Mistake as Reasonable Cause | Offshore Voluntary Disclosure Lawyer

This article is a continuation of a series of articles on the Reasonable Cause Exception as a defense against various IRS penalties. Today, we will be exploring whether a mistake made by a taxpayer satisfies the ordinary business care and prudence standard and can be considered a reasonable cause.

Mistake Alone Does Not Constitute Reasonable Cause

Generally, the IRS takes the view that a mistake alone is not sufficient to establish a reasonable cause defense to an imposition of an IRS penalty, because it is not considered to be a conduct that would qualify as ordinary business care and prudence – i.e. generally, situations when a taxpayer acted prudently, reasonably and in good faith (taking that degree of care that a reasonably prudent person would exercise) and still could not comply with the relevant tax requirement.  We remind the readers that the ordinary business care and prudence standard is at the heart of the Reasonable Cause Exception.

Mistake Can Help Establish Reasonable Cause

While a taxpayer’s mistake alone is insufficient to establish a reasonable cause, the Internal Revenue Manual (IRM) specifically foresees a possibility that a mistake can help assert a reasonable cause defense. IRM (12-11-2009) specifically states that the Reasonable Cause Exception may be established if mistake with “additional facts and circumstances support the determination that the taxpayer exercised ordinary business care and prudence but nevertheless was unable to comply within the prescribed time”.

In other words, if mistake, in combination with other facts and circumstances, established that a taxpayer’s behavior was consistent with the ordinary business care and prudence standard, the IRS may agree that the tax noncompliance was caused by a reasonable cause.

IRS Factors Supporting Mistake as a Reasonable Cause

IRM (12-11-2009) does not limit the number of factors that will be considered by the IRS in deciding whether there are sufficient facts and circumstances supporting mistake as a reasonable cause. However, it provides five specific factors to which the IRS will pay special attention:

1. When and how the taxpayer became aware of the mistake;

2. The extent to which the taxpayer corrected the error;

3. The relationship between the taxpayer and the subordinate (if the taxpayer delegated the duty);

4. If the taxpayer took timely steps to correct the failure after it was discovered;

5. The supporting documentation.

Contact Sherayzen Law Office for Professional Legal Help with Establishing a Reasonable Cause Exception in Your Case

If the IRS imposed a penalty for your prior tax noncompliance, you should contact Sherayzen Law Office for the legal help. We will thoroughly review the facts of your case, determine available defense options, including the Reasonable Cause Exception defenses, implement the case strategy with which you feel comfortable, and negotiate the abatement or reduction of your IRS penalties.

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US Tax Return Statute of Limitations and IRC Section 6501(c)(8)

Most tax practitioners are familiar with the general rules of assessment statute of limitation for US tax returns. However, very few of them are aware of the danger of potentially indefinite extension of the statute of limitations contained in IRC Section 6501(c)(8). In this article, I would like to do offer a succinct observation of the impact of IRC Section 6501(c)(8) on the US tax return Statute of Limitations as well as your offshore voluntary disclosure strategy.

Background Information

While IRC Section 6501(c)(8) has existed for a while, its present language came into existence as a result of the infamous HIRE act (the same that gave birth to FATCA) in 2010. The major amendments came from PL 111-147 and PL 111-226.

When IRC Section 6501(c)(8) Applies

IRC Section 6501(c)(8) applies when there has been a failure to by the taxpayer to supply one or more accurate foreign information return(s) with respect to reporting of certain foreign assets and foreign-related transactions under IRC Sections 1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A and 6048. In essence, it means IRC Section 6501(c)(8) applies whenever the taxpayer fails to file Forms 8621, 5471, 5472, 926, 3520, 3520-A, 8865, 8858 and 8938 (and potentially other forms). In essence, this Section comes into play with respect to virtually all major international tax reporting requirements, with the exception of FBAR (which is governed by its own Title 31 Statute of Limitations provisions).

It is important to emphasize that it is not just the failure to file these international tax returns that triggers IRC Section 6501(c)(8). Rather, most international tax attorneys agree that, if the filed international tax returns are inaccurate or incomplete, IRC Section 6501(c)(8) still applies.

IRC Section 6501(c)(8) only applies to the returns filed after the date of the enactment of the provisions that amended the section – March 18, 2010. The Section also applies to returns filed on or before March 18, 2010 if the statute of limitations under Section 6501 (without regard to the amendments) has not expired as of March 18, 2010.

