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IRS Compliance Campaigns | US International Tax Attorney and Lawyer

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On January 31, 2017, the IRS announced a complete new approach to tax enforcement – Issue-Focused IRS Compliance Campaigns. A total of thirteen IRS compliance campaigns were announced; all of them will be administered by the LB&I (Large Business and International) division of the IRS. Let’s explore in more detail this highly important IRS announcement.

Background Information: IRS Compliance Campaigns is the Second Phase of the LB&I Restructuring

The announcement of the IRS Compliance Campaigns does not come as a surprise. The IRS has been talking about the LB&I division restructuring for a long while and the first details of the new campaigns already appeared as early as September of 2015.

In fact, the IRS Compliance Campaigns represent the second phase of this restructuring. Already in the fall of 2015, the LB&I completed the first phase – the administrative re-organization of the LB&I into nine units, including four geographic practice areas and five issue-based practice areas.

The first phase of the LB&I reorganization focused on the administrative structure of the Division. The IRS Compliance Campaigns are meant to reorganize the Division’s tax enforcement process in a way that fits best the new administrative structure.

IRS Compliance Campaigns are Focused on Specific Tax Issues

On January 31, 2017, during a conference call announcing the new IRS Compliance Campaigns, the IRS stated that each campaign is meant to provide “a holistic response to an item of either known or potential compliance risks.” In other words, each Campaign is focused on a specific tax issue which carries a heightened noncompliance risk.

This focus on specific issues fits perfectly with the new organizational structure of the LB&I which we already discussed above. Again, this is all part of a large IRS plan to devote its scarce resources towards the areas which have significant noncompliance risk and, hence, require a more intense level of IRS scrutiny.

Issue-Focused IRS Compliance Campaigns: What Areas Will the Campaigns Affect?

As of March 21, 2017, the IRS identified thirteen such high-risk areas. A separate campaign was assigned to each of these areas. The campaigns can be grouped according to the IRS LB&I Practice Areas.

1. Cross Border Activities Practice Area

The following campaigns are included within the Cross Border Activities Practice Area of the LB&I Division: Form 1120-F Non-Filer Campaign and Repatriation Campaign.

2. Enterprise Activity Practice Area

The Enterprise Activity Practice Area of the LB&I Division contains more campaigns than any other area by a large margin. Seven different campaigns are launched within this Practice Area: IRC 48C Energy Credit; Domestic Production Activities Deduction, Multi-Channel Video Program Distributors (MVPD’s) and TV Broadcasters; Micro-Captive Insurance Campaign; Related Party Transactions; Deferred Variable Annuity Reserves & Life Insurance Reserves IIR Campaign; Basket Transactions Campaign; and Land Developers – Completed Contract Method (CCM) Campaign.

3. Pass-Through Entities Area

Two huge campaigns are launched in the Pass-Through Entities Area of the LB&I Division: TEFRA Linkage Plan Strategy Campaign and S Corporation Losses Claimed in Excess of Basis Campaign.

4. Treaty and Transfer Pricing Operations Practice Area

One campaign is launched within the Treaty and Transfer Pricing Operations Practice Area: the Inbound Distributor Campaign.

5. Withholding and International Individual Compliance Practice Area

Only one, but highly important campaign was launched within the Withholding and International Individual Compliance Practice Area – OVDP Declines-Withdrawals Campaign.

The taxpayers should remember that they may be subject to multiple IRS Compliance Campaigns at the same time.

IRS Compliance Campaigns: Treatment Streams

The goal of the campaigns is to promote tax compliance – even more fundamentally, to change the taxpayer behavior in general, replacing noncompliance with compliance.

In order to achieve this goal, the IRS may utilize a variety of “treatment streams” as part of a campaign. The first and most fundamental treatment stream is the traditional audit, which will remain the ultimate weapon in all IRS Compliance Campaigns.

Second, the IRS stated that it will also include “soft letters” to taxpayers. The idea behind the soft letters is to draw a taxpayer’s attention to a particular item or issue on the taxpayer’s return, explain the IRS position and give the taxpayer an opportunity to amend his return himself (i.e. without resorting to an audit). If the taxpayer does not do so after he receives the IRS letter, an audit will most likely follow.

Additionally, the IRS stated that it will pursue four additional strategies: guidance, new forms and instructions, published practice units, and practitioner and stakeholder outreach.

More IRS Compliance Campaigns Will Be Launched in the Future

The IRS has affirmatively stated that the number of the IRS Compliance Campaigns will increase in the future. At this point, it is not yet known what particular areas the new Campaigns will affect.

