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2015 UBS Probe Poses Threat to US Owners of Undisclosed UBS Accounts

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!

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.

Kentucky Resident Charged for Maintaining Secret Swiss Bank Accounts

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.

Brazil FATCA IGA Signed

The long-awaited Brazil FATCA IGA (Intergovernmental Agreement) was finally signed on September 23, 2014. This is an event of high importance and, in this article, I would like to explore Brazil FATCA IGA in more detail.

FATCA & Model Treaties

FATCA (“Foreign Account Tax Compliance Act”) was signed into law in 2010. This is a grand piece of US legislation that has already made a huge impact on international tax compliance landscape, and US taxpayers with undisclosed foreign accounts are feeling the pressure of this law more than anyone else.

In essence, FATCA directs foreign financial institutions (FFIs) to identify and report to the IRS all of their US customers with the account balances of $50,000 or more. How this reporting is done will depend on the tax treaty that is signed by the relevant foreign country.

There are two Model treaties that IRS created for the foreign countries to sign. Model I treaty that requires FFIs to send the reporting information regarding US-held accounts to their national tax authority which will report this information to the IRS. Model II treaty skips the national authority – it requires FFIs to directly turn over the US-owned account information directly to the IRS.

Brazil FATCA IGA is a reciprocal Model I treaty.

Brazil FATCA IGA

Since Brazil FATCA IGA is a Model I treaty, under the Brazil FATCA IGA, Brazilian FFIs will turn over the information regarding US accountholders to Receita Federal Brasileira (the national tax authority in Brazil). Receita Federal Brasileira will then turn over all of this information to the IRS. A Brazilian FFI that complies Brazil FATCA IGA due diligence and reporting requirements will be eligible to be treated as a registered deemed-compliant FFI for FATCA purposes.

Remember that Brazil FATCA IGA is a reciprocal treaty. This means that the United States will also have to share information with the Receita Federal Brasileira regarding accounts held by Brazilian residents with certain US financial institutions.

Impact of Brazil FATCA IGA on US Taxpayers with Undisclosed Accounts in Brazil

The signing of Brazil FATCA IGA suddenly raised the stakes for US taxpayers with undisclosed bank and financial accounts in Brazil, because there is almost a certainty that these accounts will now be reported to the IRS. This, in turn, means nothing else than full exposure of undisclosed US-held accounts to a potential IRS investigation with potential criminal and willful FBAR penalties as well as additional penalties (including criminal) with respect to US tax returns.

Moreover, the implementation of Brazil FATCA IGA means that this exposure to the IRS investigation is likely to occur very soon, perhaps as soon as December 31, 2014 or (more likely) March 31, 2015. If the IRS learns about the existence of these undisclosed accounts from Receita Federal Brasileira before the US taxpayer with undisclosed Brazilian accounts attempts his voluntary disclosure, it is very likely that this taxpayer will not be able to enter the 2014 Offshore Voluntary Disclosure Program.

Contact Sherayzen Law Office for Professional Help With Undisclosed Bank and Financial Accounts in Brazil

If you have undisclosed foreign and financial accounts in Brazil, you should contact Sherayzen Law Office for legal and tax help as soon as possible. Our international tax law office is highly experienced in the matters related to the Offshore Voluntary Disclosures and has helped hundreds of US taxpayers worldwide to bring their tax affairs into full compliance with US tax laws.

Contact Sherayzen Law Office to Schedule Your Confidential Consultation Now.

Ireland to End Double Irish Tax Loophole used by many US Companies

Less than a month ago, Irish Finance Minister Michael Noonan announced in an address introducing the 2015 budget to the Irish parliament that the country will be changing its tax code to require all companies registered in Ireland to be tax residents, thereby ending the so-called Double Irish loophole utilized by many US companies and multinationals to reduce their tax liabilities. Noonan was quoted in one recent article as stating, “Aggressive tax planning by the multinational companies has been criticized by governments across the globe, and has damaged the reputation of many countries.”

