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Serious Illness as Reasonable Cause | International Tax Lawyer

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We are continuing our series of articles on Reasonable Cause. Today, we will discuss whether a serious illness can establish a reasonable cause for abatement of the IRS penalties. It is important to note that this discussion of serious illness as a reasonable cause is equally applicable to death and unavoidable absence of the taxpayer (in fact, the Internal Revenue Manual (IRM) discusses all three circumstances – death, serious illness and unavoidable absence of taxpayer – at the same time in providing guidance on reasonable cause).

Serious Illness Can Constitute a Reasonable Cause

IRM 20.1.1.3.2.2.1 (11-25-2011) expressly states that serious illness can be used as a Reasonable Cause Exception: “death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late… .” In this context, “immediate family” means spouse, siblings, parents, grandparents, or children.

In the business context, a reasonable cause may be established if death, serious illness or other unavoidable absence occurred with respect to a taxpayer (or his immediate family) who had the sole authority to execute the return, make the deposit, or pay the tax. The same rule applies to corporations, partnerships, estates, trusts and other legal vehicles for conducting business.

Taxpayer Has the Burden of Proof to Establish that Serious Illness Constitutes Reasonable Cause for His Prior Tax Noncompliance

Stating that a serious illness can constitute a reasonable cause for abatement of the IRS penalties with respect to prior tax noncompliance is not equivalent to stating that serious illness automatically establishes a reasonable cause.

On the contrary, the taxpayer has the burden of proof to establish that serious illness did indeed constitute reasonable cause with respect to his prior tax noncompliance. In other words, serious illness may not be sufficient to establish reasonable cause for various reasons (for example, in cases where it was not actually related to tax noncompliance).

Factors Relevant to Determination of Whether Serious Illness Is Sufficient to Establish Reasonable Cause Exception

IRM 20.1.1.3.2.2.1 (11-25-2011) provides a list of recommended factors to consider in evaluating a taxpayer’s request for abatement of penalties based on serious illness, death or unavoidable absence. I somewhat modified the list to fit in all factors expressly mentioned in the IRM. Here is the non-exclusive list of factors expressly referenced in the IRM:

1. the relationship of the taxpayer to the other parties involved;

2. the dates, duration, and severity of illness (in case of death, the date of death; in case of unavoidable absence, the dates and reasons for absence);

3. how the event prevented tax compliance;

4. how the event impaired other obligations (including business obligations);

5. if tax duties were attended to promptly when the illness passed (or within a reasonable period of time after a death or absence);

6. (in a business setting) in a situation where someone other than responsible person or the taxpayer was responsible for meeting the infringed business tax obligation, and why that person was unable to meet the obligation;

7. (in a business setting) if only one person was authorized to meet the tax obligation, whether such an arrangement was consistent with ordinary business care and prudence.

This is not an all-inclusive list of factors. The IRM foresees the possibility that any other relevant factors may be considered in the analysis of whether a Reasonable Cause Exception was established based on serious illness, death or unavoidable absence.

Contact Sherayzen Law Office for Experienced Help With Establishing A Reasonable Cause Defense, Including Based on Serious Illness

There is always a risk that the IRS may reject a taxpayer’s reasonable cause argument, often simply because the argument was never properly elaborated by the taxpayer. This is why it is important to maximize your chance of success by timely securing professional legal help.

Sherayzen Law Office is a highly experienced tax law firm that has helped its clients around the world to establish various reasonable cause defenses against IRS domestic and international tax penalties. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

US Continental Shelf Definition of the United States | US Tax Attorney

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The US continental shelf presents a unique problem to the tax definition of the United States. It is governed by a special tax provision that sets it apart from any other tax definition. If fact, the US continental shelf is only considered to be part of the United States with respect to specific taxpayers who are engaged in a particular activity on or over the continental shelf. In this article, I will explore certain features of the US continental shelf definition of the United States that distinguishes it from any other tax provision in the Internal Revenue Code (IRC).

Definition of the US Continental Shelf

For the purposes of the US income tax, the IRC § 638(1) states that the United States “when used in a geographical sense includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.” The opening clause of IRC § 638 specifically states that this definition of the United States applies only to the activities “with respect to mines, oil and gas wells, and other natural deposits.”

