international tax lawyers

US International Tax Attorney On The Necessity of Anti-Deferral Regimes

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As a US international tax attorney, I am fully aware of the crucially important role that the US international tax anti-deferral regimes (the Subpart F rules and PFIC rules) play in the Internal Revenue Code. Yet, the enormous complexity of the US international anti-deferral regimes often makes some people wonder about why we even have them.

As a US international tax attorney, I feel that it is important to educate the general public about the necessity of the anti-deferral regimes and how this necessity is deeply grounded in our tax system. I also wish to address here the issue of why the US anti-deferral regimes are so complex.

US International Tax Attorney: Anti-Deferral Regimes are a Natural Product of Our Tax System

The anti-deferral regimes is a natural legislative response to the anti-deferral strategies that originate from the deep policy contradictions that form the core of the US tax system. The most important of these contradictions arose from the recognition of income rules.

Generally, the US government imposes an income tax only when income is “recognized.” The recognition rules are complex, but there is a basic asymmetry in the treatment of individuals and corporation. On the one hand, US citizens are taxed on their worldwide income which is usually (though, with important exceptions) recognized when it is earned.

On the other hand, in general and without taking into account any anti-deferral regimes, the individuals are not be taxed on the corporate income (even if this is a one-hundred percent owned corporation) until: (a) the income is distributed (for example, as a dividend), or (b) the shares of the corporation are sold.

In the past, US international tax attorneys would combine these rules with the fact that, in general, foreign corporation would not be subject on foreign-source income earned outside of the United States, to build an effective investment strategy – contribution of all investment assets to a foreign corporation in order to avoid current US taxation of the taxpayers’ investment income. If a US international tax attorney was able to extend this strategy indefinitely, then it brought his clients benefits almost as valuable as not paying taxes at all.

Obviously, such an indefinite offshore deferral of US taxation of otherwise taxable income was not considered consistent with the fundamental goals and policies of US government. This is why the US Congress deemed it necessary to enact various anti-deferral regimes to combat offshore tax avoidance.

US International Tax Attorney: Why Are There Two Anti-Deferral Regimes Instead of One?

Even a US international tax attorney would agree that having multiple esoteric anti-deferral regimes with complex interrelationship between each other cannot be the best way to combat offshore tax avoidance investment strategies. Yet, this is our present reality and it is important to understand why this is the case.

There are four reasons for having multiple anti-deferral regimes. First, the US Congress did not create all of the anti-deferral regimes at the same time. Rather, the anti-deferral regimes appeared gradually over time with multiple amendments and shifting IRS interpretations.

Second, undoubtedly, the political influence of various lobbies with competing policies has greatly hampered the creation of a more transparent anti-deferral regime and elimination of many loopholes and exceptions.

Third, as I explained above, the offshore investment policies arose from the basic contradiction between different income recognition rules of the Internal Revenue Code. This contradiction in itself necessitates a more complex approach to combating any strategies of US international tax attorneys that seek to exploit it. It is difficult to do so with only one anti-deferral regime.

Finally, the combination of the sheer complexity of international commerce, conflicting policy priorities (for example, Congress does not want to stifle the US companies’ ability to compete overseas just for the purpose of completely closing off some offshore investments) and the great variety of various fact patterns makes it virtually impossible to address the offshore investment strategies in a simple way. This factor partially explains why there is such a variety of international tax rules that form part of the anti-deferral regimes.

Contact Sherayzen Law Office for Help with Anti-Deferral Regime Compliance and Planning

If you are a US person who owns a foreign business or foreign brokerage accounts, you are very likely to run into either Subpart F rules or PFIC rules. At this point, the extremely complex nature of these anti-deferral regimes makes it a reckless gamble to attempt to conduct business overseas without an advice from an experienced US international tax attorney.

This is why you should contact the experienced US international tax professionals of Sherayzen Law Office. We have helped clients around the globe to comply with and plan for the US anti-deferral regimes, and we can help you!

So, Contact Us Today to Schedule Your Initial Consultation!

