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IRS Tax Attorney Perspective on the Top 3 International Tax Enforcement Trends in 2014

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As an IRS tax attorney, I foresee that 2014 is likely to be a continuation of the global tax enforcement trends that started in the earlier years. Specifically, I believe the following three moves by the IRS will form the core of the US international tax enforcement efforts in 2014.

IRS Tax Attorney Top Trend #1: FATCA IGAs

I believe we will see a continuous efforts by the U.S. government to expand the enforcement scope of the Foreign Account Tax Compliance Act by increasing the number of Intergovernmental Agreements (“IGAs”). Through the IGAs, the IRS hopes to increase FATCA compliance to the most important tax jurisdictions in the world.

Of course, expanding FATCA compliance to such countries as China, Russia and even India, will continue to present a formidable challenge to the IRS. If IGAs are actually enforced in these countries, it would be a major victory for U.S. enforcement efforts given the sheer number of non-compliant U.S. taxpayers from these countries and their stubborn belief (less so in India than in other countries) that the IRS will not be able to expand FATCA to these countries.

IRS Tax Attorney Top Trend #2: US DOJ Program for Swiss Banks

Undoubtedly, the latest initiative by the US government in the form of the Department of Justice Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (the “Program”) will occupy the central stage if the attention of any IRS tax attorney who practices in the area of international tax compliance. The Program is a unique, unprecedented effort to apply the lessons from the individual IRS Offshore Voluntary Disclosure Program (“OVDP” now closed) that has been running in the United States since 2012 in its current form (and since 2003 in other variations) to foreign banks located in foreign jurisdictions.

As I predicted earlier, it is likely that the Program, if successful, will become the template for similar programs throughout the world. Potentially, it could become a permanent feature in the current arsenal of tax enforcement tools.

IRS Tax Attorney Top Trend #3: OVDP for Non-Compliant US Taxpayers

The latest version of the IRS Offshore Voluntary Disclosure Program was launched in 2012 on the heels of the success of 2011 Offshore Voluntary Disclosure Initiative. I anticipate that this trend will continue into 2014. In combination with the Program, it is likely that an ever increasing number of non-compliant U.S. taxpayers will join the OVDP, especially since they are urged to do so by the Swiss banks without the benefit of analyzing their voluntary disclosure options (something that should be done by an IRS tax attorney who specializes in international tax compliance such as at Sherayzen Law Office).

Contact Sherayzen Law Office for Help with International Tax Compliance

So far, I provided just the top three trends that every IRS tax attorney who practices in the area of international tax law should know. However, even this simplistic overview makes it abundantly clear that international tax compliance is real and you should be worried about it if you have undisclosed foreign assets or income.

Given the complexity of the international tax law and the draconian penalties in case of non-compliance or incorrect compliance, it is very important to choose the right firm to represent your interests. This is why you should contact the IRS tax practice of Sherayzen Law Office who has built a wide range of expertise in the area of international tax compliance.

We offer specialized services for international tax matters to individuals and businesses with foreign income and/or assets. If you are currently in violation of US tax laws, we can help you bring your tax affairs into full compliance in a responsible manner.

Forms 3520 and 3520-A and Increased Use of Foreign Trusts

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The Internal Revenue Service recently released its Statistics of Income Studies (SOI) reports concerning data for 2010 foreign trusts that have U.S. persons as grantors, transferors, or beneficiaries. The data shows that, despite the various compliance costs associated with reporting requirements, use of foreign trusts by U.S. taxpayers continues to increase.

This article will briefly explain Form 3520 and Form 3520-A, and highlight some of the newly released SOI data relating to such forms. The article is not intended to constitute tax or legal advice. US-International taxation and foreign trusts can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters.

Form 3520

The purpose of Form 3520 (“Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts”) is for U.S. persons (and executors of estates of U.S. decedents) to report certain transactions with foreign trusts, ownership of foreign trusts (see IRC Sections 671-679), and receipt of certain large gifts or bequests from certain foreign individuals.

