Update on U. S. Tax Compliance Initiatives
In T- AB Vol. 2/ 2014, the article entitled “U. S. Tax Enforcement for U. S. Individual Taxpayers Has Become Supercharged- And You Ain’t Seen Nothin’ Yet” described the various choices available to U. S. taxpayers who were out- of- compliance with their U. S. tax obligations. This article will: ( 1) update the reader regarding changes in IRS tax compliance initiatives since that time; ( 2) discuss current U. S. and international activities that support the continued validity of the statement “You Ain’t Seen Nothing Yet”; and ( 3) alert readers to an important change regarding FBAR filings that takes effect next year.
1. RECENT CHANGES IN IRS TAX COMPLIANCE INITIATIVES
While the 2014 article discussed six different things a noncompliant taxpayer could do, for most taxpayers the two alternatives for consideration are the “streamlined” program if the noncompliance was not “willful” and the Offshore Voluntary Disclosure Program ( OVDP) for others. ( Undoubtedly, significant numbers of taxpayers are also still doing “quiet” disclosures.)
There have been several changes to the streamlined and OVDP programs in the last two years.
Changes to the Streamlined Program ( i) Expanded Streamlined Program
On June 18, 2014, the IRS materially expanded the streamlined program. Notably, the 2014 streamlined compliance procedures are now available to eligible U. S. taxpayers residing in the U. S. along with those residing abroad. To qualify for the new Streamlined Filing Compliance Procedures, taxpayers are required to file original or amended tax returns for the past three years, FBARS for the past six years, and to complete a certification stating that their failure to comply was not willful.
The IRS defines non- willful conduct as conduct “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” As described below, the IRS now requires much more detail to be provided by taxpayers to support their “non- willful” certifications.
Because streamlined filing does not result in the signing of a closing agreement with the IRS, the streamlined procedures do not limit the civil penalties that may be assessed against a taxpayer in the same way that signing an OVDP closing agreement would should the IRS later determine that the information provided by the taxpayer is inaccurate or incomplete. It is important to note that, once a taxpayer makes a submission under a streamlined program, he or she cannot participate in OVDP.
There are two streamlined programs. The first is called the “Streamlined Foreign Offshore Procedures.” The second is the “Streamlined Domestic Offshore Procedures.”
Under the Streamlined Foreign Offshore Procedures, U. S. taxpayers ( or estates of such taxpayers) who are eligible for the program and are residing outside the United States must file delinquent or amended tax returns for each of the most recent three years for which the U. S. tax return date has passed, file delinquent FBARS for the most recent six years for which the FBAR due date has passed, pay the full amount of the U. S. tax and interest due at the time the returns are filed, and complete a Certification by a U. S. Person Residing Outside of the U. S. for Streamlined Foreign Offshore Procedures ( Form 14653), stating that failure to file was non- willful. No penalties are payable by taxpayers participating in the Streamlined Foreign Offshore Procedures program.
In order to be regarded as nonresident and eligible for the Streamlined Foreign Offshore Procedures, taxpayers residing outside of the U. S. must pass a non- residency test. For U. S. citizens and green card holders, the non- residency test requires that the taxpayer, in any one or more of the most recent three years for which the U. S. tax return due date has passed, did not have a U. S. abode and was physically outside the U. S. for at least 330 full days.
Taxpayers are eligible for the Streamlined Domestic Offshore Procedure if they fail to meet the non- residency tests. Such taxpayers must pay a miscellaneous offshore penalty equal to five percent of the highest aggregate balance of their undisclosed accounts from the last six years, as well as the full amount of the tax and interest due in connection with these filings. A “Certification by U. S. Person Residing in U. S. for Streamlined Domestic Offshore Procedures,” Form 14654, must also be completed and signed.
Surprisingly there has been little feedback yet from the IRS on streamlined submissions, though commentators have expressed concerns that clearly willful taxpayers have tried to sneak through the streamlined program. Apparently last November the IRS began to examine streamlined submissions, so there may be feedback from the IRS in the near future. Many practitioners wonder whether making non- willful submissions will become more difficult in the near future, given how much publicity there has been about filing requirements and how active financial institutions have become in warning their customers with U. S. connections about their compliance obligations ( and closing their accounts). Some practitioners also wonder if the IRS may end the streamlined program in the not- too- distant future because arguably few taxpayers who have not come forward by now would still qualify as non- willful.
