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

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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 to 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 (now closed) 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, 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.

Contact Us Today to Schedule Your Confidential Consultation!

Société Générale Private Banking Non-Prosecution Agreement

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On June 9, 2015, the Department of Justice announced that Société Générale Private Banking (Suisse) SA has reached a resolution under the DOJ’s Swiss Bank Program.

According to the terms of the non-prosecution agreement, Société Générale Private Banking 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 these banks for tax-related criminal offenses.

Société Générale Private Banking has had a presence in Switzerland since 1926, and had a U.S.-licensed representative office in Miami from the early 1990s until it closed on August 26, 2013. Société Générale Private Banking opened and maintained accounts for accountholders who had U.S. tax reporting obligations, and was aware that U.S. taxpayers had a legal duty to report to the Internal Revenue Service (IRS) and pay taxes on all of their income, including income earned in Société Générale Private Banking accounts. Société Générale Private Banking knew that it was likely that certain U.S. taxpayers who maintained accounts at the bank were not complying with their U.S. income tax obligations.

Société Générale Private Banking’s U.S. cross-border banking business aided and assisted some U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income the clients held in their accounts from the IRS. SGBP-Suisse used a variety of means to assist U.S. clients in hiding their assets and income, including opening and maintaining accounts for U.S. taxpayers in the name of non-U.S. entities, including sham entities, thereby assisting such U.S. taxpayers in concealing their beneficial ownership of the accounts. Such entities included Panama and British Virgin Island corporations, as well as Liechtenstein foundations. In two instances, an Société Générale Private Banking employee acted as a director of entities that had U.S. taxpayers as beneficial owners. In another instance, upon the death of the beneficial owner of an entity, the heirs opened accounts held by sham entities at Société Générale Private Banking to receive their shares of the assets from the entity account.

Société Générale Private Banking further provided numbered accounts, allowing the accountholder to replace his or her identity with a code name or number on documents sent to the client, and held statements and other mail at its offices in Switzerland, rather than sending them to the U.S. taxpayers in the United States. In addition to these services, Société Générale Private Banking:

Processed requests from U.S. taxpayers for cash or gold withdrawals so as not to trigger any transaction reporting requirements;

Processed requests from U.S. taxpayers to transfer funds from U.S.-related accounts at Société Générale Private Banking to accounts at subsidiaries in Lugano, Switzerland, and the Bahamas;

Opened accounts for U.S. taxpayers who had left UBS when the department was investigating that bank;

Processed requests from U.S. taxpayers to transfer assets from accounts being closed to other Société Générale Private Banking accounts held by non-U.S. relatives and/or friends; and

Followed instructions from U.S. beneficial owners to transfer assets to corprate and individual accounts at other banks in Switzerland, Hong Kong, Israel, Lebanon, Liechtenstein and Cyprus.

Throughout its participation in the Swiss Bank Program, Société Générale Private Banking committed to full cooperation with the U.S. government. For example, Société Générale Private Banking described in detail the structure of its U.S. cross-border business, including providing a list of the names and functions of individuals who structured, operated or supervised the cross-border business at Société Générale Private Banking; a summary of U.S.-related accounts by assets under management; written narrative summaries of 98 U.S.-related accounts; and the circumstances surrounding the closure of relevant accounts holding cash or gold. Société Générale Private Banking also provided information to make treaty requests to the Swiss competent authority for U.S. client account records.

Since August 1, 2008, Société Générale Private Banking held and managed approximately 375 U.S.-related accounts, which included both declared and undeclared accounts, with a peak of assets under management of approximately $660 million. Société Générale Private Banking will pay a penalty of $17.807 million.

US taxpayers who have not yet disclosed their Société Générale Private Banking accounts, but who wish to participate in the 2014 OVDP, are likely to face now a 50% OVDP penalty rate.

Abusive Tax Shelters on the IRS “Dirty Dozen” List of 2015

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On February 3, 2015, the IRS said using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them,” said IRS Commissioner John Koskinen. “The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Abusive tax shelters are classified as illegal scams and can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Abusive Tax Shelters

Abusive tax shelters have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax shelters. CI’s primary focus is on the identification and investigation of the promoters of the abusive tax shelters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax shelters, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax shelters.

What are these abusive tax shelters? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These abusive tax shelters are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The abusive tax shelters are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement may be classified as abusive tax shelter. Another thing to remember is that the promoters of abusive tax shelters often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Abusive Tax Shelters: Misuse of Trusts

Trusts also commonly show up in abusive tax shelters. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Abusive Tax Shelters: Captive Insurance

Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. Tax law allows businesses to create “captive” insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive tax shelters, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities oftentimes poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” while maintaining their economical commercial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision. Underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient. The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.

Who Must File IRS Form 1042

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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, Ltd. 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, Ltd. for all of your tax and legal needs.

OVDP lawyers: Recent News Regarding the DOJ Program for Swiss Banks

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For OVDP lawyers, one of the most significant recent developments in the US international tax law enforcement was the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (“Program”) announced by the US Department of Justice (“DOJ”) on August 29, 2013. Since the Program began functioning, more than a hundred Swiss banks (out of the approximate total of three hundred eligible banks) elected to enter the Program.