The IRS Onslaught Against Bank Leumi Clients Continues: The Fogel Case

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On February 2, 2015, one of Bank Leumi clients, Dr. Baruch Fogel of Laguna Beach, California, pleaded guilty today in the U.S. District Court for the Central District of California to willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) for tax year 2009. In this article, I would like to explore some of the most pertinent facts of the Fogel Case and analyze this case in the context of the continuous IRS onslaught against Bank Leumi clients.

The Facts and Outcome of the Fogel Case

According to court documents, Fogel, a U.S. citizen, maintained an undeclared bank account held in the name of a foreign corporation at the Luxembourg branch of Bank Leumi. The undeclared foreign bank account and foreign corporation were set up with the assistance of David Kalai, a tax return preparer who owned United Revenue Service (URS). In December 2014, David Kalai and his son, Nadav Kalai, were convicted in the Central District of California of conspiracy to defraud the United States for helping certain URS clients set up foreign corporations and undeclared bank accounts to evade U.S. income taxes and for willfully failing to file FBARs for an undeclared foreign account that they controlled.

According to court documents and evidence introduced at the trial of David and Nadav Kalai, Fogel was a doctor who operated several managed health care businesses. David Kalai suggested to Fogel that he could reduce his taxes by transferring money to a foreign bank account held in the name of a foreign corporation. David Kalai advised Fogel to open up the bank account that was set up in the name of a British Virgin Islands corporation. At a meeting facilitated and attended by David Kalai at the Beverly Hills branch of Bank Leumi, Fogel executed documents to open his Luxembourg bank account at Bank Leumi, becoming one of the many Bank Leumi clients to do so. According to court documents, Fogel diverted at least $8 million to his undeclared bank account at Bank Leumi’s branch in Luxembourg.

Fogel has agreed to pay a civil penalty in the amount of approximately $4.2 million to resolve his civil liability with the IRS for failing to file FBARs. Fogel faces a statutory maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss to any person, whichever is greater.

IRS Recent Onslaught Against Bank Leumi Clients Continues

The Fogel Case is another example of the recent IRS series of victories against former Bank Leumi clients. It is also a direct fallout of the Kalai Case (David Kalai worked with a number of Bank Leumi clients). Bank Leumi itself already admitted late last year to helping its US customers evade income taxes and hide assets.

Bank Leumi Clients and Clients from Other Israeli Banks Should Expect Continuous Pressure from the IRS

With the information already disclosed by other Bank Leumi clients to the IRS as part of their voluntary disclosures through 2011 OVDI, 2012 OVDP and 2014 OVDP, it becomes clear that the IRS has gathered sufficient evidence to investigate and successfully prosecute other Bank Leumi clients, current and former. Bank Leumi itself also agreed to help DOJ efforts against its Bank Leumi clients. It appears that this IRS onslaught against Bank Leumi clients is likely to affect disproportionately the Jewish communities in New York, California and Florida.

However it is not only the Bank Leumi clients that should be worried; as part of its deal with the US Department of Justice, Bank Leumi is required to help the DOJ investigations of other Israeli banks. Given the fact that Bank Leumi is the second largest bank in Israel, one can expect that the information provided by Bank Leumi and Bank Leumi clients is likely to affect all major banks in Israel.

Voluntary Disclosure Options Should Be Explored by Bank Leumi Clients and Clients of Other Israeli Banks

The Fogel case is a somber reminder to Bank Leumi clients that time is running out. For Bank Leumi clients with undisclosed foreign accounts, there is now a high chance of an IRS investigation, imposition of civil penalties and even of criminal prosecution.  Hence, it appears that the best course of action of the Bank Leumi clients and customers of other Israeli banks is to explore their voluntary disclosure options as soon as possible.

Contact Sherayzen Law Office for Help With Your Undisclosed Israeli Accounts

If you have undisclosed foreign financial accounts and other foreign assets in Israel or through an Israeli bank (and especially if you are one of the Bank Leumi clients), contact Sherayzen Law Office for professional legal and tax help as soon as possible.

Once our experienced international tax law firm will review the facts of your case and recommend the voluntary disclosure options available in your case; you will be able to choose the voluntary disclosure option that best appeals to you. We will then prepare all of the necessary legal documents and tax forms, and Mr. Sherayzen will personally negotiate the final settlement of your case with the IRS, bringing you into full US tax compliance.

