Percent Offshore Penalty is a three-step process. First, you need to identify the Penalty Base. Second, you need to determine the December 31 value of each asset included in the Penalty Base and enter these values into Form 14654. Finally, you need to determine the aggregate value of these assets per year and apply the Streamlined Five Percent Offshore Penalty to the highest aggregate value.

Penalty Base of the Streamlined Five Percent Offshore Penalty

The first and most important step in the calculation is determining the Penalty Base. I strongly advise retaining an international tax lawyer to do this calculation for you; neither the accountants nor the clients themselves should be trusted with this task, because it requires a legal determination of what assets need to be included in the Penalty Base for the Streamlined Five Percent Offshore Penalty.

In general, however, the Penalty Base consists of all foreign assets that are subject to the Streamlined Five Percent Offshore Penalty – i.e. a legal determination needs to be made with respect to which assets need to be included in the calculation of this penalty and which assets do not need to be included.

This determination needs be made with respect to assets that the taxpayer had in each of the last six years – this is called the voluntary disclosure period. For example, in general, the voluntary disclosure period for taxpayers who are filing their voluntary disclosure under the Streamlined Domestic Offshore Procedures in March of 2016 will be calendar years 2009-2014.

After a few changes in its position, the IRS finally established its position on the calculation of the Penalty Base and it is frightfully broad. In general, the Penalty Base for the Streamlined Five Percent Offshore Penalty consists of three types of assets. First, it includes, for each of the six years in the voluntary disclosure period, all foreign financial accounts (as determined by the FBAR rules) in which the taxpayer has a personal financial interest and which should have been, but were not reported, on an FBAR.

The second class of assets, consists of all foreign financial assets (as defined in the instructions for Form 8938) in which the taxpayer has a personal financial interest and that should have been, but were not, reported on Form 8938. Note here the difference in the number of years applicable to this asset class – only in each of the three years in the covered tax return period (i.e. in our example above, in general, it would be years 2012-2014; however, if the 2015 tax return was filed, then, the covered tax return period could shift to 2013-2015). This is very different from the first class of assets reportable on the FBARs. The difference is due to the fact that the Streamlined Domestic Offshore Procedures only require the tax returns to be filed for the past three years, while the FBAR covers the past six years.

This second class of assets is the most problematic, because Form 8938 is very broad and covers a wide range of assets, including interests in foreign businesses and foreign trusts. Moreover, the Streamlined Five Percent Offshore Penalty is even applicable to the assets that are reportable on Forms 3520, 5471, 8621 and other forms which are linked to Form 8938 – i.e. foreign financial assets that would be reportable on Form 8938 had it not been for the provision in Form 8938 instructions designed to eliminate the burden of the duplicate reporting. Other complications may arise with respect to the spectrum of assets that should be included in this second category of the Penalty Base.

The third class of assets includes all foreign financial accounts and other foreign financial assets that were reported on the FBAR and Form 8938, but the gross income for these accounts and assets was not reported in that year. This is called income tax non-compliance.

Valuation of Assets for Streamlined Five Percent Offshore Penalty

After your international tax lawyer determines the assets that need to be included in the Penalty Base, the next step is to value these assets in order to enter them into Form 14654 (here, if you have numerous assets, I recommend that your lawyer creates an attachment that includes all required information). There are two important issues that one must remember with respect to asset valuation for the purpose of calculating the Streamlined Five Percent Offshore Penalty.

First, your lawyer should value the assets as of December 31 value of the applicable year; the IRS is not looking for the highest value of an asset, just the December 31 value. This is easy to do with respect to foreign financial accounts, but the problems arise with respect to other assets included in the Penalty Base, which leads us to the second issue.

Second, special rules apply to valuation of ownership of foreign disregarded entities, corporations and trusts. A reasonable valuation method should be used in making these determinations. Oftentimes, the balance sheet of Form 5471 can be used; however, sometimes an event (for example, a sale of corporate stock) may occur which provides a reasonable value for the stock. Remember, however, the valuation should be done as of December 31. This means that, if the stock is sold on December 30, the value of the stock (for the purpose of the year in which the stock is sold) would be zero.

Application of the Streamlined Five Percent Offshore Penalty to the Highest Aggregate Balance

The last step in the Streamlined Offshore Five Percent Penalty calculation is the easiest. Once the asset values included in the Penalty Base are properly valued and entered into Form 14654, the international tax lawyer needs to add-up the totals for each year and determine the highest aggregate amount among the years. Then, the lawyer should apply the Streamlined Five Percent Offshore Penalty to the highest aggregate balance – this is the amount due to the IRS.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure Under the Streamlined Domestic Offshore Procedures

The determination of the Streamlined Five Percent Offshore Penalty may be a difficult and tricky process and you need an international tax lawyer to do it. Moreover, the actual choice of the type of voluntary disclosure that a taxpayer should pursue needs be analyzed by an experienced attorney.

