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Voluntary Disclosure of Foreign Accounts and Foreign Assets in 2012

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This article offers an important strategic perspective on the foreign financial accounts disclosure in the year 2012. In particular, it appears that, this year, U.S. taxpayers who have not fully disclosed their foreign financial accounts and foreign assets should make the urgent decision to bring their tax affairs into full compliance.

Three Trends Greatly Enhanced IRS Ability to Identify and Prosecute Non-Compliance

In 2012, waiting with the voluntary disclosure of previously unreported foreign financial accounts is just too dangerous for any U.S. taxpayer to afford. This is the result of three converging trends in U.S. tax enforcement.

First, as a result of the 2009 and 2011 offshore voluntary disclosure programs, the IRS is currently sitting on top of a gigantic mountain of information about the financial institutions, wealth-management advisors, and individual taxpayers involved in the U.S. tax non-compliance. Once processed, this information should allow the IRS to effectively identify and target the main sources of noncompliance, including common countries, financial institutions, and individuals (including U.S. taxpayers). Therefore, the risk of discovery – whether intentional or accidental – has risen tremendously for U.S. taxpayers who either willfully or non-willfully failed to disclosure their reportable foreign assets and foreign income.

Second, the new reporting requirements force U.S. taxpayers to disclose assets that previously may have escaped the IRS disclosure. The first and foremost of these new requirements is Form 8938, which should allow the IRS to collect the information that previously was not required to be collected as well as effectively connect various tax reporting requirements, allowing the IRS to assess the scope of potential non-compliance with relative ease.

Moreover, in addition to Form 8938, a stricter interpretation as well as expansion of other existing forms allows the IRS to upgrade the reach of other reporting requirements. Form 8621 is the best-known example of this trend. Form 8621 is used to report PFIC (Passive Foreign Investment Company) income; soon, the U.S. taxpayers will be required to file a new version of Form 8621 to report their PFIC holdings even if they do not have PFIC income.

Finally, the third trend is the ever expanding IRS statute of limitations. The IRS has been given (or it interpreted the law in such a way) an increasing power to look back farther and deeper into older U.S. tax returns. FATCA (Foreign Account Tax Compliance Act) further enhanced this ability. At this point, failure to file any of the major disclosure forms, such as Forms 5471, 8865, 8938 and so on, is likely to prevent the IRS Statute of Limitations from running, keeping a tax return open potentially forever.

Impact of These Trends on Taxpayer Compliance Strategies

These three trends have a tremendous impact on the tax compliance strategies of U.S. taxpayers. First, as a result of the extended Statute of Limitations, the U.S. taxpayers cannot now just contend themselves with making sure that they are in full compliance in the current year – they need to make sure that they were compliant in all years potentially open to the IRS audit.

This means that the “quiet disclosure” practice (where taxpayers are attempting to amend their tax returns and comply with current reporting requirements without providing any explanation to the IRS) employed by so many accountants in the past can be more damaging than helpful at this point. While I have always been in disagreement with this strategy, it appears that the current enhanced abilities of the IRS to identify and prosecute non-compliance make this strategy downright dangerous for most non-compliant taxpayers.

Second, with the issuance of new Form 8938, the taxpayers’ ability to maneuver around the foreign asset reporting requirements is greatly reduced. Moreover, it appears that Form 8938 forces the previously non-compliant (whether willful or non-willful) taxpayers into a situation where they have to choose between further exacerbating their non-compliance with potentially grave consequences or complete disclosure of all of the assets that they previous did not or could not report.

Third, there is now an added urgency to the voluntary disclosure to non-compliant taxpayers. From one side, the aforementioned obligation to comply with Form 8938 and other forms during this tax season places strict deadlines for conducting voluntary disclosure (even with extensions). From the other side, for the taxpayers who have unreported assets in countries and institutions that were exposed during the 2009 and 2011 offshore voluntary disclosure programs, this is a race against time. As soon as the IRS is able to process the gigantic pile of data that they have accumulated as a result of those programs, these taxpayers are at heightened risk of discovery. It is well-known that, once the IRS launches an investigation against a particular taxpayer, this taxpayer will not be able to take advantage of any existing voluntary disclosure options.

Cumulative Effect: 2012 is the Year of Voluntary Disclosures

The cumulative effect of all of these trends and strategies is likely to be a heavy pressure on the U.S. taxpayers to conduct some form of voluntary disclosure of previously-unreported foreign assets. Therefore, it is very likely that year 2012 will continue to build on the previous years’ pattern of increasing number of disclosures – perhaps, the numbers will climb even higher than in 2011.