So, Contact Us Now to Schedule Your Confidential Consultation!

2015 UBS Probe Poses Threat to US Owners of Undisclosed UBS Accounts

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This week, UBS Group AG confirmed that it was under a new investigation over whether the Switzerland bank sold unregistered securities to US taxpayers in violation of US law. This article will discuss the new UBS probe and the threat it poses to US owners of undisclosed UBS accounts who never went through an offshore voluntary disclosure. This article is not intended to convey tax or legal advice.

Prior Investigations and 2009 Deferred-Prosecution Agreement

The 2015 bearer bond investigation of UBS is the latest in the series of DOJ investigations of UBS. Previously, in 2009, as a result a landmark DOJ victory that started the today’s rout of bank secrecy laws throughout the world, UBS paid a $780 million dollar fine and disclosed 250 previously undisclosed UBS accounts of US taxpayers to the DOJ (some of the owners of these undisclosed UBS accounts were later criminally prosecuted by the IRS). The bank promised that it would be compliant with US law under its deferred-prosecution agreement with the DOJ. The agreement expired in October, 2010. This was a critical agreement for the US owners of undisclosed UBS accounts, and we will come back to this subject below.

In addition to the deferred-prosecution agreement in 2009, UBS also settled an antitrust case in 2011 concerning the municipal-bond investments market, and resolved a 2012 DOJ investigation involving alleged rigging of the London interbank offered rate (Libor). UBS was granted an agreement to extend the term of its non-prosecution deal in the latter investigation until later this year. Additionally, in a probe not involving the DOJ, UBS paid US, UK and Swiss authorities nearly $800 million in November to settle allegations that they did not have satisfactory controls to prevent traders from attempting to rig Forex dealing.

The DOJ also has reportedly also opened a new investigation concerning certain currency-linked structured products sold by UBS. International tax attorneys who worked with undisclosed UBS accounts for their US clients in the past know how common it was for UBS to sell these products to their US clients.

The 2015 UBS Investigation

As noted above, the new investigation is being conducted by the U.S. Attorney’s Office for the Eastern District of New York and from the U.S. Securities and Exchange Commission. UBS stated in its fourth-quarter report, “In January 2015, we received inquiries from the U.S. Attorney’s Office for the Eastern District of New York and from the U.S. Securities and Exchange Commission, which are investigating potential sales to U.S. persons of bearer bonds and other unregistered securities.” UBS added that it was cooperating with the authorities in the probes. According to various new sources, the bank is also being probed as to whether the alleged sales occurred while the bank was under DOJ supervision from its earlier 2009 tax evasion case.

Bearer bonds can be redeemed by anybody physically holding them. Because of the ease with which these instruments can be transferred, they are a potentially useful tool for enabling individuals to hide assets and evade taxes. While bearer bonds were not deposited on undisclosed UBS accounts, some US owners of undisclosed UBS accounts were owners of these unregulated instruments.

Undisclosed UBS Accounts and the 2015 UBS Investigation

According to various sources, if UBS is found to have breached the agreement by selling the unregistered bearer bonds to US persons in violation of US law during the time period in which the agreement was still in effect, it is possible that the DOJ will prosecute the bank under the original conspiracy charge, in addition to filing new charges and penalties.

The significance of this scenario lies in the fact that there may still be US taxpayers with undisclosed UBS accounts (whether owned directly, indirectly or constructively). Many of these taxpayers were trying to hide in the relative safety of the UBS 2009 Deferred-Prosecution Agreement, hoping that the worst was over for UBS.

Moreover, because UBS was classified as a Category 1 bank, it could not participate in the DOJ Program for Swiss Banks. This gave a wrong type of encouragement to some US owners of undisclosed UBS accounts not to come forward and go through a voluntary disclosure program.

In reality, however, due to the fact that UBS was the first bank that succumbed to the pressure from the US DOJ and disclosed previously undisclosed UBS accounts owned by US persons, the DOJ’s deal with UBS was relatively mild compared to the later penalties on other large Swiss Banks (such as Credit Suisse). Hence, there is a great incentive for the DOJ to re-open the investigation into UBS to force the bank to pay an amount equivalent to its other Swiss peers.

