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Disclosure of Swiss Bank Staff Details to the IRS Blocked by Swiss Court

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On January 3, 2018, a decision of the Swiss Federal Court (the nation’s highest court) dated December 18, 2017, was published, prohibiting automatic disclosure of the Swiss bank staff details to the IRS and the US DOJ. Let’s analyze this decision in more detail.

Disclosure of Swiss Bank Staff Details: History of the Case

The lawsuit decided in 2017 is not the first time that the Swiss Federal Court is placing limits on the IRS ability to obtain information from Switzerland with respect to Swiss citizens. Already in 2016, the Court ruled that a Swiss bank could not disclose to the US authorities the names of financial advisers who helped US taxpayers set up secret Swiss bank accounts (“facilitators”). The reasoning was based on the inadequate level of data protection in the United States which is far below the Swiss Data Protection Act.

It should be emphasized, however, that in the same opinion, the Court also said that the names of facilitators could be disclosed to the US government despite the data protection concerns if the failure to do so would deepen the legal dispute between Switzerland and a the United States and harm the Swiss reputation as a financial center.

The lawsuit with respect to disclosure of Swiss bank staff details was initiated by an unnamed US taxpayer who lived in Switzerland. He filed a lawsuit to prevent the Swiss equivalent of the IRS, the Federal Tax Administration (“FTA”) from disclosing to the US government the name of third parties who were involved or might have been involved with his financial affairs. The lower Swiss court agreed with the taxpayer.

Automatic Disclosure of Swiss Bank Staff Details to the IRS Prohibited

The Swiss Federal Court also partially agreed with the unnamed US taxpayer, stating that FTA could not automatically turn over to the US government the names of Swiss bankers and others who might have helped US tax residents in evading their US tax reporting obligations. The reasoning behind the decision was based on relevance.

Basically, the Court stated that the Swiss bank staff details in this particular case were not necessary to the US government to prove its tax evasion case against the unnamed US account holder. “What is needed . . . is information about the existence and intervention of these third parties, not their identities,” the Court said.

The Court basically stated that administrative assistance requests should not be used for indirect purposes. In other words, the IRS cannot use such requests “in order to obtain information about the identities of alleged accomplices of the taxpayer . . . that could be subject to criminal prosecution if this information is not relevant to elucidate the tax situation of the same taxpayer.”

Obviously, this reasoning does not offer any decisive protection for Swiss bank staff details. It appears that, if the information would have been necessary for the US tax authorities to prove its tax evasion case, the transfer of Swiss Bank Staff details would have been permitted. Additionally, the decision might have come in a bit late as hundreds of documents with the Swiss bankers’ names have already been turned over to the IRS.

Swiss Bank Staff Case Offers No Protection to US Taxpayer’s Data Transfer

Moreover, the Court’s decision offered no hope for blocking the transfer of US taxpayers’ information. While the Court blocked the transfer of the Swiss bank staff details, it still allowed the FTA to provide to the US government the US account holder’s information. This means that the transfer of data concerning US tax residents from Switzerland to the United States will continue unimpeded.

Swiss Bank Staff Case Offers Insight Into IRS’ Next Target in Switzerland

This case also offers a good insight into the current IRS strategy concerning Switzerland. It appears that the IRS is compiling statistics concerning Swiss bank staff who might have helped US taxpayers evade their US tax reporting obligations. Most likely, the focus is on the bankers who provided this help regularly to a large amount of US taxpayers.

Sherayzen Law Office will continue to observe the IRS latest moves in Switzerland.

Specified Foreign Financial Assets | Form 8938 International Tax Lawyers

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Specified Foreign Financial Assets is one of the most important terms in contemporary US international tax law. In this article, I will explore what these Specified Foreign Financial Assets are and why they play such an important role in modern US international tax compliance.

Specified Foreign Financial Assets and FATCA

In order to understand the significance of the Specified Foreign Financial Assets, we must turn to one of the most important US tax laws called Foreign Account Tax Compliance Act or FATCA.

FATCA was signed into law in 2010 and it immediately became the most important development in international taxation since at least 1970s, if not all the way to the end of the Second World War. There are three parts of FATCA that made it such a revolutionary development in international tax law. The first part of FATCA requires all foreign financial institutions (FFIs) to report to the IRS, directly or indirectly, Specified Foreign Financial Assets (be careful, this concept can be modified by a FATCA implementation treaty to include and exclude various foreign assets) owned by US persons. In essence, it meant that the world financial community would now serve as an IRS informer, providing the third-party reporting of financial assets owned by US persons.