Sherayzen Law Office is a leading offshore voluntary disclosure law firm in the world with clients in virtually every continent. We have helped hundreds of US taxpayers to bring their US tax affairs into full compliance with US tax laws and we can help You!

Contact Us to Schedule Your Confidential Consultation!

Hiding Assets and Income in Offshore Accounts Again Made the IRS “Dirty Dozen” List

/0 Comments/in , /by

On February 5, 2016, the IRS again stated that avoiding U.S. taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

The problem with offshore accounts is two-fold. On the one hand, there are numerous con-artists who use offshore accounts to lure taxpayers into scams and schemes. The second and a much larger problem for the IRS is the fact that many U.S. taxpayers used offshore account to hide assets and income from the IRS.

Fighting the strategy of using offshore accounts to hide assets and income has been one of the top priorities of the IRS since the early 2000s. The problem has been complicated by the fact that there are many legitimate reasons for having an offshore account – a fact that, unfortunately, has been largely ignored by journalists and the public opinion in the United States. Therefore, it is necessary for the IRS to approach the problem of offshore accounts carefully in order to avoid hurting innocent people.

Over the years, the IRS (with the help of Congress) has chosen five different and interrelated strategies to fight tax evasion through offshore accounts.

1. IRS Civil and Criminal Enforcement

IRS examinations, audits, subpoenas, and criminal enforcement play a central role in the IRS war against using offshore accounts to hide assets and income. The ability of the IRS to enforce U.S. tax laws is amazingly broad and the IRS will use it whenever it wishes.

Since 2009, the IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Hence, brute force still looms large in fighting tax evasion through offshore accounts and creates enormous (and fully justified) fear in the hearts of many U.S. taxpayers. This fear is also central to the IRS ability to use the other four strategies listed below.

2. Extensive Reporting Requirement for Owners of Offshore Accounts

As owners of offshore accounts have already noticed, the number of reporting requirements with respect to offshore accounts has risen dramatically. In addition to FBAR (which has existed since the 1970s), FATCA introduced Form 8938 in 2011. Furthermore, Form 8621 and Schedule B to Form 1040 have been modified to require additional reporting with respect to offshore accounts. Other forms also indirectly require reporting of foreign accounts (through reporting of ownership or a beneficial interest in a foreign entity or a foreign trust).

By forcing U.S .taxpayers to do extensive reporting with respect to their offshore accounts, the IRS has achieved two goals at the same time. First, it has collected an enormous amount of information with respect to U.S. offshore accounts and their owners. This information can be used in a later investigation to track fund and identify patterns of behavior. In a short while, due to the implementation of FATCA in many jurisdictions around the world, this information will also be used to compare the banks’ information with the information provided by the taxpayers on their information returns.

Second, the enormous fines associated with offshore accounts reporting can create huge tax liabilities for noncompliant taxpayers. This provides the IRS with a financial incentive to pursue these taxpayers. These potentially disastrous noncompliance fines also serve to deter many taxpayers from engaging in risky tax evasion schemes.

Of course, one of the biggest problems associated with these reporting requirements is that the majority of persons, including tax accountants, never heard of them until they were already in trouble. When the IRS pressure started to rise, it was already too late for a lot of U.S. taxpayers to do simply current compliance and they had to pay fines to the IRS. It is important to emphasize that the process is by no means over – on the contrary, as the complexity of U.S. tax compliance continues to rise, a lot of taxpayers (and their accountants) still do not know about a lot of these requirements.

3. Voluntary Disclosures

In order to alleviate the reporting noncompliance nightmares for U.S .taxpayers, the IRS created a number of voluntary disclosure programs. The early programs were not very successful; however, after the IRS stunning victory in the 2008 UBS case, the 2009 Offshore Voluntary Disclosure Initiative (OVDI) turned out to be a huge success. The 2011 OVDP, 2012 OVDP and 2014 OVDP with 2014 Streamlined Compliance Procedures followed in quick succession and with even bigger success. Since 2009, more than 54,000 OVDP disclosures took place and the IRS has collected more than $8 billion; this is not taking into account the huge surge in Streamlined disclosures since 2014.