Contact Sherayzen Law Office for Help With 2012 Offshore Voluntary Disclosure

If you have any unreported foreign accounts, foreign assets or foreign income, contact Sherayzen Law Office NOW. Our experienced voluntary disclosure firm will assist you during every stage of your disclosure – analysis of your legal situation and your risk exposure, choosing the right disclosure based on your fact pattern, preparation of all necessary documents (including tax returns, FBARs, business ownership disclosure (5471, 8865, 8858), PFIC, foreign trust distribution, foreign inheritance, and other forms), management of proper filing of the disclosure, creative ethical approach to establishing the legal foundation of your case, and rigorous advocacy of your interests during IRS negotiations.

Offshore Voluntary Disclosure Program 2012: Impact of Form 8938

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The announcement by the IRS of the opening of the new Offshore Voluntary Disclosure Program (OVDP) on January 9, 2012 (now closed) came as a surprise to most tax practitioners, especially since the 2011 OVDI just ended on September 9, 2011. Yet, if one analyzes the number of new developments in international tax compliance over the past several years, then the surprise of the announcement of a new offshore voluntary disclosure program is greatly reduced.

One of these latest developments is the new Form 8938, which was born out of the passage of FATCA (Foreign Account Tax Compliance Act). In this article, I will analyze some of the key aspects of the interaction between Form 8938 and OVDP 2012.

Link between OVDP 2012 and Form 8938

In an earlier article, I already described the main features of the OVDP 2012. In announcing the OVDP 2012, IRS cited several reasons for announcing the new voluntary disclosure program for U.S. taxpayers with offshore assets, particularly the success of the previous programs and the mountain of information gathered by the IRS which would allow it to investigate (and ultimately penalize and/or prosecute) additional non-compliant U.S. taxpayers as well as Swiss bankers. Some international tax attorneys elaborated on the IRS motivation as well as added some of their own reasoning.

Yet, among all of these reasons, most international tax attorneys completely omitted even mentioning the new Form 8938. Yet, in my opinion, Form 8938 is likely to play a very important role in driving additional U.S. taxpayers toward OVDP 2012.

Form 8938’s Impact on Foreign Asset Disclosure Structure

The main reason for Form 8938‘s potentially profound impact on OVDP 2012 participation lies in the nature of Form 8938.

As I explained in an earlier article, Form 8938 is a fundamental tool for the IRS to identify the scope of international tax non-compliance of a given U.S. taxpayer. It is very important to understand the reason why Form 8938 is so useful for the IRS. It is not only because Form 8938 now requires a taxpayer to disclose more information, but, rather, because Form 8938 connects various parts of a taxpayer’s international tax compliance including the information that escaped disclosure on other forms earlier. This summary, in turn, allows the IRS to identify the overall scope of a taxpayer’s noncompliance in an efficient manner. Moreover, compliance with Form 8938 may lay the foundation for an IRS investigation of whether the taxpayer has been in compliance previously.

Compliance With Form 8938 May Force Taxpayers to Enter a Voluntary Disclosure Program

This ability by the IRS to discern whether the areas of actual or potential non-compliance in current as well as prior years puts previously non-compliant taxpayers in a highly uncomfortable position.

For example, suppose that taxpayer T was previously non-compliant with respect to reporting his foreign bank accounts because he did not know anything about the FBAR. Since Form 8938 is filed together with the tax return, T will have to go through a voluntary disclosure of some type because failure to file Form 8938 at this point is likely to turn his previous non-willful non-compliance into a willful one.

Similarly, suppose T was did not report his ownership of a business entity because he classified the entity as a partnership (assuming at this point that it is not a “controlled partnership”) instead of as a corporation. Prior to Form 8938, it was unlikely that the IRS would challenge this classification because the partnership ownership was never disclosed. However, with Form 8938, T will have to disclose his partnership ownership drawing IRS attention to the classification issue. T will have to consult Sherayzen Law Office in order to figure out what is the best course of action to deal with this dilemma.

Thus, as the examples above demonstrate, Form 8938 is likely to have a profound impact on the number and depth of voluntary disclosures as taxpayers are forced to re-evaluate their tax compliance strategies.

