international tax lawyers

FBAR Filing: FinCEN’s Third Extension for Certain Signatory Authority Filers

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In FinCEN Notice 2012-2, the Financial Crimes Enforcement Network (FinCEN) announced a third extension of time for certain Report of Foreign Bank and Financial Accounts (FBAR) filings in light of ongoing consideration of questions regarding the filing requirement and its application to individuals with signature authority over but no financial interest in certain types of accounts. The new extended deadline is set for June 30, 2014.

This extended filing deadline applies only to the following classes of individuals:

1). An employee or officer of a covered entity (see 31 C.F.R. § 1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”). For this purpose, a “controlled person” is a U.S. or foreign entity that is more than 50% owned (directly or indirectly) by an excepted entity.
2). An employee or officer of a controlled person of a covered entity (see 31 C.F.R. § 1010.350(f)(2)(i)-(v)) who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.
3). An employee or officer of an investment advisor registered with the Securities and Exchange Commission who has signature or other authority over and no financial interest in a foreign financial account of persons that are not investment companies registered under the Investment Company Act of 1940.

Notice that categories 1 and 2 do not apply to companies that are not publicly traded or not SEC-registrants.

This extension comes after a series of earlier extensions by FinCEN. On February 14, 2012, FinCEN issued Notice 2012-1 to extend the filing date for FinCEN Form 114 Formerly TD F 90-22.1, FBAR, for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts to June 30, 2013. This Notice was preceded by two earlier extensions: on May 31, 2011, FinCEN issued Notice 2011-1 (revised on June 2, 2011) to extend to June 30, 2012, the due date for filing the FBAR for certain individuals with signature authority over but no financial interest in one or more foreign financial accounts, specifically individuals whose FBAR filing requirements may be affected by the signature authority filing exceptions in 31 CFR § 1010.350(f)(2)(i)-(v). On June 17, 2011, FinCEN issued Notice 2011-2 similarly extending the FBAR filing due date to June 30, 2012, for certain employees or officers of investment advisers registered with the Securities and Exchange Commission who have signature authority over but no financial interest in certain foreign financial accounts.

The extension contained in FinCEN Notice 2012-2 is the third filing extension for individuals with signature authority over but no financial interest in certain types of accounts. It covers not only the reporting of signature authority held by such persons for 2012, but also for all other years for which filing was previously extended to June 30, 2012, under FinCEN Notices 2011-1 and 2011-2.

It is important to note, however, that all other taxpayers who are required to file an FBAR must still do so by June 30, 2013.

IRS FY 2012 Performance Results

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The IRS released the statement describing its performance in the Fiscal Year 2012. The general results continued last year’s trend.

In the enforcement area, audits of individuals topped 1 million for the sixth year in a row, with a 1.03% coverage rate out of all tax returns filed. Audits in the upper income ranges remained substantially higher than other categories.

With respect to businesses, the IRS increased examinations across all categories of business returns by more than 12% in FY 2012, with the largest increases coming in audits of flow-through entities, which include partnerships and Subchapter S corporations. The examination rate exceeded 20% for the largest corporations.

IRS enforcement was highly profitable for the U.S. government, especially in the area of voluntary disclosures (such as 2009 OVDP, 2011 OVDI and 2012 OVDP). The IRS collected more than $50 billion in enforcement revenue in FY 2012, the third year in a row topping that figure. However, the 2012 numbers were lower than 2010 and 2011, which were unusual years with enforcement dollars helped by large numbers of offshore tax cases coming in. More than 38,000 disclosures of offshore accounts have been made to date through the IRS’ offshore voluntary disclosure programs. In addition, the economic slowdown contributed to lower enforcement figures, as most enforcement dollars collected resulted from audits of returns for years during the slowdown.

In terms of staffing, however, the IRS again suffered from the cuts to its budget by the Congress, despite extensive evidence that investment in IRS enforcement brings disproportionate amount of income to U.S. government. After a nearly flat budget in FY 2011, the IRS’ FY 2012 budget was reduced by $305 million. This reduction affected the level of staffing available to deliver service and enforcement programs. Overall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.

One exception to the staffing problems has been identify theft. In FY 2012, the IRS more than doubled the number of staff dedicated to preventing refund fraud and assisting taxpayers victimized by identity theft, with more than 3,000 employees working in this area. As a result of these increased efforts, the IRS in FY 2012 was able to prevent the issuance of more than 3 million fraudulent refunds worth more than $20 billion, an increase from approximately 1.8 million refunds worth about $14 billion the previous year.

On the service side, the IRS saw continued strong growth in electronic filing by individuals, as the e-filing rate in FY 2012 exceeded 80% for the first time. Taxpayer interest in online interactions continued to increase as well, with web page visits on IRS.gov up nearly 17% to 372 million.

One of the most surprising trends has been the steady increase in criminal investigations and the growth in the conviction rate. The number of criminal investigations for tax and tax-related matters has gone up from the low of 1,269 investigation in 2009 to 1,846 in 2012 – a whopping 45% increase. During the same time, the conviction rate went up from 87.2% in 2009 to 93.0% in 2012. This means that the IRS is not only radically increasing the number of criminal investigations, but also it is more successful in its prosecution efforts.

Overall, 2012 appears to have been a successful year for the IRS, especially with respect to international tax enforcement.

