FBAR - Possible Criminal Charges
According to IRS FAQ (#14) of May 6, 2009, Taxpayers who do not report income from foreign bank/financial accounts or file FBAR’s face up to 19 years in jail:
What are some of the criminal charges I might face if I don’t come in under voluntary disclosure and the IRS finds me?
Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). The failure to file an FBAR and the filing of a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C.§ 5322.
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
FBAR: Civil Pentalties
IRS FBAR FAQ #15 (posted on 5/06/09) states: Taxpayers who fail to report foreign bank/financial accounts face civil penalties (based on the entity tax reporting due).
What are some of the civil penalties that might apply if I don’t come in under voluntary disclosure and the IRS finds me? How do they work?
The following is a summary of potential reporting requirements and civil penalties that could apply to a taxpayer, depending on his or her particular facts and circumstances.
• A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account. See 31 U.S.C. § 5321(a)(5). Nonwillful violations are subject to a civil penalty of not more than $10,000.
• A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under section 6048. This return also reports the receipt of gifts from foreign entities under section 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
• A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under section 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is five percent of the gross value of trust assets determined to be owned bythe United States person.
• A penalty for failing to file Form 5471, Information Return of U.S. Person with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under sections 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
• A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by sections 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
• A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under section 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
• A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under sections 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
• Fraud penalties imposed under sections 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
• A penalty for failing to file a tax return imposed under section 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
• A penalty for failing to pay the amount of tax shown on the return under section 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
• An accuracy-related penalty on underpayments imposed under section 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
FBAR Filing: Statute of Limitations
On 6/24/09, in FAQ #31, the IRS confirmed they will be able to assess taxes under a 6 year statute of limitations if the IRS can prove a substantial omission of gross income:
How can the IRS propose adjustments to tax for a six-year period without either an agreement from the taxpayer or a statutory exception to the normal three-year statute of limitations for making those adjustments?
Going back six years is part of the resolution offered by the IRS for resolving offshore voluntary disclosures. The taxpayer must agree to assessment of the liabilities for those years in order to get the benefit of the reduced penalty framework. If the taxpayer does not agree to the tax, interest and penalty proposed by the voluntary disclosure examiner, the case will be referred to the field for a complete examination. In that examination, normal statute of limitations rules will apply. If no exception to the normal three-year statute applies, the IRS will only be able to assess tax, penalty and interest for three years. However, if the period of limitations was open because, for example, the IRS can prove a substantial omission of gross income, six years of liability may be assessed. Similarly, if there was a failure to file certain information returns, such as Form 3520 or Form 5471, the statute of limitations will not have begun to run. If the IRS can prove fraud, there is no statute of limitations for assessing tax.
IRS to Expand Audits as Cash Runs Low
By Joe Mont, TheStreet.com – The Internal Revenue Service, trying to recoup some of the estimated $14 billion that companies underpay in employer taxes a year, plans to wage a three-year campaign to audit 6,000 businesses.
Click link above for complete article.
Currency Transaction Report (CTR) & Suspicious Activity Report (SAR)
U.S. financial institutions file Currency Transaction Reports (CTR) and Suspicious Activity Reports (SAR) with the IRS Detroit Computing Center (uploaded into the IRS/DCC Currency Banking and Retrieval System database at the IRS/DCC).
The combined CTR/SAS currency transaction reports provides a paper trail (or roadmap) for investigations of financial crimes and illegal activities including: tax evasion, embezzlement and money laundering. Between 1994 - 1997, the IRS criminal Investigation Division initiated 1030 investigations as a result of CTR/SAR (Currency Transaction Reports).
Report/Requirements
Currency Transaction Report (CTR) - Filed by financial institutions that engage in a currency transaction in excess of $10,000.
Currency Transaction Report Casino (CTRC) - Filed by a casino to report currency transactions in excess of $10,000.
Report of Foreign Bank and Financial Accounts (FBAR) - Filed by individuals to report a financial interest in or signatory authority over one or more accounts in foreign countries, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.
IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business - Filed by persons engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or two or more related transactions within a twelve month period.
Suspicious Activity Report (SAR) - Filed on transactions or attempted transactions involving at least $5,000 that the financial institution knows, suspects, or has reason to suspect the money was derived from illegal activities. Also filed when transactions are part of a plan to violate federal laws and financial reporting requirements (structuring).