It is important to emphasize that the impact of Form 8938 on your particular situation should be analyzed separately by an international tax attorney. This article can only provide a very general background, because the exact strategies, including the optional enrollment into OVDP 2012, will differ from situation to situation.

Contact Sherayzen Law Office for Legal Help With U.S. Tax Compliance Issues

If you have any questions with respect to Form 8938, OVDP 2012, and any other international tax compliance issues, contact Sherayzen Law Office. Our experienced international tax firm will guide you through the complex web of international tax requirements, identify potential problem areas, create a plan of action to deal with these problems, and implement the plan while providing zealous ethical IRS representation.

Impact of Form 8938 on the International Tax Compliance Structure

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The new IRS Form 8938 is not just another tax form that a taxpayer needs to file. Its reach and impact on taxpayer compliance and IRS ability to verify it are far more profound.

Yet, while the addition of Form 8938 to the long list of international tax compliance forms has created a burst of interest among various international tax attorneys (as evidenced in their writings), a very important assessment of the impact of Form 8938 on the rest of the IRS international tax compliance structure appears to be missing in these writings. It is this crucial strategic aspect of the new Form that I wish to address in this article.

Pre-8938 Structure of the IRS International Tax Compliance Requirements

In order to assess the impact of the IRS Form 8938 on the rest of the international tax compliance requirements, it is necessary to briefly explore the pre-8938 (or pre-FATCA (Foreign Account Tax Compliance Act) international tax compliance structure.

Prior to Form 8938, the IRS has already imposed a tremendous variety of reporting requirements on U.S. taxpayers with economic ties to the overseas. First and foremost, the FBAR (the Report on Foreign Bank and Financial Accounts) already forced the disclosure of the foreign bank and financial accounts which are either owned by the U.S. taxpayers or over which these taxpayers have signatory or other authority. Moreover, the FBAR disclosure is tied to the taxpayers’ tax returns through Section III of Schedule B.

From the business side, the IRS required the taxpayers to file a relevant tax form if to report partial or full ownership of a business entity (or if the taxpayer were a director or officer of such entity), including a disregarded business entity. The most prominent examples are Forms 5471, 8865, and 8858. On top of that, Form 3520 and 3520-A address foreign trust ownership and income issues.

Then, there are numerous other reporting requirements addressing such diverse issues as foreign gifts and inheritances, PFIC (Passive Foreign Investment Company) income, Controlled Foreign Corporations, and so on.

In essence, the IRS managed to cover huge areas of international economic activity with various forms and regulations. Moreover, in the past decade, all of these forms were supported by a radical, almost atrocious, increase in penalties in case of non-compliance.

Main Enforcement Problem With Pre-8938 Structure

If the IRS had all of these tools before FATCA, why did the IRS then need any additional forms?

A careful analysis reveals that, despite the presence of the multitude of various forms, it is still not easy to spot a taxpayer’s non-compliance or address all of the non-compliance issues in a given situation for one important reasons – these forms are not connected. Prior to FATCA, there was no form that would allow the IRS to immediately assess the extent of a taxpayer’s non-compliance.

Moreover, despite the number of various tax compliance forms, a lot of information still escaped the IRS. For example, suppose that T (a U.S. taxpayer) owns 15 percent of a business entity B in a country X; other owners are not U.S. taxpayers under any definition. Let us further suppose that business entity B possesses characteristics of a corporation and of a partnership. Assuming all other conditions are met, if B is a foreign corporation, then T would have to file Form 5471. However, if B is a partnership (and assuming all other conditions are met), T would not have to file Form 8865. T was able to classify it as a partnership for U.S. tax purposes, therefore, he needs to file neither Form 5471 nor 8865, leaving the IRS with no information (again, assuming this information would not fall under any other reporting requirement) of T’s foreign business ownership.

Form 8938 is a “Catch-All” Form That Fixes Enforcement Problem for the IRS

This is where Form 8938 comes in. In an example above, the Form 8938 may potentially force T to disclose the ownership information that did not need to be disclosed on Form 8865. If T is particularly unlucky, the IRS may decide to challenge his classification of the business entity, require him to file Form 5471 and impose non-compliance penalties under Form 5471.

This is just one possible scenario. In fact, Form 8938‘s reach is far more ambitious – it is the catch-all form that the IRS desired so much. The Form is directly tied to Forms 3520, 3520-A, 5471, 8621, 8865 and 8891. Moreover, it forces the taxpayers to re-state their foreign bank and financial accounts that should be reported on the FBAR, thereby allowing IRS to identify with ease if a taxpayer has not complied with the FBAR requirements. Then, it imposes additional reporting requirements that may potentially expose any other taxpayer non-compliance (as in example above).