IRS Provides Penalty Relief to Farmers and Fishermen

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On January 18, 2013, the IRS announced that it will issue guidance in the near future to provide relief from the estimated tax penalty for farmers and fishermen unable to file and pay their 2012 taxes by the March 1 deadline due to the delayed start for filing tax returns.

The delay stems from this month’s enactment of the American Taxpayer Relief Act (ATRA). The ATRA affected several tax forms that are often filed by farmers and fishermen, including the Form 4562, Depreciation and Amortization (Including Information on Listed Property). These forms will require extensive programming and testing of IRS systems, which will delay the IRS’s ability to accept and process these forms. The IRS is providing this relief because delays in the agency’s ability to accept and process these forms may affect the ability of many farmers and fishermen to file and pay their taxes by the March 1 deadline. The relief applies to all farmers and fishermen, not only those who must file late released forms.

Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. Under the guidance to be issued, farmers or fishermen who miss the March 1 deadline will not be subject to the penalty if they file and pay by April 15, 2013. A taxpayer qualifies as a farmer or fisherman for tax-year 2012 if at least two-thirds of the taxpayer’s total gross income was from farming or fishing in either 2011 or 2012.

Farmers and fishermen requesting this penalty waiver must attach Form 2210-F to their tax return. The form can be submitted electronically or on paper. The taxpayer’s name and identifying number should be entered at the top of the form, the waiver box (Part I, Box A) should be checked, and the rest of the form should be left blank.

FBAR Criminal Enforcement: Liechtenstein and Israel

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The voluntary disclosure programs provided the IRS with an enormous amount of information regarding countries, banks and individuals involved in US taxpayers’ non-compliance with U.S. tax laws. With so much information, it was reasonable to expect that the IRS would not be satisfied with solely prosecuting Swiss banks. Year 2012 confirmed these expectations; building up on FATCA and the information provided in voluntary disclosures, the IRS made aggressive moves far beyond Switzerland, initiating negotiations about and, in many cases, concluding bilateral FATCA treaties with over 50 different countries. Among these enforcement efforts, two countries stand out as most likely candidates for future prosecutions – Liechtenstein and Israel.

Banks in Liechtenstein and Israel Are Targets in U.S. Probes

In May of 2012, the IRS issued a request to Liechtensteinische Landesbank AG (LLB) to disclose information regarding accounts of at least $500,000 owned by U.S. taxpayers. The request covers all years 2004 through present time. The bank already sent out the letters to its U.S. clients describing their intention to comply with the request. It should be noted that Liechtenstein has been under tremendous pressure not only from the United States, but also France and Germany to wind down its secrecy laws.

At the same time, the IRS became very concerned about the money flow between Switzerland and Israel. It appeared that some taxpayers decided to exit Switzerland in light of the USB and Wegelin case and moved all of their accounts to Israel. The IRS caught up with this trend and decided to pursue these taxpayers in Israel.

The focus is on three Israeli banks – Bank Leumi Le-Israel, Bank Hapoalim and Mizrahi-Tefahot Bank. It appears that these banks are cooperating even ahead of the 2013 deadline and U.S. taxpayers with undisclosed accounts in these banks are well-advised to assume that their accounts will be disclosed to the IRS sooner rather than later (especially given the close relationship between Israel and the United States).

Voluntary Disclosure for Non-Compliant U.S. Taxpayers in Liechtenstein and Israel

It appears that U.S. taxpayers with undisclosed accounts in Liechtenstein and Israel are in a race against time and they are losing to the IRS. Therefore, at this point, it is absolutely essential for these taxpayers to consider their voluntary disclosure options as soon as possible. Otherwise, they run a tremendous risk of being discovered by the IRS and subject to severe criminal and civil penalties.

2012 OVDP voluntary disclosure, Reasonable Cause (Modified) voluntary disclosure and FAQ #17 and #18 (absence of additional U.S. tax liability) disclosure are options that may be open to such taxpayers. All of these options must be thoroughly analyzed by an international tax attorney who is familiar with these issues.

Contact Sherayzen Law Office for Help With Voluntary Disclosure of Foreign Accounts and Foreign Income

If you have any undisclosed foreign accounts and/or foreign income, contact Sherayzen Law Office. Our experienced international tax firm will thoroughly review your case, advise you on the available voluntary disclosure options, prepare your voluntary disclosure documentation (including tax returns and offshore information returns such as Forms 5471, 8865, 926, 3520, FBARs and others), guide you throughout the voluntary disclosure process and vigorously represent your interests during your negotiations with the IRS.

Tax-Free Transfers to Charity Renewed For Certain IRA Owners

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On January 16, 2013, the IRS confirmed that certain owners of individual retirement arrangements (IRAs) have a limited time to make tax-free transfers to eligible charities and have them count for tax-year 2012.

Pursuant to the American Taxpayer Relief Act of 2012, Congress extended for 2012 and 2013 the tax provision authorizing qualified charitable distributions (QCDs). Under this provision, an otherwise taxable distribution from an IRS, owned by a person who has at least 70.5 years or older, can exclude from gross income up to $100,000 of QCDs paid directly to an eligible charitable organization. The eligible IRA owners have until Thursday, January 31, 2013, to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer.

It is iimportant to note that QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.

For tax year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.

QCDs are reported on Form 1040 Line 15. The full amount of the QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but write “QCD” next to that line.