The information that has been collected through OVDP is used to identify noncompliant individuals and entire schemes to evade U.S. taxes through offshore accounts. The IRS then uses this information to pursue taxpayers with undeclared offshore accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas using offshore accounts. The IRS works closely with the Department of Justice (DOJ) to prosecute these tax evasion cases.

4. Swiss Bank Program

In addition to the voluntary disclosure program for individuals, the IRS also created a voluntary disclosure program for Swiss banks. Such voluntary disclosure program is, of course, an unprecedented event – never in history did one country force another country’s entire bank system to do a voluntary disclosure on the territory of that other country.

While the debate over this breach of Swiss sovereignty (although, technically, the Swiss government agreed to the Swiss Bank Program) is interesting, for the purposes of this article, it is important to note that Swiss Bank program was a huge step forward in attacking the usage of offshore accounts to hide assets and income.

By the end of February of 2016, about 80 Swiss banks went through Category 2 voluntary disclosure and paid penalties to the U.S. government. They also turned over enormous amount of information regarding their U.S. accountholders and the various schemes that Swiss bankers developed to hide assets and funds from the IRS. In essence, the Swiss bankers turned over to the IRS substantially all of the blueprints for tax evasion that they had created.

5. FATCA

The final major strategy for fighting the practice of using offshore accounts to hide assets and income from the IRS is the famous Foreign Account Tax Compliance Act or FATCA. Ever since FATCA entered into force, it has changed the global landscape of international tax compliance. One of the most salient features of FATCA is the fact that it forces foreign banks to report to the IRS all of the offshore accounts that they can identify as owned by U.S. persons.

This groundbreaking piece of legislation has had an enormous impact on the ability of the IRS to identify noncompliance by U.S. persons, because foreign banks now act as its agents and voluntarily disclose U.S. persons and their offshore accounts.

Contact Sherayzen Law Office for Help With Your Offshore Accounts

If you have undisclosed offshore accounts, you should contact Sherayzen Law Office as soon as possible. We have helped hundreds of U.S. taxpayers to bring their U.S. tax affairs in order while saving millions of dollars in potential penalty reductions. We furthermore help to reduce your income tax liability as a result of your voluntary disclosure and post-voluntary disclosure tax planning.

Contact Us NOW to Schedule Your Initial Consultation!

What Needs to Be Included in the OVDP Preclearance Request

/0 Comments/in , /by

The OVDP Preclearance Request is a very important document that is required to be filed in order to commence a US taxpayer’s voluntary disclosure under the 2014 IRS Offshore Voluntary Disclosure Program (2014 OVDP) which is still in existence at the time of this writing. This is why it is important to understand what actually needs to be included in the OVDP Preclearance Request.

FAQ 23 of the 2014 OVDP details three major requirements for the OVDP Preclearance Request. First, the OVDP Preclearance Request must include the identifying information of the applicant(s), including complete name(s), date(s) of birth, tax identification number(s), address (or adresses), and telephone number(s).

Second, the OVDP Preclearance Request should include the identifying information of all financial institutions at which undisclosed OVDP assets were held during the voluntary disclosure period. The “identifying information” includes complete names of the foreign institutions (including all DBAs and pseudonyms), addresses, and telephone numbers.

It is up to your international tax lawyer to determine the OVDP assets and the voluntary disclosure period prior to filing the OVDP Preclearance Request.

Finally, the OVDP Preclearance Request should include the identifying information of all foreign and domestic business entities (e.g., corporations, partnerships, limited liability companies, foundations, et cetera) and trusts through which the undisclosed OVDP assets (again, this is the determination that needs to be made by your international tax lawyer) were held by the applicant.
Note that this request does not include the entities that are traded on a public stock exchange in the United States or overseas.

This information should be supplied for the entities that were in existence during any period of time during the Voluntary Disclosure Period, including any entities that were dissolved. The determination of the Voluntary Disclosure Period should be done by your international tax lawyer.

The identifying information that should be included in your OVDP Preclearance Request with respect to entities includes: complete names (including all DBAs and pseudonyms), employer identification numbers (if applicable), addresses, and the jurisdiction in which the entities were organized.

The OVDP Preclearance Requests should be accompanied by an executed Form 2848 (IRS Power of Attorney form) if the applicant is represented. I strongly advise that you retain an experienced international tax lawyer to conduct your voluntary disclosure process.

Note that, if your case involves jointly-filed US tax returns, the OVDP Preclearance Request should be prepared for both spouses.