In February 2016 the IRS revised the streamlined offshore procedure forms ( Forms 14653 and 14654) to require a much more detailed statement regarding the taxpayer’s non- willfulness. The form now requires a streamlining taxpayer to:
“Provide specific reasons for your failure to report all income, pay all tax, and submit
all required information returns, including FBARS. Include the whole story including favorable and unfavorable facts. Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARS. Additionally, explain the source of funds in all of your foreign financial accounts/ assets. For example, explain whether you inherited the account/ asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it. And explain your contacts with the account/ asset including withdrawals, deposits, and investment/ management decisions. Provide a complete story about your foreign financial account/ asset.
The following points address common situations that may apply to you:
• We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you ( or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation. • We realize that some taxpayers that owned or controlled a foreign entity ( e. g., corporation, trust, partnership, IBC, etc.) failed to properly report ownership of the entity or transactions with the foreign entity. If you ( or your return preparer) inadvertently failed to report ownership or control of the foreign entity or transactions with the foreign entity, explain why and include your understanding of your reporting obligations to the IRS and to foreign jurisdictions. If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. Also provide background such as how you came into contact with the advisor and frequency of communication with the advisor. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.
( ii) Changes in Pr ocedure for Delinquent FBAR and International Tax Returns
All U. S. citizens, residents, green card hold- ers and persons doing business in the U. S. who have a financial interest in or signature authority over financial accounts in foreign countries exceeding an aggregate value of USD 10,000 must file Foreign Bank Account Reports ( FBARS) with respect to such accounts each year. Non- willful failure to file the FBAR can lead to a USD 10,000 penalty per account per year, while willful violations can result in a penalty equal to the greater of USD 100,000 or fifty percent of the account balance. Willful failure to file an FBAR can also be a criminal violation, in which case the penalty can include a USD 250,000 fine, imprisonment for up to five years, or both.
An international taxpayer may need to file other U. S. tax forms as well. These include IRS Form 3520, “Annual Return With Foreign Trusts and Receipt of Certain Foreign Gifts,” IRS Form 3520- A, “Information Return of Foreign Trust With a U. S. Owner,” IRS Form 5471, “Information Return of U. S. Person With Respect to Certain Foreign Corporations,” IRS Form 5472,” Information Return of a 25 Percent Foreign- Owned U. S. Corporation or a Foreign Corporation Engaged in a U. S. Trade or Business” and IRS Form 926, “Return by a U. S. Transferor of Property to a Foreign Corporation.” Failure to file any of the above mentioned forms may result in substantial penalties.
On June 18, 2014, the IRS announced new procedures for taxpayers who have no unpaid tax but who have failed to file FBARS or other required information returns. Under these new procedures, the IRS will not impose a penalty for failure to file the delinquent FBARS, if the taxpayer has not previously been contacted by the IRS regarding an income tax examination or delinquent returns and the taxpayer reported income from foreign financial accounts on his or her U. S. tax return and paid all tax with respect to the financial accounts listed on the delinquent FBARS. Additionally, other delinquent non- U. S. tax filings may be submitted without a penalty but, in the case of these filings a reasonable cause statement must accompany each delinquent information return.
Changes in the OVDP Program and Its Success to Date
In addition to requiring additional information and documentation, the most significant changes in the OVDP program are that: ( i) the “in lieu of penalty” has been raised to 50 percent of the highest value of unreported accounts or assets bought with such funds during the preceding eight years ( from 27.5 percent), if accounts were maintained at certain institutions; and ( ii) the in lieu of penalty is now supposed to be paid when amended returns are filed and back taxes, interest and accuracy- related penalties are paid, rather than at the end of the process when the IRS agent will be familiar with the taxpayer and his or her professional advisor. ( Such familiarity facilitated making informed decisions whether to “opt out” of the OVDP program and instead negotiate penalties with the IRS.)
In October 2015 the IRS announced that 54,000 taxpayers have participated in OVDP. USD 8 billion has been collected. The IRS also announced that an additional 30,000 taxpayers have participated in the streamlined program.