This means that, if the 2015 investigation is successful and the DOJ can get around the 2009 Deferred-Prosecution Agreement, the UBS may, in a new deal with DOJ, conduct a wholesale disclosure of the US owners of undisclosed UBS accounts – not only the current owners, but also the US owners who had undisclosed UBS accounts in the years 2008-2010.

What Should the US Owners of Undisclosed UBS Accounts Do?

Thus, the 2015 DOJ investigation of UBS could have disastrous consequences for US persons who owned undisclosed UBS accounts between the years 2008 and the present time. The premature disclosure of undisclosed UBS accounts may foreclose very important voluntary disclosure options for the US owners of these undisclosed UBS accounts. The subsequent investigations by the IRS may result in draconian civil penalties and even criminal prosecutions.

This is why US persons who owned undisclosed UBS accounts should contact an experienced international tax attorney to discuss their voluntary disclosure options as soon as possible.

Contact Sherayzen Law Office for Help with Your Undisclosed Foreign Accounts

If you are have not disclosed your foreign accounts (including undisclosed UBS accounts) to the IRS, you are advised to immediately contact the experienced international tax law firm of Sherayzen Law Office, Ltd. For many years now, we have been helping US taxpayers like you to bring their US tax affairs into full compliance, and we can help you.

Contact Us to Schedule Your Initial Consultation! Remember, contacting Sherayzen Law Office is Confidential!

Abusive Tax Shelters on the IRS “Dirty Dozen” List of 2015

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On February 3, 2015, the IRS said using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them,” said IRS Commissioner John Koskinen. “The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Abusive tax shelters are classified as illegal scams and can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Abusive Tax Shelters

Abusive tax shelters have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax shelters. CI’s primary focus is on the identification and investigation of the promoters of the abusive tax shelters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax shelters, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax shelters.

What are these abusive tax shelters? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These abusive tax shelters are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The abusive tax shelters are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement may be classified as abusive tax shelter. Another thing to remember is that the promoters of abusive tax shelters often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Abusive Tax Shelters: Misuse of Trusts

Trusts also commonly show up in abusive tax shelters. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Abusive Tax Shelters: Captive Insurance

Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. Tax law allows businesses to create “captive” insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive tax shelters, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities oftentimes poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” while maintaining their economical commercial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision. Underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient. The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.

New Convictions for Helping Hide Millions in Israeli Offshore Accounts

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On December 19, 2014, a federal jury sitting in Los Angeles convicted two California tax return preparers of one count of conspiracy to defraud the Internal Revenue Service (IRS) and two counts of willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) with respect to secret Israeli Offshore Accounts.

Israeli Offshore Accounts: Facts of the Case

According to the second superseding indictment and evidence introduced at trial, David Kalai and Nadav Kalai were principals of United Revenue Service Inc. (URS), a tax preparation business with 12 offices located throughout the United States. David Kalai worked primarily at URS’s former headquarters in Newport Beach, California, and later at URS’s location in Costa Mesa, California. Nadav Kalai, who is David Kalai’s son, worked out of URS’s headquarters in Bethesda, Maryland, as well as the URS locations in Newport Beach and Costa Mesa. David Almog was the branch manager of the New York office of URS and supervised tax return preparers for URS’s East Coast locations.

The second superseding indictment and the evidence introduced at trial established that the co-conspirators prepared false individual income tax returns that did not disclose the clients’ secret Israeli Offshore Accounts nor reported any income earned from these Israeli Offshore Accounts. In order to conceal the clients’ ownership and control of Israeli Offshore Accounts and to conceal the clients’ income from the IRS, the co-conspirators incorporated offshore companies in Belize and elsewhere and helped clients open secret Israeli Offshore Accounts at the Luxembourg locations of two Israeli banks, Bank A and Bank B. Bank A is a large financial institution headquartered in Tel -Aviv, Israel, with branches worldwide. Bank B is a mid-size financial institution, also headquartered in Tel Aviv, with a presence on four continents.