In order to enforce this “obligation”, the second part of FATCA imposed a 30% penalty on the gross amount of a transaction whenever the transaction is related to an institution that is not compliant with FATCA. Such a huge penalty was meant to force all FFIs to become FATCA-compliant and, to a large extent, this goal has been attained.

With the third-party reporting secured by the first two parts of FATCA, the third part of FATCA imposed a new reporting requirement, Form 8938, on certain categories of US taxpayers who would fall within the categories of Specified Individuals and (starting 2016) Specified Domestic Entities. FATCA Form 8938 forced these Specified Persons to directly report their Specified Foreign Financial Assets with their US tax returns.

Specified Foreign Financial Assets: General Definition

In general, Specified Foreign Financial Assets include: foreign financial accounts and assets that are held for investment and not held in an account maintained by a financial institution. The concept of “assets held for investment and not held in an account” covers stocks or securities issued by anyone who is not a US person, any interest in a foreign entity, any financial instrument or contract that has an issuer or counterparty that is other than a US person, stock issued by a foreign corporation, an interest in a foreign trust or foreign estate and a capital or profits interest in a foreign partnership.

In other words, definition of the Specified Foreign Financial Assets is so broad that it applies to virtually any financial instrument or security one can imagine as long as one of the counterparties and/or issuers is a foreign person. It also includes pretty much any ownership interest in a foreign business entity as well as a beneficiary interest in a foreign trust. Therefore, it is always prudent to contact an international tax attorney to confirm whether your particular investment is covered by the definition of the Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Additional Non-Exclusive Lists of Assets

Additionally, the instructions to Form 8938 specifically state that Specified Foreign Financial Assets encompass an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty. Specified Foreign Financial Assets also include a note, bond, debenture, or other form of indebtedness issued by a foreign person. Finally, options and other derivative instructions with a foreign counterparty or issuer are also included in the definition of Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Influence of FATCA Implementation Treaties

Despite the broad general definition of Specified Foreign Financial Assets and despite the “laundry” list of assets specifically identified above, one should always look at a specific FATCA implementation treaty in order to verify whether an asset is considered to fall within the definition of Specified Foreign Financial Assets. In particular, one must have extra care with foreign retirement accounts. During the negotiation of FATCA Implementation Treaties, countries often insisted that particular types of retirement accounts should be excluded from FATCA reporting (the United Kingdom was particularly successful in this respect).

A word of caution: even if an asset is excluded from FATCA reporting, it does not automatically mean that it would also be excluded from FBAR reporting. It is possible to have a financial asset reportable exclusively on FBAR, but not Form 8938.

Contact Sherayzen Law Office for Professional Help with Reporting of Specified Foreign Financial Assets on Form 8938

If you have any of the Specified Foreign Financial Assets listed above, contact Sherayzen Law Office for professional help. In addition to annual tax compliance, our firm can help you with the offshore voluntary disclosure with respect to any delinquent Forms 8938 which you have not timely filed in any of the prior years.

Contact Us Today to Schedule Your Confidential Consultation

Tata Mutual Fund FATCA Letters and Indians in the United States

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Tata Mutual Fund FATCA Letters were some of the first FATCA letters received by U.S. investors in India. A lot of these U.S. investors were Indians born in India, but living and working in the United States. However, the process of sending FATCA letters is not over at this point. Therefore, more and more Indian-Americans should expect to receive Tata Mutual Fund FATCA Letters. In this article, I explore the purpose of Tata Mutual Fund FATCA Letters and how these letters affect Indians who live and work in the United States.

FATCA

The Foreign Account Tax Compliance Act (FATCA) became a law in 2010. The main purpose of FATCA is to combat tax noncompliance of U.S. taxpayers with foreign accounts. Since its enaction, FATCA was successfully implemented by most countries around the world and became a new global standard for the exchange of tax information. In fact, more than 110 jurisdictions today operate under the worldwide reach of FATCA.

What makes FATCA different from other tax regimes is the fact that its core target are foreign financial institutions and it has “teeth” in the form of 30% tax withholding on transactions done with noncompliant foreign financial institutions. While the 30% tax withholding provision is important, it is not directly relevant to our discussion.

On the other hand, it is very important to understand how FATCA impacts the behavior of foreign financial institutions – FATCA obligates foreign financial institutions to turn over certain information regarding foreign accounts owned by U.S. persons as well as certain information regarding the U.S. owners themselves. In essence, FATCA effectively turns all compliant foreign financial institutions into de-facto IRS informants.