Once the OVDP Preclearance Request is faxed to the IRS, the IRS-CI (Criminal Investigation) may take up to 30 days to notify the applicant’s representative (or the applicant himself (or herself), if the applicant is not represented). In my experience, if the IRS-CI is not busy, it will usually respond within a few weeks, but it can take the whole month. However, there are instances (like the August of 2014 deadline for US taxpayers to secure the 27.5% penalty, instead of 50%) when the IRS-CI is overwhelmed and it can take even a couple of months for them to make the decision on your OVDP Preclearance Request.

Contact Sherayzen Law Office for Experienced and Professional Help With the Voluntary Disclosure of Your Foreign Assets and Foreign Income

If you have undisclosed foreign accounts and you are considering entering the OVDP, you should contact the experienced voluntary disclosure team of Sherayzen Law Office, Ltd. We will handle your entire case, including all legal and accounting documentation (including the preparation of amended tax returns and FBARs). We have helped hundreds of US taxpayers worldwide and we can help you!

Contact Sherayzen Law Office to Schedule Your Confidential Consultation!

Higher OVDP Penalty Risk for US Taxpayers With Foreign Accounts

/0 Comments/in , /by

December of 2015 was one of the most successful months for the DOJ’s Swiss Bank Program as nearly a record number of banks signed non-prosecution agreements. This success for the DOJ means that more and more of non-compliant US taxpayers with foreign accounts are likely to deal with Higher OVDP Penalty with respect to their undisclosed foreign accounts.

DOJ’s Swiss Bank Program

The Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (Program) was announced by the US Department of Justice on August 29, 2013. The Program was intended to achieve multiple goals, but there are four of them that are most important to the understanding of the Higher OVDP Penalty and the Program.

First, this was an “offer that one cannot refuse” for the Swiss banks– the Program was intended to “allow” (or force) Swiss banks to bring themselves into compliance with US tax laws. In exchange, the Swiss banks received a non-prosecution agreement that promised them protection from US legal enforcement actions.

Second, the Program was intended to obtain as much information as possible about non-compliant US taxpayers with foreign accounts.

The third important goal was to create an atmosphere of global enforcement that would make US voluntary disclosure the most rational choice for non-compliant US taxpayers with foreign accounts given the risk of IRS discovery of their undisclosed foreign accounts.

Fourth, the Program was intended to pave the way for easier acceptance of FATCA throughout the world by demonstrating what could potentially happen in any country that decides to resist the implementation of FATCA.

It must be stated that the Swiss Bank Program has been a spectacular success for the DOJ and the IRS. Both, the banks and non-compliant US taxpayers with foreign accounts flocked to the voluntary disclosure programs. Moreover, today, FATCA is the new global standard of international tax enforcement.

2014 OVDP

The current 2014 IRS Offshore Voluntary Disclosure Program is a modification of 2012 OVDP which, in turn, was the continuation of a series of prior IRS offshore voluntary disclosure programs (particularly 2011 OVDI). The 2014 OVDP is designed to help non-compliant US taxpayers with foreign accounts to bring their tax affairs into compliance with US tax laws.

2014 OVDP has a two-tier penalty system. The 50% penalty rate applies to US taxpayers with foreign accounts in the banks on the special IRS list. The 27.5% penalty rate applies to everyone else.

Influence of the Program on the OVDP

The Swiss Bank Program has a direct impact on the IRS Offshore Voluntary Disclosure Program because every Swiss Bank that signs a Non-Prosecution Agreement under the Program is automatically added to the 50% penalty list of foreign banks.

Thus, as more and more Swiss Banks reach an agreement with the DOJ under the Program, the list of 50% penalty banks keeps expanding and so does the list of US taxpayers with foreign accounts who may be subject to this higher penalty rate.

What Should Non-Compliant US Taxpayers With Foreign Accounts Do?

The growing risk of higher OVDP penalty means that non-compliant US taxpayers with foreign accounts should explore their voluntary disclosure options as soon as possible by contacting an experienced international tax lawyer.

It is a mistake to assume that 50% penalty list will grow only as a result of the Swiss Bank Program. Even today, the list already contains banks which are located outside of the United States (such as HSBC India and Israeli Bank Leumi). This means that any bank in almost any part of the world may tomorrow be on the 50% penalty list and US taxpayers with foreign accounts in this bank would be forced to pay a much higher penalty.

Contact Sherayzen Law Office for Professional Tax Help With The Voluntary Disclosure of Your Foreign Accounts

The growing risk of higher OVDP penalty means that you should contact the experienced international tax team of Sherayzen Law Office. International tax attorney and Founder of Sherayzen Law Office, Mr. Eugene Sherayzen, will personally analyze your case, estimate your IRS penalty exposure, determine your offshore voluntary disclosure options, and implement your customized voluntary disclosure plan to resolve your US tax problems.