As further proven at trial, the co-conspirators incorporated offshore companies in Belize and elsewhere to act as named account holders on the secret Israeli Offshore Accounts. The co-conspirators then facilitated the transfer of client funds to the secret Israeli Offshore Accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense. The co-conspirators also failed to disclose the existence of, and the clients’ financial interest in and authority over, the secret Israeli Offshore Accounts and caused the clients to fail to file FBARs with the U.S. Treasury.

The evidence at trial established that David Kalai and Nadav Kalai each failed to file FBARs for calendar years 2008 and 2009 concerning secret Israeli Offshore Accounts. The bank account for Bank A in Luxembourg was held in the name of a nominee corporation in Belize and held over $300,000.

“The Kalais created sham foreign corporate entities and used banks in Luxembourg and Israel as havens for hiding their U.S. clients’ money from the U.S. government,” said Acting Deputy Assistant Attorney General Wszalek. “Today’s guilty verdict sends a clear message that those professionals who facilitate tax evasion through the use of offshore bank accounts will be held accountable for their criminal conduct. The Tax Division will continue its vigorous tax enforcement efforts in prosecuting return preparers, bankers, and other facilitators who assist clients in concealing assets offshore.”

“As the defendants in this case have learned, hiding income and assets offshore is not tax planning; it’s tax fraud,” said Chief Richard Weber IRS-Criminal Investigation. “There is no secret formula that can eliminate an individual’s tax obligations. Today’s verdict reinforces our commitment to every American taxpayer that we will identify and prosecute those who implement off-shore tax schemes designed to evade the payment of taxes.”

Sentencing of the defendants is scheduled for March 16, 2015.

Israeli Offshore Accounts: Obligation to Report Foreign Accounts and Income Including Israeli Offshore Accounts

U.S. citizens, resident aliens and legal permanent residents have an obligation to report to the IRS on Schedule B of the U.S. Individual Income Tax Return, Form 1040, whether they had a financial interest in, or signature authority over, a financial account in a foreign country in a particular year by checking “yes” or “no” in the appropriate box and identifying the country where the account is maintained. They further have an obligation to report all income earned from the foreign financial account on the tax returns. Separately, U.S. citizens, resident aliens and legal permanent residents with a foreign financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year must also file an FBAR with the U.S. Treasury disclosing such an account by June 30th of the following year.

Israeli Offshore Accounts: Lessons from the Kalai Case

The Kalai case is pretty much in line with other similar cases where the IRS was able to obtain criminal conviction for failing to file FBARs to disclose foreign accounts, including secret Israeli Offshore Accounts.

The highly negative factors include: evidence of sophisticated planning to conceal the identify of the secret Israeli Offshore Accounts owners; evidence of international concealment of funds (by reporting them as a business loss) that formed the balances of the secret Israeli Offshore Accounts; evidence of intentional failure to report income from the secret Israeli Offshore Accounts; and the education level of Kalai as tax preparers.

What is critically important for US taxpayers with undisclosed secret Israeli Offshore Accounts to remember is that, if they engaged tax preparers to avoid disclosing their Israeli Offshore Accounts or foreign financial accounts in any other country, they are at an even higher risk of exposure. The reason is because these tax preparers are likely to have engaged in similar pattern of criminal behavior with respect to their other clients; when these other clients do their voluntary disclosure, they are very likely to exposure their tax preparers as well.

This is why it is critically important for US taxpayers with undisclosed secret Israeli Offshore Accounts or foreign financial accounts in any other country to explore their voluntary disclosure options as soon possible and before they are precluded by an IRS investigation.

Contact Sherayzen Law Office for Help with Your Undisclosed Foreign Accounts

If you have undisclosed foreign financial accounts and any other foreign assets, contact Sherayzen Law Office for professional legal and tax help. We will thoroughly analyze your current penalty exposure, identify the offshore voluntary disclosure options available to you, prepare all legal documents and tax forms (including amended tax returns) needed in your case, rigorously defend your interests in front of the IRS, and guide you through the entire voluntary disclosure process.

Contact Us Today to Schedule Your Confidential Consultation!