This means that foreign financial institutions report to the IRS the information which, prior to FATCA, the IRS could only obtain after a long and expensive investigation. Therefore, the investigative reach of the IRS has grown enormously and the IRS is now able to find and track down with far more ease noncompliant U.S. taxpayers.

Furthermore, another part of FATCA is targeting U.S. taxpayers themselves by requiring them to report “Specified Foreign Assets” on Form 8938.

Tata Mutual Fund FATCA Letters

FATCA is usually implemented after an adoption of a FATCA implementation treaty. India signed the Model 1 FATCA treaty which came into force on August 31, 2015.

As a foreign financial institution, Tata Mutual Fund is obligated to comply with the obligations accepted by the Indian government under the FATCA agreement. For this purpose, Tata Mutual Fund needs to collect and turn over certain information regarding its U.S. investors.

Tata Mutual Fund FATCA Letters are designed exactly for this purpose – to collect the required FATCA information regarding U.S. investors into Tata Mutual Fund.

Impact of Tata Mutual Fund FATCA Letters on Indian-American Investors

Tata Mutual Fund FATCA Letters may have a profound impact on Indian who live and work in the United States while investing into Tata Mutual Fund, especially if this investment was not timely disclosed to the IRS. I would like to focus here on two issues: identification and voluntary disclosure.

First, Tata Mutual Fund FATCA Letters would allow IRS to identify noncompliant Indian-American investors into Tata Mutual Fund. This can lead to an IRS investigation and imposition of civil and even criminal penalties (depending on the gravity of tax noncompliance).

Second, by reporting noncompliant U.S. investors, Tata Mutual Fund FATCA Letters may trigger an IRS investigation that may prevent these U.S. investors from doing a timely voluntary disclosure. It must be remembered that, one of the fundamental conditions of all IRS voluntary disclosure options is that the U.S. taxpayer is not under IRS examination or investigation.

Hence, when a U.S. taxpayer receives Tata Mutual Fund FATCA Letters, the clock starts on his ability to do a timely voluntary disclosure. On the other hand, if the taxpayer refuses to provide the requested information, he may be classified as a “recalcitrant taxpayer” (although, the Indian FATCA Agreement offers better treatment to recalcitrant taxpayers than most other FATCA treaties).

Contact Sherayzen Law Office if You Received a FATCA Letter from India

If you are an Indian-American or just an Indian who lives and works in the United States and you received a FATCA letter from your Indian financial institution, please contact Sherayzen Law Office for experienced help. Our professional legal team will thoroughly analyze your situation, propose the best strategy with respect to responding to the FATCA Letter, review your voluntary disclosure options and prepare all legal and tax documents required to complete your voluntary disclosure.

Call Us Today to Schedule Your Confidential Consultation!

Jordanian Bank FATCA Letters

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As FATCA continues its triumphant march across the globe, banks from more and more countries continue to send out FATCA letters to their US customers. Recently, the banks in the Kingdom of Jordan sent out additional FATCA letters (hereinafter, “Jordanian Bank FATCA Letters”). Jordanian Bank FATCA letters caught many U.S. taxpayers by surprise; some even refuse to believe that they are obligated to provide this type of information to their banks. Yet, noncompliance with the requests of Jordanian Bank FATCA Letters may have grave consequences for US taxpayers.

FATCA Background

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to target tax noncompliance of U.S. taxpayers with foreign accounts. Since its enaction, this law established a new global standard for tax information exchange. More than 110 jurisdictions today operate under the worldwide reach of FATCA.

In essence, FATCA is used by U.S. authorities to obtain information regarding foreign accounts held by U.S. persons directly from foreign financial institutions by forcing these institutions to collect and send to the IRS information required by FATCA. Hence, FATCA effectively turns all FATCA-compliant foreign banks into IRS informants.

Additionally, FATCA requires U.S. taxpayers to report “Specified Foreign Assets” (this is a term of art in international tax law) on Forms 8938. Forms 8938 should be attached to the taxpayers’ U.S. tax returns and filed with the IRS.

Jordanian Bank FATCA Letters

FATCA is implemented worldwide through a network of bilateral treaties, which are divided in to Model 1 and Model 2 treaties. However, individual banks can also comply with FATCA without Model 1 and Model 2 treaties. A minority of countries follow this path, and the Kingdom of Jordan is one of them.

This means that Jordanian Bank FATCA Letters are sent out by Jordan banks not due to any Model 1 or Model 2 treaties between the United States and Jordan, but, rather, through direct FATCA compliance (i.e. Jordanian banks register with the IRS and provide the required information directly to the IRS).