The SOI data for Forms 3520 with Gratuitous Transfers for 2010 shows U.S. taxpayers filed 950 returns with transfers for a total value of 1.49 billion dollars. This was an increase in the number of returns from 2006 (752 returns with transfers) and 2002 (429 returns with transfers). The total transferred value for the year of the study, however, decreased from 2002 (2.18 billion) and 2006 (1.64 billion).

Certain countries figure prominently in the SOI data. For Forms 3520 with Gratuitous Transfers for 2010, Mexico led the way with 178 transfers (approximately $236 million in value), followed by Puerto Rico (approximately $57 million in value). Other leading countries include St. Christopher/Nevis, with 58 ($21.68 million), Canada, with 49 ($63.69 million), Isle of Man with 47 ($82.44 million), and United Kingdom and Northern Ireland with 45 (12.78 million).

For Forms 3520 with Non-Grantor Trust Distributions, there were 1,698 total returns with total distributions of 3.165 billion dollars for the 2010 SOI data. This was also an increase from the 2006 data of 1,200 returns with distributions of 2.87 billion, and the 2002 data of 607 returns with distributions of 311 million dollars.

Form 3520-A

Form 3520-A (“Annual Information Return of Foreign Trust With a U.S. Owner”) must be filed by foreign trusts with a U.S. owner in order to satisfy its annual information reporting requirements under section 6048(b). Form 3520-A provides information about the foreign trust, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the foreign trust.

For the 2010 SOI data, 7,051 foreign grantor trusts reported total distributions of $3.96 billion, net income of 1.13 billion, and foreign taxes paid of 13.75 million. This is a huge increase from the 2006 data of 740 total returns with distributions of 57.88 million, net income of 6 million, and foreign taxes paid of $149 thousand; and 2002 with 2,550 returns with distributions of $884 million, net income of $358 million, and foreign taxes paid of $4 million. A distribution is defined by Form 3520-A instructions to be, “[A]ny gratuitous transfer of money or other property from a trust, whether or not the trust is treated as owned by another person under the grantor trust rules, and without regard to whether the recipient is designated as a beneficiary by the terms of the trust.”

Contact Sherayzen Law Office for Help With Forms 3520, 3520-A and Foreign Trust Tax Planning Issues

International tax issues, like foreign trust compliance, are highly complex and result in very costly mistakes and even criminal liability. This is why it is important to consult an experienced Form 3520 foreign trust tax attorney who would be able to analyze the issues involved, identify compliance requirements, complete all of the necessary legal and tax documents, and create a tax plan for moving forward.

Contact Sherayzen Law Office if you are a beneficiary of a foreign trust, an owner of a foreign trust, or you are thinking about a comprehensive asset protection plan involving foreign trusts. Our experienced international tax firm can assist you with U.S. tax compliance with respect to foreign trusts (including Forms 3520, 3520-A, FinCEN Form 114, (formerly form TD F 90-22.1), Form 8938 and other relevant forms) as well as creation of a comprehensive asset protection plan that will strive to balance tax optimization with asset protection strategies according to your needs.

FBAR: Financial Interest, Signature Authority, and Other Comparable Authority

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One of the major requirements that gives rise to the obligation to file the FBAR is that a U.S. person has either a financial interest in, or a signature authority or other comparable authority over the relevant foreign financial accounts. In deciding whether the FBAR is required, it is useful to go through all three of these requirements in order.

First, the filer needs to determine whether he has a financial interest in the account. If the account is owned by an individual, the financial interest exists if the filer is the owner of record or has legal title in the financial account, whether the account is maintained for his own benefit or for the benefit of others, including non-U.S. persons. See 75 Fed. Reg. at 8847. Hence, if the owner of record or holder of legal title is a U.S. person acting as an agent, nominee, or in some other capacity on behalf of another U.S. person, the financial interest in the account exists and this agent or nominee needs to file the FBAR. If a corporation is the owner of record or the holder of legal title in the financial account, a shareholder of a corporation has a financial interest in the account if he owns, directly or indirectly, more than 50 percent of the total value of the shares of stock or has more than 50 percent of the voting power. Id. Where a partnership is the owner of record or the holder of legal title in the financial account, a partner has a financial interest in the financial account if he owns, directly or indirectly, more than 50 percent of the interest in profits or capital. Similar rule applies to any other entity (other than a trust) where a U.S. person owns, directly or indirectly, more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits. Id. Special rules apply to trust and can be found in the Proposed Regulations. Id. Finally, a U.S. person who “causes an entity to be created for a purpose of evading the reporting requirement shall have a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title.” Id.