New U. S. Law Regarding Revocation and Non- Renewal of Passports of Certain U. S. Taxpayers
The infrastructure funding legislation enacted on December 4, 2015 ( the so- called “FAST” Act) includes provisions that allow the IRS, under certain circumstances, to revoke U. S. passports and refuse to renew passports of U. S. taxpayers who have a “seriously delinquent tax debt”. A “seriously delinquent tax debt” is an “unpaid, legally enforceable Federal tax liability” over USD 50,000 that has been assessed and with respect to which the IRS has filed a notice of lien or levy.
2. ONGOING AND UPCOMING U. S. AND INTERNATIONAL ACTIVITIES
The U. S. Foreign Trust Tax Compliance Act (“FATCA”) came into force on July 1, 2014, and the first exchanges of information under FATCA and the intergovernmental agreements the U. S. has signed with many other countries ( so- called IGA’S) began late last summer. While it is too early to know how such information will be used, the information exchange has begun.
Of perhaps greater long- term significance is the “global FATCA”, the Common Reporting Standards ( CRS) promulgated by the OECD and agreed to by almost 100 jurisdictions ( though not yet by the United States), which came into effect on January 1, 2016. Starting next year, the CRS provides for automatic exchange of information among these jurisdictions. In March, 2016 the IRS Commissioner asked Congress to adopt CRS.
Also of note is the fact that the IRS is currently seeking to force UBS to turn over an account in Singapore held by a U. S. citizen. This action evidences the beginning of a shift in focus from Switzerland to other international financial centers. The identity of this taxpayer is also interesting. The taxpayer is a Taiwan- born, naturalized U. S. citizen who previously lived in the U. S. and who opened an undisclosed UBS account in Switzerland in 1994 which he later moved to Singapore. The taxpayer is now living in China, apparently permanently.
In a recent interview, a senior U. S. Department of Justice official, Caroline Ciraolo, discussed the recent settlements the Department of Justice has reached with approximately eighty Swiss banks and the next steps that the Department of Justice will take to enforce global tax compliance. Ciraolo stated “We are looking well beyond Switzerland, into jurisdictions around the world [ including based on information Swiss banks have been required to provide to be eligible to settle with the Department of Justice, so- called “leavers lists”]. These jurisdictions include, but are not limited to, the British Virgin Islands, the Channel Islands, Guernsey, Hong Kong, Israel, Liechtenstein, Luxembourg, Panama and Singapore.” Legislation was also proposed in Congress this year that would prevent the use of anonymously- held U. S. companies. Currently U. S. law regarding transparency is more than is now generally the case outside of the United States due to FATCA and the CRS. Many countries object to the lack of a “level playing field” because arguably the U. S. can now be used to shield a person’s identity while other jurisdictions cannot. In addition, there are both Democrats and Republicans in Congress who worry that U. S. companies are increasingly now being used to launder money and perhaps transfer terroristrelated funds due to the greater anonymity still permitted for U. S.- created entities compared to entities in most other jurisdictions.
3. CHANGES IN THE FBAR FILING REQUIREMENTS IN 2017
Every U. S. taxpayer who owns or has signature authority over more than USD $ 10,000 worth of financial accounts located outside of the United States must annually file the so- called FBAR ( Fincen Form 114, “Report of Foreign Bank and Financial Accounts”) electronically by June 30. Extensions are not available. A law enacted in July 2015 changed the filing deadline for FBAR’S. The new law provides that, beginning for the 2016 tax year, FBARS must be filed with the taxpayer’s Federal tax return due on April 15 ( or on June 15 in the case of taxpayers living overseas), or October 15 if the taxpayer requests an extension.
Unfortunately, there is some confusion around the new law. Many people have assumed the new rules take effect this year. But in fact they take effect for returns filed for the 2016 tax year, so the new FBAR filing date and availability of extensions begins for returns filed in 2017. This year’s FBARS are due on June 30, as has been the case previously, with no extensions available.
Based on the foregoing, it is safe to say that the phrase “you ain’t seen nothin’ yet” still applies to U. S. tax compliance efforts and likely future IRS successes. Taxpayers with outstanding issues would be well advised to remedy their noncompliance.
Arthur Winter is a Tax and Estate Planning attorney at Winter & Melbinger, LLP. He can be contacted at wintassoc@ gmail. com.