Analysis of the Definition of the US Continental Shelf

Two aspects need to be noted with respect to the definition above. First, the reference to international tax law means that the US government considers 200 miles of land underneath the ocean as its territory (the so-called “Exclusive Economic Zone” or “EEZ”). An interesting assumption that underlies IRC § 638 is that the continental shelf and the EEZ are the same.

Second, I want to emphasize that this is the definition that is tied to land only, not the water above the land – even more precisely, to certain activities on the ocean’s floor rather than in the water. This is a highly important aspect of IRC § 638, because it produces interesting results.

On the one hand, anyone (including foreign vessels and foreign contractors) drilling or exploring oil in the US continental shelf is considered to be engaged in a trade or business in the United States, which subjects these individuals and companies to US income tax. This also means that US tax withholding needs to be done with respect to foreign contractors. Moreover, even personal property (located over the US continental shelf) of a taxpayer engaged in the drilling or the exploration of the US continental shelf would most likely be classified as US personal property within the meaning of IRC § 956.

On the other hand, fishing in a boat in the same zone will not be considered as an activity within the United States, because it is not linked to mines, oil and gas wells, and other natural deposits.

This means that the application of the US Continental Shelf’s definition of the United States depends on the activity of the taxpayer, not just his location.

US Continental Shelf Rules and Foreign Countries

There is one more interesting aspect of the US continental shelf definition of the United States: its application to foreign countries. The first part of IRC § 638(2) states that the same definition of the continental shelf will also apply to foreign countries – i.e. the seabed and subsoil adjacent to the foreign country or possession and over which the country has EEZ rights.

At the end, however, IRC § 638(2) contains an interesting limitation: “ but this paragraph shall apply in the case of a foreign country only if it exercises, directly or indirectly, taxing jurisdiction with respect to such exploration or exploitation.” In other words, if a foreign country exercises its taxing jurisdiction over the continental shelf, then it is considered to be part of a foreign country. Otherwise, it will be considered as “international waters” (since it is also outside of the US continental shelf).

Contact Sherayzen Law Office for Professional Help with US Tax Issues

The definition of the United States in the context of the US continental shelf is just one of many examples of the enormous complexity of US tax laws. While even US citizens with domestic assets only have to struggle with these issues, the complexity of US tax laws is multiplied numerous times when one deals with a foreign individual/company or even US taxpayers with foreign assets. It is just too easy to get yourself into trouble.

This is why you need the help of the professional international tax law firm of Sherayzen Law Office. Our firm specializes in helping US and foreign taxpayers with their annual tax compliance, tax planning and dealing with past US tax noncompliance.

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

Kentucky Resident Charged for Maintaining Secret Swiss Bank Accounts

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U.S. Attorney Preet Bharara for the Southern District of New York and Acting Special Agent in Charge Shantelle P. Kitchen of the Internal Revenue Service-Criminal Investigation (IRS-CI) New York Field Office announced on November 18, 2014, the unsealing of an indictment against Peter Canale, a U.S. citizen and resident of Kentucky, for conspiring to defraud the IRS and evade taxes by establishing and maintaining secret Swiss bank accounts. Canale was arrested on November 18, 2014, at his residence in Jamestown, Kentucky, and is expected to be presented later today in the US District Court for the Eastern District of Kentucky. Canale is scheduled to be arraigned before US District Judge Katherine B. Forrest in Manhattan federal court on December 3, 2014, at 3:00 p.m.

Facts of the Case With Respect to Secret Swiss Bank Accounts According to Indictment

According to the allegations in the indictment unsealed on November 18, 2014, in Manhattan federal court, Canale conspired with others – including Michael Canale, his brother, Beda Singenberger, a Swiss citizen who ran a financial advisory firm, and Hans Thomann, a Swiss citizen who served as a client adviser at UBS and certain Swiss asset management firms – to establish and maintain secret Swiss bank accounts and to hide those accounts from the IRS. Canale used a sham entity to conceal from the IRS his ownership of the secret Swiss Bank Accounts and deliberately failed to report the accounts and the income generated in the accounts to the IRS.

One of the most surprising facts in this case is the source of money – it was foreign inheritance. In approximately 2000, a relative of Canale’s who held an undeclared bank account in Switzerland died and left a substantial portion of the assets in the undeclared account to Canale and Michael Canale. Canale and his brother met with Thomann and Singenberger and determined they would continue to maintain the assets in the secret Swiss Bank accounts for the benefit of Canale and his brother.