Contact Sherayzen Law Office for Professional Help If You Are Affected by One or More of the IRS Compliance Campaigns

If you are affected by any of the IRS campaigns or you have received a soft letter from the IRS, contact Sherayzen Law Office for professional help. Our team of tax professionals, headed by Attorney Eugene Sherayzen, will thoroughly analyze your case, create a plan to move forward to resolve the situation, implement the plan and defend your position against the IRS.

Mistake as Reasonable Cause | Offshore Voluntary Disclosure Lawyer

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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 20.1.1.3.2.2.4 (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 20.1.1.3.2.2.4 (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, 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.

Contact Us Today to Schedule Your Confidential Consultation!

US Airspace and the Definition of the United States | US Tax Lawyers

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This article is a continuation of a recent series of articles on the exploration of the definition of the United States. As it was mentioned in a prior article, the general definition of the United States found in IRC § 7701(a)(9) has numerous exceptions throughout the Internal Revenue Code (“IRC”). The US airspace is another example of such exceptions. In this article, I would like to outline some of the ways in which the borders of the United States are defined in the context of the US airspace.

General Tax Definition of the United States Does Not Mention US Airspace

The general tax definition of the United States is found in IRC § 7701(a)(9). According to IRC § 7701(a)(9), the United States is comprised of the 50 states, the District of Columbia and the territorial waters. There is no mention of the US airspace.

This, of course, does not mean that US airspace never constitutes part of the United States. Rather, as I had explained it in a prior article, one needs to look at the specific tax provisions and determine if there is a special definition of the United States that applies to them.

Examples of Various IRC Provisions Including and Excluding US Airspace from the Definition of the United states

Indeed, there is a rich variety of treatment of US airspace that can be found within the IRC. Here, I will just mentioned three examples that demonstrate how differently the IRC provisions define the United States with respect to its airspace.

1. There is an esoteric but important IRC § 965 which deals with the Dividends Received deduction for repatriated corporate earnings. IRS Notice 2005-64 provides foreign tax credit guidance under IRC § 965 and specifically follows the general definition of the United States with the addition of the Continental Shelf. Then, the Notice states: “the term ‘United States’ does not include possessions and territories of the United States or the airspace over the United States and these areas”. Thus, the US airspace is excluded from the tax definition of the United States under IRC § 965.

2. The treatment of the US airspace is the opposite for the purposes of the Foreign Earned Income Exclusion (“FEIE”). Since FEIE allows a taxpayer to exclude only “foreign” earned income, the tax definition of the United States is crucial for this part of the IRC.

In general, the courts have ruled that the airspace over the United States is included within the definition of the United States with respect to IRC § 911. This means that, if you are flying over the United States, you are considered to be within the United States for the purposes of FEIE.

3. When we are dealing with the analysis of whether an individual is a US tax resident under the Substantial Presence Test, we are again back to the same situation as in example 1 – the US airspace is not included in the definition of the United States.

Contact Sherayzen Law Office for Professional Legal and Tax Help

Sherayzen Law Office is a premier international tax law firm that helps individuals and businesses with US tax compliance, including Offshore Voluntary Disclosures. We can help you with any US international tax law issues.

Contact Us Today to Schedule Your Confidential Consultation!

Prison Sentence for Quiet Disclosure: the Kaminsky Case

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On March 4, 2015, Gregg A. Kaminsky, a former UBS client, was sentenced for willfully failing to file a Foreign Bank Account Report (the “FBAR”) with the U.S. Department of Treasury in connection with his concealment of income and assets in accounts in Switzerland, Hong Kong, and Thailand over several years, as well as his failure to report certain income earned in the virtual world, “Second Life.”

“Federal tax revenue is crucial to protecting our borders; fighting terrorism, cybercrime, and other national security threats; providing disaster relief; and to performing other critical government functions,” said Acting U. S. Attorney John Horn. “This office is committed to investigating and prosecuting those who intentionally avoid paying their fair share, whether their schemes involve income earned or hidden offshore, here at home, or even in a virtual world.”

“U.S. citizens who seek to avoid their tax obligations by hiding income in undeclared bank accounts abroad should by now be fully on notice that they will be held accountable for their actions, both civilly and criminally,” stated IRS Criminal Investigation Special Agent in Charge, Veronica F. Hyman-Pillot. “Americans who file accurate, honest and timely returns can be assured that the government will hold accountable those who don’t.”