If that were not enough, failure to file Form 8938 will render the filing of a tax return incomplete, keeping the Statute of Limitations open until the Form is actually filed.

Impact of Form 8938: Breeding Ground for IRS Audits

Thus, Form 8938 is not just another tax compliance form. Rather, it is a fundamental, crucially-important tool which the IRS needs in order to effectively identify potential taxpayer non-compliance.

Hence, the most likely consequence of Form 8938 will the commencement of numerous IRS audits and investigations (which will also feed on the mountain of information obtained by the IRS through various voluntary disclosure programs) of the potentially non-compliant taxpayers. I also expect that the IRS ability to identify and challenge problematic classifications will be increased manifold.

Contact Sherayzen Law Office for Help With Form 8938

If you need help with Form 8938 or you are worried about your tax compliance exposure in light of Form 8938 or any other form, contact Sherayzen Law Office. Our experienced international tax firm will guide you through the complex web of international tax requirements, identify potential problem areas, create a plan of action to deal with these problems, and implement the plan while providing zealous ethical IRS representation.

Form 5472: Basic Information

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The focus of this article is to provide some basic information on the IRS Form 5472, an Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

The purpose of Form 5472 is to provide information required by the IRS when “reportable transactions” occur during the tax year of a “reporting corporation”, with a foreign or domestic related party. In general, “reportable transactions” are defined to mean certain types of transactions listed in part IV of the form (such as sales, rents, royalties, interest), for which either monetary consideration was the sole consideration paid or received during the reporting corporation’s tax year, or if any part of the consideration paid or received was either not monetary consideration, or was less than full consideration.

“Reporting companies” that generally are required to file Form 5472 include both: 25% foreign-owned U.S. corporations and foreign corporations engaged in a trade or business within the United States.  Broadly speaking, the 25% ownership requirement is meant to apply to a foreign person who owns either directly or indirectly 25% of a US corporation, but not to multiple foreign persons owning only 25% in the aggregate.  However, the related party rules apply to determining ownership.  In certain situations, filing of Form 5472 may not be necessary if applicable exceptions are met.

For those required to file, Form 5472 must be filed with the reporting corporation’s tax return.  The IRS may consider a substantially incomplete Form 5472 to constitute a failure to file the Form.  For each foreign or domestic related party with which a reporting corporation had a reportable transaction during its tax year, a separate Form 5472 must be filed.  The IRS recently issued temporary and proposed regulations with the intent to remove a requirement under existing regulations mandating duplicate filing of the form.

Contact Sherayzen Law Office for Legal Help With Form 5472

If you have any legal or tax questions about Form 5472, contact Sherayzen Law Office for professional help.  Our experienced international tax firm will help you determine your 5472 filing requirements as well as assist you in properly completing the form.

IRS Declares New 2012 Offshore Voluntary Disclosure Program

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On January 9, 2012, the Internal Revenue Service announced that it opens another offshore voluntary disclosure program – 2012 Offshore Voluntary Disclosure Program or 2012 OVDP – to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS opened the 2012 OVDP following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The 2012 OVDP is similar to the 2011 OVDI program in many ways, but with a few key differences. First, unlike the last year, there is no set deadline for people to apply. Second, while the 2012 OVDP penalty structure is mostly similar to the OVDI program, the taxpayers in the highest penalty category will suffer from a hike in the penalty rate – the new penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. Third, participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Fourth, as under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The important details of the 2012 OVDP are still going to be announced by the IRS later.  It is important to emphasize, however, that the terms of the 2012 OVDP could change at any time going forward. For example, the IRS may increase penalties in the 2012 OVDP for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

The IRS also stated that it is currently developing procedures by which dual citizen taxpayers, who may be delinquent in filing but owe no U.S. tax, may come into compliance with U.S. tax law.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

This offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new 2012 OVDP program.

Contact Sherayzen Law Office for Legal Help With Your Voluntary Disclosure

If you are currently not in compliance with U.S. tax laws, contact Sherayzen Law Office for legal help. Our experienced international tax firm will explore all of the available options, advise you on the best course of action, draft all of the required documentation, provide IRS representation, and conduct the necessary disclosure to bring your affairs tax affairs into full compliance with U.S. tax system.