If there is no financial interest in the foreign financial account, the filer should determine whether he has signature authority over the account. A U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank or other person with whom the account is maintained. See 75 Fed. Reg. at 8848. Notice, once again, that control over the disposition of assets in the account is one of the main factors in deciding whether the FBAR needs to be filed.

It is important to mention that, pursuant to the IRS Announcement 2010-23, persons with signature authority over, but no financial interest in, a foreign financial accounts for which an FBAR would otherwise have been due on June 30, 2010, will now have until June 30, 2011, to report those foreign financial accounts. Combined with IRS Announcement 2009-62, this means that the deadline has been extended for the calendar year 2009 and all prior years.

Finally, even if no financial interest or signature authority exists, the filer has to continue his analysis and determine whether he has “other comparable authority” over the account. This catch-all, ambiguous term is not defined by the IRS. Nevertheless, the instructions to FinCEN Form 114 formerly Form TD F 90-22.1 generally state that the other comparable authority exists when the filer can exercise power comparable to the signature authority over the account by communication with the bank or other person with whom the account is maintained, either directly or through an agent, or in some other capacity on behalf of the U.S. person.

FBAR Penalties

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In this essay, I would like to discuss some of the penalties that may be imposed as a result of the failure to file the FBAR even though you were required to do so. In particular, I will focus on three general scenarios describing specific penalties commonly attributed to each of them. The first scenario is where you willfully failed to file the FBAR, or destroyed or otherwise failed to maintain proper records of account, and the IRS learned about it when it launched an investigation. This is the worst type of scenario which carries substantial penalties. The IRS may impose civil penalties of up to the greater of $100,000, or 50 percent of the value of the account at the time of the violation, as well as criminal penalties of up to $500,000, or 10 years of imprisonment, or both.

Another scenario is where you negligently and non-willfully failed to file the FBAR, and the IRS learned about it during an investigation. Unlike the first scenario, there are no criminal penalties for non-willful failure to file the FBAR; only civil penalties of up to $10,000 per each violation (unless there is a pattern of negligence which carries additional civil penalties of no more than $50,000 per any violation). In this situation, you are likely to fare much better, and you may even be able to obtain lower penalties by showing of reasonable cause for the failure to file.

The third scenario is where you non-willfully fail to file the FBAR, accidentally discover your mistake, and come to an attorney to file a delinquent FBAR before the IRS commences its investigation of your finances. This is the most favorable of all scenarios due to the fact that you may qualify for the benefits of a voluntary disclosure program, despite the fact that the position of the IRS regarding civil penalties for voluntarily filed but delinquent FBARs is uncertain following the October 15, 2009 voluntary disclosure deadline (now ended). The best strategy for addressing delinquent FBARs, however, varies depending on the facts and circumstances of the particular case.

A word of caution: this discussion focuses solely on the penalties associated with the failure to file the FBAR. This essay does not address the various strategies that may be employed in dealing with the delinquent FBAR filings in the post-October 15, 2009 world, including qualification for the voluntary disclosure program. In certain situations, there may also be other relevant significant tax issues outside of the FBAR realm – the most important of which is non-payment of taxes on undisclosed income by the U.S. taxpayers – which may significantly alter the amount of penalties, interest, and taxes due to the IRS.

FBAR (Report on Foreign Bank and Financial Accounts) is due on June 30, 2010

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Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, FinCEN Form 114 formerly Form TD F 90-22.1 (the FBAR) must be filed with the DOT.

The FBAR must be filed by June 30 of each relevant year, including this year (2010).