Up­date on U. S. Tax Com­pli­ance Ini­tia­tives

Thai-American Business (T-AB) Magazine - - Contents - Writ­ten by: Arthur Win­ter

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.

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