Facts of the Case

According to Acting U.S. Attorney Horn, the charges and other information presented in court:

Kaminsky was an Internet entrepreneur who served as the Chief Executive Officer of Circlenet LLC, based in Atlanta, Georgia. From 2000 through mid-2009, Kaminsky owned and controlled a foreign bank account with Union Bank of Switzerland AG (“UBS”). By 2006, Kaminsky’s UBS account held approximately $1.1 million. From time to time between 2002 and 2009, Kaminsky caused funds to be wire-transferred from his UBS account in Switzerland to other foreign bank accounts controlled by him in Thailand and Hong Kong. Also during that time, Kaminsky caused his income from at least two different U.S. companies to be direct-deposited into his UBS account in Switzerland.

Yet, over this period, Kaminsky did not disclose his UBS account or other foreign financial accounts to the U. S. Treasury Department as required, and thereby concealed several hundred thousand dollars in taxable income, interest, and dividends from the U.S. Internal Revenue Service (IRS).

In addition, in 2007 and 2008, Kaminsky omitted his UBS account and associated income from Free Applications for Federal Student Aid (FAFSA) that he electronically filed with the U.S. Department of Education in order to qualify for need-based federal financial aid to fund his tuition for an Executive MBA program at Emory University. At the time of the FAFSA applications, Kaminsky controlled over a half million dollars in his UBS account, which would have made him ineligible for federal student loan assistance.

On June 30, 2008, the U.S. Department of Justice sought court approval to compel UBS to disclose the identities of U.S. account holders who may be using UBS accounts to hide assets overseas and thereby evade U.S. taxes. The request and the order authorizing it were widely reported by the media throughout the United States, and this coverage continued throughout 2008 and 2009 as the U.S., UBS, and Switzerland negotiated a resolution and UBS began disclosing U.S. account holders to the IRS.

Following this news, Kaminsky closed his UBS account and transferred the balance of his UBS account to an account that he controlled at HSBC Bank in Hong Kong. Further, in spring 2010, Kaminsky filed FBARs for his Swiss and Hong Kong accounts for the very first time, also filing amended individual income tax returns for 2007 and 2008 that disclosed the previously unreported income in his UBS account. However, in his amended 2007 and 2008 returns, and in his subsequently filed returns for 2009 through 2012, Kaminsky still failed to report nearly $150,000 in taxable income earned from his business activities in the virtual world, “Second Life.”

Participants in Second Life, referred to as “residents,” can engage in a wide variety of business activities, including buying, renting, and sub-leasing virtual land and buying and selling other virtual goods, services, and experiences for their “avatars.” Transactions are conducted using a virtual currency, “Linden Dollars.” Linden Dollars can be bought and traded on the “Linden Exchange,” and are redeemable for cash.

Including his virtual world income, Kaminsky failed to report over $400,000 in income to the IRS between 2000 and 2012, resulting in a loss to the IRS of approximately $125,000.

Kaminsky’s Sentence

Kaminsky was sentenced to serve four months in federal prison to be followed by two years of supervised release, two months of home confinement, and 200 hours of community service. Kaminsky was also ordered to pay restitution to the IRS in the amount of $91,983. Kaminsky was convicted on these charges on December 18, 2014, after he pleaded guilty. As part of his plea agreement with the United States, Kaminsky was also required to pay a civil penalty to the IRS in the amount of $250,635.20, which is equivalent to fifty percent of the value of the balance in Kaminsky’s HSBC account in Hong Kong as of June 30, 2009.

Lesson from the Kaminsky’s Case – the Dangers of Attempting Incomplete Quiet Disclosure

Kaminsky’s case is a good illustration of my last year’s article on the how quiet disclosure in the current enforcement environment can be a very dangerous option. Kaminsky amended two tax returns and disclosed income from his UBS account for those two years and filed the FBARs for 2009. This was a fairly standard way of doing quiet disclosure, but it could not in any form qualify as a voluntary disclosure – and Kaminsky paid dearly for this attempt.

However, there is another important lesson of Kaminsky’s case for the persons who intend to engage in a voluntary disclosure – you cannot do a partial voluntary disclosure. Kaminsky failed to report his worldwide income on his amended tax returns – he only reported income that was directly relevant to the foreign accounts. Failure to submit complete and accurate amended tax returns undoubtedly contributed to the criminal sentence in this case.

Contact Sherayzen Law Office for Help with Conducting Proper Voluntary Disclosure

If you have undisclosed foreign accounts and foreign income, contact Sherayzen Law Office for professional legal and tax help. Our international tax lawyer, Mr. Eugene Sherayzen will thoroughly analyze your case and advise you on your voluntary disclosure options. Once you choose your voluntary disclosure path, our firm will prepare all of the necessary documents and legal forms, and conduct your voluntary disclosure in a proper and expeditious manner.

We have helped hundreds of US taxpayers around the globe, and we can help you. So, Call 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!