Thereafter, in approximately 2005, Canale, with Singenberger’s assistance, opened secret Swiss Bank Accounts at Wegelin bank (no longer in existence). The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal Canale’s ownership.

Equally surprising is that a criminal case was brought against an account that was under $1,000,000. As of December 31, 2009, the account held assets valued at approximately $789,000.

For each of the calendar years from 2007 through 2010, Canale willfully failed to report on his tax returns his interest in the secret Swiss Bank Accounts and the income generated in those secret Swiss Bank accounts. For each of these years, Canale also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS, as the law required him to do.

Canale, 61, is charged with one count of conspiracy to defraud the United States, evade taxes, and file a false and fraudulent income tax return, which carries a statutory maximum sentence of five years in prison. The maximum potential sentence is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Secret Swiss Bank Accounts Charges Related to a Client List Obtained from Indicted Swiss Banker

The Canale case is another example of an indictment stemming directly from a misplaced letter mailed by a Swiss financial adviser Singenberger (the same advisor who helped Canale open his secret Swiss Bank Accounts) that ended up in the hands of the US tax authorities. The IRS has been picking off the clients on the list one by one since 2013 (including Jacques Wajsfelner and Michael Reiss).

Lessons to be Learned from Canale Case

As I mentioned in a recent article regarding the Cohen case, there has been a growing trend where the IRS is pursuing criminal prosecutions in cases that involve smaller balances on secret Swiss Bank Accounts as long as the IRS is comfortable with its ability to establish willfulness with respect to FBAR non-reporting.

Canale case is just one more example of this trend. The balances were not large at all – the highest balance was far under $1 million. However, the Canale case also included an aggravating factor of allegedly using a sham foundation to conceal his identity; these cases usually carry a higher than usual probability of an IRS criminal prosecution.

What was unusual about the Canale case is how little weight was given to the source of the funds on the secret Swiss Bank Accounts – inheritance. It appears that, in all likelihood, other circumstances were so negative as to simply overwhelm the positive nature of this factor.

Contact Sherayzen Law Office for Professional Help Regarding Your Undisclosed Foreign Accounts

If you had undisclosed foreign accounts at any point since the year 2006, you should consider your voluntary disclosure options as soon as possible. While the DOJ Program for Swiss Banks makes the maintenance of secret Swiss Bank Accounts extremely dangerous at this point, the implementation of FATCA since July 1, 2014, carries a far more potent chance that you undisclosed foreign accounts will be discovered even if they are outside of Switzerland.

If you need help, contact Mr. Sherayzen, a voluntary disclosure professional and international tax attorney at Sherayzen Law Office. Our team will thoroughly analyze your case, evaluate your current voluntary disclosure options, and proceed to implement your voluntary disclosure plan (including preparation of all legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now.

IRS Releases Proposed Guidance for FFIs under FATCA

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On October 29, 2013, many Austin FATCA tax lawyers received the news that the U.S. Department of the Treasury and the Internal Revenue Service issued a notice for foreign financial institutions (FFIs) to comply with the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA). FATCA is rapidly becoming the global standard in the effort to curb offshore tax evasion.

To date, Treasury has signed nine intergovernmental agreements (IGAs), has reached 16 agreements in substance, and is engaged in related conversations with many more jurisdictions.

The notice, which is the next step in implementation, previews proposed guidance and provides a draft agreement for participating FFIs directly engaging in agreements with the IRS and those reporting through a Model 2 IGA (like Switzerland). It provides FFIs with advance notice prior to the beginning of FATCA withholding and account due diligence requirements on July 1, 2014. The FFI agreement will be finalized by year end.

“The Agreement and forthcoming guidance have been designed to minimize administrative burdens and related costs for foreign financial institutions and withholding agents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. “Today’s preview demonstrates the Administration’s commitment to ensuring full global cooperation and a smooth implementation.”

Congress enacted FATCA in 2010 as a way to identify U.S. citizens using foreign accounts to evade their U.S. tax responsibilities. FATCA requires U.S. financial institutions to withhold a portion of payments made to FFIs that do not agree to identify and report information on U.S. account holders.

Treasury has taken a global approach to the exchange of tax information in its implementation of FATCA. To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, Treasury developed two alternative model IGAs. Under Model 1, FFIs report to their respective governments who then relay that information to the IRS. Under Model 2, FFIs report directly to the IRS to the extent that the account holder consents or such reporting is otherwise legally permitted, and such direct reporting is supplemented by information exchange between governments with respect to non-consenting accounts.