This article will briefly examine the Double Irish structure used by US companies and others, and the new changes that will affect this structure; this article is not intended to convey tax or legal advice under either US or Irish laws.

The changes to the Double Irish loophole, combined with the recent Department of the Treasury and Internal Revenue Service Notice 2014-52, “Rules Regarding Inversions and Related Transactions” will significantly affect many US companies. Tax planning and compliance will become even more important the days ahead. Please contact Mr. Eugene Sherayzen, an experienced international tax attorney at Sherayzen Law Office, PLLC for questions about your tax and legal needs.

The Double Irish Loophole

Before the new changes, multinationals could utilize a structure commonly referred to as the “Double Irish”. In general, under the Double Irish structure, companies would take advantage of Irish territorial taxation laws, meaning that the income of an Irish subsidiary operating outside of Ireland would not be subject to taxation. Prior to the new change, an entity in Ireland would be considered to be a tax resident not where it was incorporated, but rather where its controlling managers were located; thus, an entity registered in Ireland with its managers located in a tax haven would be considered to be a tax resident of the tax haven, and not Ireland, if properly structured.

US companies would often take advantage of this structure by forming offshore subsidiary entities that would own the rights to intellectual property located outside the United States, typically without paying US tax, through a cost sharing agreement between US parents and offshore companies. The non-US intellectual property rights would then be licensed to a second Irish subsidiary (hence the “Double Irish” phrase), which would be an Irish tax resident, generally in return for royalty payments, or similar fees. The second Irish subsidiary would additionally be able to deduct the royalties or other fees paid to the entity in the tax haven, thereby reducing its taxable profits (and subjecting any remaining profits to Ireland’s competitive 12.5% rate). Until such profits were remitted to the US, they would typically not be subject to US taxation.

Many US companies, such as LinkedIn, Facebook, Google, Twitter and others successfully used the Double Irish loophole to reduce their overall tax liabilities.

Ending the Double Irish Loophole

Under the new changes to the Double Irish loophole, beginning in January of 2015, all newly Irish-registered entities will automatically be deemed to be Irish tax residents. The new rules will not apply to companies currently utilizing the Double Irish structure; however, such companies will need to be compliant with the new rules by the end of 2020. Ireland will still retain its favorable 12.5% corporate tax rate.

The changes to the Double Irish loophole were made as a result of intense international criticism and potentially adverse consequences for Ireland. This year, the European Commission announced that it would conduct a formal investigation into the practices of various companies with Irish subsidiaries, including the Double Irish loophole. According to various news reports, European Union officials have expressed preliminary support for the new changes.

To address the possible loss of jobs resulting from the new changes (one news report puts the number of jobs created by foreign firms registering in Ireland to be 160,000 jobs, or approximately one in ten workers in the country – a lot of these jobs were created as a result of the Double Irish loophole), Noonan announced that he intended to create a new taxable rate for income derived from intellectual property in the form of a “Knowledge Development Box”. However, the EU is currently investigating so-called “patent boxes” (which could likely be similar to Noonan’s future proposal) utilized by various other European countries, such as the U.K. and the Netherlands.

Contact Sherayzen Law Office for Professional Help With International Tax Planning

Since 2008, the world has experienced an almost unprecedented surge in the international tax enforcement, reflecting the desire (and the great economic need) of many countries to be able to obtain what these countries consider their fair share of tax revenues from international companies. The recent change to Irish tax laws with respect to the Double Irish loophole is just the latest example of this growing trend.

As tax enforcement rises, many US companies operating overseas and foreign companies operating in the United States are facing increasing risks of over-taxation with a direct threat to their profitability. For a number of reasons, the mid-size and small companies that operate internationally face a disproportionate increase in these risks than large multinational companies.

Sherayzen Law Office has successfully helped companies around the world to successfully operate internationally while reducing the risks of being subject to unfair tax treatment. If you have a small or mid-size business that operates internationally, you should contact our international tax team for professional legal and tax help.