The Impact of IRC Section 6501(c)(8) On the Statute of Limitations

As amended by PL 111-147 and PL 111-226, IRC Section 6501(c)(8) may have a truly monstrous effect on the statute of limitations for the entire affected tax return – a failure to file any of the aforementioned international tax forms (including a failure to provide accurate and complete information) will keep the statute of limitations open indefinitely with respect to “any tax return, even, or period to which such information relates”.

Thus, a failure to file a foreign information return may keep the statute of limitations open forever for the entire tax return, not just that particular foreign information return. This means that the IRS can potentially audit a taxpayer’s return and assess additional taxes outside of the usual statute of limitations period; the IRS changes can affect any item on the US tax return, not just the items on the foreign information return.

Reasonable Cause Exception to the “Entire Case” Rule

IRC Section 6501(c)(8)(B) provides a limited exception to the “entire case” rule. Where a taxpayer establishes that the failure ot file an accurate international information return was due to a reasonable cause and not willful neglect, only the international tax forms will be subject to indefinite statute of limitations and not the entire return.

Impact of IRC Section 6501(c)(8) on Your Voluntary Disclosure Strategy

IRC Section 6501(c)(8) may have a significant impact on the voluntary disclosure strategy where multiple international tax forms need to be filed. In these cases, the taxpayers are more likely to go into Streamlined disclosures or 2014 OVDP rather than attempt doing a reasonable cause disclosure.

This is the case because this indefinite statute of limitations may undermine a reasonable cause strategy if the disclosure period does not coincide with the years in which the international tax returns were due. For example, let’s suppose that US citizen X owned PFICs during the years 2008-2014, but he never filed Forms 8621 even though they were required. If X decides to do a reasonable cause disclosure and files amended 2012-2014 tax returns only, then, the years 2008-2011 will still be open to an IRS audit (though, if X successfully establishes reasonable cause for the earlier non-filing, only Forms 8621 will be subject to an IRS audit). In this case, X may have to make a choice between an unpleasant filing of amended 2008-2011 tax return or doing a Streamlined disclosure.

Obviously, IRC Section 6501(c)(8) is just one factor in what could be a very complex maze of pros and cons of a distinct voluntary disclosure strategy. Other factors need to be taken into effect in determining, including whether the financials were disclosed on the FBAR and Form 8938 and the amounts of underreported income (which may actually keep the statute of limitations open for the years 2009-2011 as well).

These types of decisions need to be made carefully by a tax professional on a case-by-case basis with detailed analysis of the facts and potential legal strategies; I strongly recommend retaining an experienced tax attorney for the creation and implementation of your voluntary disclosure strategy.

Contact Sherayzen Law Office for Help With Your Delinquent International Tax Forms

If you have not filed international tax forms and you were required to do so, you should contact the professional international tax team of Sherayzen Law Office. Our team is lead by an experienced international tax attorney, Mr. Eugene Sherayzen, and has helped hundreds of US taxpayers around the world to bring their US tax affairs into fully US tax compliance.

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Who Must File IRS Form 1042

Form 1042 (“Annual Withholding Tax Return for U.S. Source Income of Foreign Persons”) serves a number of important reporting purposes. In general, it is used to report the tax withheld under chapter 3 of the Internal Revenue Code (“IRC”) on certain income of foreign persons (such as nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts), as well as to report the tax withheld under chapter 4 of the IRC on payments subject to tax withholding. It also utilized to report tax withheld pursuant to IRC Section 5000C (“Imposition of tax on certain foreign procurement”), and reportable payments from Form 1042-S under chapters 3 or 4.

In this article, we will cover who is responsible for filing Form 1042. US individuals involved with cross-border businesses or living overseas should be aware of this form as they may be subject to the form’s filing requirements for a variety of common reasons, without even knowing it. For instance, US-source alimony paid to a nonresident alien former spouse may be reportable by a withholding agent on Form 1042 (in addition to 1042-S), even if the entire amount is exempt under a tax treaty.

This article provides general information and is not intended to convey tax or legal advice. Please contact Mr. Eugene Sherayzen, an experienced tax attorney at Sherayzen Law Office, PLLC if you have any questions about filing this form, or any other US-international tax questions.

Who is Responsible for Filing Form 1042?