The purpose of the Jordanian Bank FATCA Letters are similar to all other FATCA Letters – obtain the information required to be reported under FATCA by foreign financial institutions to the IRS. In particular, this includes information relevant to the account owner’s U.S. tax residency.

Impact of Jordanian Bank FATCA Letters on U.S. taxpayers with Undisclosed Foreign Accounts

Jordanian Bank FATCA Letters may have very important impact on U.S. taxpayers with undisclosed foreign accounts. In this article I want to emphasize the timing aspects of such letters.

By requesting FATCA information, Jordanian Bank FATCA Letters create a timetable for timely voluntary disclosure of the concerned U.S. taxpayers. First of all, the taxpayers who receive Jordanian Bank FATCA Letters have a deadline (ranging usually between 30-45 days, and, occasionally, 90 days) to file the letter with the bank. Since the bank sends the information supplied by U.S. taxpayers to the IRS, these U.S. taxpayers have a limited window of opportunity to timely disclose their foreign accounts. If a taxpayer refuses to provide the required information, the bank may still report him to the IRS as a “recalcitrant taxpayer” and even close his accounts.

Additionally, there is a more subtle impact of Jordanian Bank FATCA Letters on U.S. taxpayers – a notice of existence of FATCA and other U.S. tax reporting requirements. A lot of U.S. taxpayers are able to utilize Streamlined Procedures due to the fact that they did not know about the U.S. tax reporting requirements with respect to foreign accounts and foreign income. However, once U.S. taxpayers receive Jordanian Bank FATCA Letters, they can only claim their lack of knowledge with respect to prior years. It will be very difficult to sustain this argument with respect to current and future tax years.

Contact Sherayzen Law Office if You Received a FATCA Letter (from Jordan or from Any Other Country)

If you received a FATCA Letter from a foreign bank, contact Sherayzen Law Office for professional help. Our experienced legal team will thoroughly analyze your situation, propose the best strategy with respect to responding to the FATCA Letter, review your voluntary disclosure options and prepare all legal and tax documents to complete your voluntary disclosure.

Call Us Today to Schedule Your Confidential Consultation!

DOJ Non-Prosecution Agreement with Bank Linth LLB AG

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On June 19, 2015, the Department of Justice announced that Bank Linth LLB AG (Bank Linth) signed a Non-Prosecution agreement pursuant to the DOJ’s Swiss Bank Program.

Bank Linth Background

Bank Linth, one of the largest regional banks in Eastern Switzerland, was founded in 1848. It is headquartered in Uznach, Switzerland, which is approximately 35 miles southeast of Zurich. Bank Linth provided private banking and asset management services to U.S. taxpayers through private bankers based in Switzerland. It opened, serviced and profited from accounts for U.S. clients with the knowledge that many were likely not complying with their tax obligations.

Bank Linth’s cross-border banking business aided and assisted U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income they held in these accounts. Bank Linth provided this assistance to U.S. clients in a variety of ways, including the following:

Opening and maintaining accounts in the names of sham entities;

Providing U.S. taxpayers with numbered accounts that hid the taxpayers’ identities;

Facilitating U.S. taxpayers’ withdrawal of cash from undeclared accounts; and

Agreeing to hold bank statements and other mail relating to accounts rather than sending them to U.S. taxpayers in the United States.

On several occasions, Bank Linth opened accounts for U.S. taxpayers through an external asset manager, and one of these accounts was opened in the name of a sham foundation. In that instance, Bank Linth knowingly accepted and included in account records forms provided by the directors of the sham foundation that falsely represented the ownership of the assets in the account for U.S. federal income tax purposes.

Participation in the Swiss Bank Program and the Non-Prosecution Agreement

In accordance with the terms of the Swiss Bank Program, Bank Linth described in detail the structure of its banking business, including its management and supervisory structure, and provided the names of management and legal and compliance officials. Bank Linth further provided detailed and specific information related to its illegal U.S. cross-border business, including the bank’s misconduct, policies that contributed to that misconduct and the names of the relationship managers overseeing the bank’s U.S.-related business. Bank Linth also obtained affidavits from bank employees regarding the bank’s conduct and related matters.

According to the terms of the non-prosecution agreements signed today, Bank Linth agreed to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute Bank Linth for tax-related criminal offenses.

Since August 1, 2008, Bank Linth held 126 U.S.-related accounts, with over $102 million in assets. Bank Linth will pay a penalty of $4.15 million (this is a post-mitigation penalty).

Consequences for US Taxpayers with Undisclosed Bank Linth Accounts

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts. On August 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement. This means that, starting June 19, 2015, noncompliant Bank Linth U.S. accountholders will now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.