October 29th Notice provides guidance to FFIs entering into agreements directly with the IRS, and to those reporting through a Model 2 IGA. The notice incorporates updates to certain due diligence, withholding, and other reporting requirements, and includes a draft FFI agreement. The draft FFI agreement will be finalized by December 31, 2013. Treasury and the IRS will continue to provide more detailed guidance on FATCA implementation as necessary.

The regulations were intentionally designed to appropriately balance the scope of entities and accounts subject to FATCA with due diligence requirements, while also phasing in the related obligations over several years. For example, the final regulations exempt all preexisting accounts held by individuals with $50,000 or less from review. For similar accounts with less than $1,000,000, an FFI is only required to search the account information that is electronically available. In many cases, FFIs are permitted to rely on information that they already must collect for local anti-money laundering and know-your-customer rules.

Many of these cost-saving simplifications were the result of comments received from affected financial institutions and foreign governments, which helped us to tailor the rules to achieve the policy objectives of the statute without imposing undue burdens or costs.

While withholding requirements begin next July and the first report of FATCA information is due in 2015, the IRS FATCA registration website is already open so that FFIs can begin testing the registration process and entering information.

Contact Sherayzen Law Office for Help with Undisclosed Offshore Accounts

If you have undisclosed foreign financial accounts overseas, contact Sherayzen Law Office for professional legal and accounting help. Our experienced international tax firm will thoroughly review your case, analyze the existing potential liabilities, propose appropriate solutions and implement the plan tailored to the facts of your case.

Beneficial Owners, Treaty Shopping and the OECD Model Tax Convention

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Recently, the Organization for Economic Co-operation and Development (OECD) Committee on Fiscal Affairs asked for public comments concerning the interpretation of the term “beneficial owner” in the OECD Model Tax Convention. Since the OECD Model Tax Convention functions as a template for many nations negotiating bilateral tax treaties, any changes or clarifications to the model convention are important for international tax law purposes. Clarifications could potentially affect US taxpayers claiming tax treaty benefits.

This article will briefly explain the concept of a “beneficial owner”, its relation to “treaty shopping”, and the problems with the term as currently interpreted in the OECD Model Tax Convention.

Beneficial Owner

The term “beneficial owner” appears in Articles 10, 11, and 12 (relating to dividend, interest, and royalty payments, respectively) of the OECD Model Tax Convention. The concept is intended to allow only those who are the true, beneficial owners (and who receive such items of income) to claim exemptions from, or reduced rates of, withholding taxes in bilateral tax treaties between nations. Thus, the term is meant to prevent taxpayers from setting up conduits or similar entities to receive such income and to claim treaty benefits by “treaty shopping”. In general, agents, nominees, or conduit companies do not qualify as beneficial owners under the OECD Model Tax Convention.

Treaty Shopping

The term, “treaty shopping” usually occurs in situations in which individuals or corporations reside in one country, earn income from another (source) country, and yet have some other type of entity in a third country that enables them to attempt to benefit from a tax treaty between the source-of-income country and the third country. An example might be a foreign company located in one country (which owns a US company) creating an entity in a third country to receive dividends from the US company, and then claiming that the dividends are not subject to US withholding taxes because of a tax treaty between the US and the third country.

In light of this term, it becomes clear how the beneficial owner definition attempts to limit treaty shopping.

Problems with the Current Beneficial Owner Terminology

The current OECD terminology has been problematic in that it does not specify how the term beneficial owner is intended to be interpreted in the vast array of international laws. In some jurisdictions and tax courts (especially in countries following the common law), the term has been interpreted in a much different way than in others. This has lead to much confusion as well as risk of the same type of income not being subject to tax in some jurisdictions while being subject to double-taxation in others. The OECD request for comments has the goal of remedying this problem by clarifying the meaning of the term and providing further guidance.

The comment period ended July 15, 2011, and the OECD Committee on Fiscal Affairs’ Working Party met a few months ago to begin review of the comments.

Contact Sherayzen Law Office For Help With International Tax Treaties

If you have questions with respect to how a particular tax treaty applies to your situation, contact Sherayzen Law Office for legal help. Our experienced tax firm will assist you in assessing the potential impact of a tax treaty on your particular tax position.