As noted by the IRS, unless an exception applies, “every withholding agent or intermediary who receives, controls, has custody of, disposes of, or pays a withholdable payment, including any fixed or determinable annual or periodical income, must file an annual return for the preceding calendar year” on Form 1042. The IRS defines “withholding agent” to mean any person who is required to withhold tax. This definition is expansive and can include, in general, any individual, trust, estate, partnership, corporation, nominee, government agency, association, or tax-exempt foundation (both domestic and foreign) that is required to withhold tax. Withholding agents are personally liable for any tax required to be withheld, as well as interest and applicable penalties.

An “intermediary” means, “a person who acts as a custodian, broker, nominee, or otherwise as an agent for another person, regardless of whether that other person is the beneficial owner of the amount paid, a flow-through entity, or another intermediary.”

When Must Form 1042 Be Filed?

Form 1042 must be filed in a number of different circumstances. As stated by the IRS, an individual or entity must file the form if, “you are required to file or otherwise file Form(s) 1042-S for purposes of either chapter 3 or 4 (whether or not any tax was withheld or was required to be withheld to the extent reporting is required)…; You file Form(s) 1042-S to report to a recipient tax withheld by your withholding agent; You pay gross investment income to foreign private foundations that are subject to tax under section 4948(a); You pay any foreign person specified federal procurement payments that are subject to withholding under section 5000C; You are a qualified intermediary (QI), withholding foreign partnership (WP), withholding foreign trust (WT), participating foreign financial institution (FFI), or reporting Model 1 FFI making a claim for a collective refund under your respective agreement with the IRS.” Note, that the FFI classification may also require other extensive reporting under FATCA.

2014 Form 1042: Due Date and Place of Filing

The 2014 Form 1042 must be filed by March 16, 2015, to the IRS’ Ogden (UT) Service Center, and an extension of time to file may be granted by submitting Form 7004, (“Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns”).

Contact Sherayzen Law Office for Help With International Tax Compliance

US-International tax reporting and planning can involve many complex areas, and you are advised to seek the advice of attorneys practicing in this area. If you have any questions, please contact Sherayzen Law Office, PLLC for all of your tax and legal needs.

Illegal Use of Offshore Accounts in the Caribbeans: Advisor Sentenced

In an earlier article, we referred to a case where a investment advisors used offshore accounts in the Caribbeans to launder and conceal funds. On September 5, 2014, the IRS ad the DOJ announced one of these advisors, Mr. Joshua Vandyk, was sentenced to serve 30 months in prison.

Mr. Vandyk, a U.S. citizen, and Mr. Eric St-Cyr and Mr. Patrick Poulin, Canadian citizens, were indicted by a grand jury in the U.S. District Court for the Eastern District of Virginia on March 6, and the indictment was unsealed March 12 after the defendants were arrested in Miami. Mr. Vandyk, 34, pleaded guilty on June 12, Mr. St-Cyr, 50, pleaded guilty on June 27, and Mr. Poulin, 41, pleaded guilty on July 11. St-Cyr and Poulin are scheduled to be sentenced on October 3, 2014.

According to the plea agreements and statements of facts, All three advisors conspired to conceal and disguise the nature, location, source, ownership and control of $2 million (believed to be the proceeds of bank fraud) through the use of the Offshore Accounts in the Caribbeans. The Offshore Accounts in the Caribbeans are often used not only to conceal illegal funds, but also perfectly legal earnings of U.S. persons.

In addition to the use of the Offshore Accounts in the Caribbeans, the advisors assisted undercover law enforcement agents posing as U.S. clients in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners. Moreover, Mr. Vandyk helped invest the laundered funds on the clients’ behalf and represented that the funds in the Offshore Accounts in the Caribbeans would not be reported to the U.S. government.

According to court documents, Mr. Poulin established an offshore corporation called Zero Exposure Inc. for the undercover agents and served as a nominal board member in lieu of the clients. Mr. Poulin then transferred approximately $200,000 that the defendants believed to be the proceeds of bank fraud from the offshore corporation to the Cayman Islands, where Mr. Vandyk and Mr. St-Cyr invested those funds outside of the United States in the name of the offshore corporation. The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements with respect to the Offshore Accounts in the Caribbeans to the clients. Clients were able to monitor their investments in the Offshore Accounts in the Caribbeans online through the use of anonymous, numeric passcodes. Upon request from the U.S. client, Mr. Vandyk and Mr. St-Cyr liquidated investments and transfered money from the Offshore Accounts in the Caribbeans, through Mr. Poulin, back to the United States.

This case is just one more example of the increased IRS international tax enforcement with respect to the Offshore Accounts in the Caribbeans.