This article will briefly highlight some recent developments concerning Swiss banks participating in the Program, as well as the likely future focus of the DOJ efforts to locate the offshore accounts of US taxpayers (an important focus for OVDP lawyers and their clients). This article is not intended to convey tax or legal advice. If you have an offshore account, you should seek the advice of a tax attorney as significant penalties may be involved. Please contact the experienced OVDP International tax firm, Sherayzen Law Office, Ltd. for professional legal and tax assistance.

OVDP Lawyers: At Least Ten Swiss Banks Have Withdrawn From the Program

It appears that some of the Swiss banks entered the Program out of pure caution. According to a recent article in the Swiss newspaper, NZZ am Sonntag, at least ten Swiss banks have withdrawn their participation in the Program. The paper, citing anonymous sources, did not specify which banks withdrew. However, the banks reportedly determined that they had not broken applicable US laws, and according to various news reports, the DOJ had no objection to the banks withdrawing from the Program.

One Swiss bank that publicly announced that it was withdrawing last month is the Liechtenstein-based private bank, VP Bank. According to a news report citing an official statement, the bank noted, “Thorough internal investigations and external expert opinions showed that the conditions for continued participation did not exist…VP Bank therefore withdrew from the U.S. programme.”

For OVDP lawyers, this maybe an important fact that may affect the voluntary disclosure strategies of their clients.

OVDP Lawyers: Many Swiss Banks May Have to Wait Until 2015 to Resolve Disputes in the Program

An important issue for the Swiss Banks and OVDP lawyers is when the DOJ will reach the final resolution under the Program. In a recent article published in the Swiss financial newspaper, finews.ch, Shelby du Pasquier, a partner at the Geneva law firm Lenz & Staehelin representing more than twenty Swiss banks enrolled in the Program, gave the opinion that for most banks enrolled, settling disputes in the Program would last until spring of 2015. He noted that this was his “personal opinion” and not the official opinion of any of the twenty (unnamed) banks he represents. In a separate news report, Boris Collardi, CEO of Julius Baer, was quoted in July of this year as stating that he expects his bank to find a “fair and equitable solution” within the next few months. Du Pasquier seconded the opinion that Julius Baer will likely be one of the next large Swiss banks to settle, along with an unnamed “smaller bank.”

Du Pasquier also opined that the US DOJ is likely to increase scrutiny of accounts in other offshore jurisdictions, especially the Bahamas, Hong Kong and Singapore, and any Swiss bank subsidiaries operating in such countries.

At Sherayzen Law Office, Mr. Sherayzen already expressed his opinion that the IRS is already in the process of widening its scope of enforcement with the particular emphasis on the Carribean region, Central America, Hong Kong, India, Singapore in addition to its already deep involvement in Israel. Mr. Sherayzen also seconded the opinion that the resolution of the issues under the Program is unlikely to be reached for most of the participants in 2014; most likely, we are looking at 2015 and maybe even 2016 for the most difficult cases.

OVDP Lawyers: Several Swiss Banks Seek More US Customers for Offshore Accounts

While most Swiss banks no longer pursue US customers desiring offshore accounts and funds because of the recent increased IRS and DOJ efforts, several Swiss banks have actually increased marketing for this customer base. The new marketing efforts are legal if such offshore funds are properly registered with the US Securities and Exchange Commission (SEC), or other applicable authorities.

In a recent news article in swissinfo.ch, René Marty, CEO of UBS Swiss Financial Advisers (UBS-SFA) stated, “We only accept clients who have declared all their assets.” The Swiss Bank, Vontobel, not only registered with the SEC, but also established a branch in Texas to pursue US customers.

UBS-SFA, Vontobel, and Pictet North America Advisors are the Swiss leaders in this targeted market. Furthermore, from a practical perspective, these banks may provide the only option for US persons living overseas who have declared their offshore accounts, but are unable to open accounts in various Swiss banks that now view having US customers as a stigma.

For OVDP lawyers, it is important to advise their clients that these offshore banks are likely to be subject to additional US tax reporting requirements.

Contact Sherayzen Law Office for Help with Undisclosed Foreign Accounts and Other Foreign Assets

If you have undisclosed foreign accounts, you may be running a grave risk of IRS detection and investigation due to FATCA enforcement as well as the widening scope of IRS investigations as it goes through the piles of information it collected as a result of the voluntary disclosure programs and the Swiss Program for Banks. This is why you need the help of an experienced OVDP lawyer to properly advise you with respect to your voluntary disclosure options.

We can help you as we have helped hundreds of our clients around the world. Our international tax team is highly experienced in all voluntary disclosure options involving offshore accounts and other foreign assets. Our international tax compliance team will thoroughly review your case, identify the international tax issues involved, analyze the penalty exposure and the available voluntary disclosure options, and implement the preferred voluntary disclosure plan for you (including preparation of all legal documents and tax forms).

Contact US to Schedule Your Confidential Consultation.