UBS Client Who Hid $6.1 Million From IRS Avoids Jail
By David Voreacos, Bloomberg.com
A New Jersey businessman who admitted using a UBS AG account to hide $6.1 million from U.S. tax authorities was sentenced to five years probation by a judge who credited his cooperation with prosecutors.
Juergen Homann, 67, also was fined $60,000 and ordered to perform 300 hours of community service by U.S. District Judge Stanley Chesler in Newark, New Jersey, yesterday. Homann, who faced as long as five years in prison after he pleaded guilty Sept. 25, has helped prosecutors pursuing offshore tax evasion, said Assistant U.S. Attorney Marc Ferzan.
“His cooperation was very significant to the government,” Ferzan said in an interview.
Click link above for complete article.
IRS to start regulating paid tax preparers
By Stephen Ohlemacher, Associated Press
WASHINGTON – The Internal Revenue Service plans to start regulating paid tax preparers, requiring them to register with the government, pass competency tests and adhere to ethical standards…
Shulman said he hopes to have all paid tax preparers registered by the 2011 filing season. Preparers will be given about three years to meet competency requirements.
Click link above for complete article.
FBAR: Foreign Accounts with Multiple Signatories
On 6/24/09, the IRS updated their Voluntary Disclosure FAQ clarifying the FBAR reporting requirements for foreign accounts with multiple signatories:
If parents have a jointly owned foreign account on which they have made their children signatories, the children have an FBAR filing requirement but no income. Should the children just file delinquent FBARs as described by FAQ 9 and have the parents submit a voluntary disclosure? Will both parents be penalized 20 percent each? Will each have a 20 percent penalty on 50 percent of the balance?
Only one 20 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. In the example, the parents will be jointly required to pay a single 20 percent penalty on the account. This can be through one parent paying the total penalty or through each paying a portion, at the taxpayers’ option. For those signatories with no ownership interest in the account, such as the children in these facts, they may file delinquent FBARs with no penalty as described in FAQs 9 and 41. However, any joint account owner who does not make a voluntary disclosure may be examined and subject to all appropriate penalties.
If there are multiple individuals with signature authority over a trust account, does everyone involved need to file delinquent FBARs? If so, could everyone be subject to a 20 percent offshore penalty?
Only one 20 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. The penalty may be allocated among the taxpayers making the disclosures in any way they choose. The reporting requirements for filing an FBAR, however, do not change. Therefore, every individual who is required to file an FBAR must file one.
Tax Informants Are On The Loose
By Janet Novack and William P. Barrett, Forbes.com
For 24 years Vincent A. Spondello toiled away as an accountant for a group of related companies known as Monex, a large Newport Beach, Calif. precious metals dealer. A trusted employee, he prepared tax returns and was given such tasks as overseeing the destruction of old corporate documents. It turns out that some records that were supposedly destroyed he took home instead.
In May Spondello sent 25 boxes of original Monex papers to the Internal Revenue Service–documents that could buttress the IRS’ claim that Monex’s owners fraudulently moved around assets to avoid a $378 million tax bill. He made his document drop after hiring lawyers and filing a claim for a whistleblower reward that could total $57 million or more. Monex denies it owes anything, has fired Spondello and is demanding back its documents.
“He’s a good guy,” says Spondello lawyer Robert D. Coviello. “But he is a rat.”
Pay attention. There are Vincent Spondellos taking notes, taking names and taking documents across America, and beyond.
For years the IRS grudgingly paid stingy rewards to squealers who brought it mostly small cases; during 2004 and 2005, 428 informants received a total of $12 million–only 7% of the paltry $168 million all their leads brought in. But in 2006, hoping to entice insiders to rat out big-dollar cheats and corporate tax shelters and games, Congress directed the IRS to pay tipsters at least 15% and as much as 30% of taxes, penalties and interest collected in cases where $2 million or more is at stake.
The gambit seems to be working very well. The IRS continues to get thousands of small case tips a year. But in fiscal 2009, ended Oct. 30, the IRS Whistleblower Office also logged big case leads on 1,900 taxpayers, up from 1,246 in fiscal 2008, the first full year the new law was in effect. Dozens of these tips involve purported tax losses of $100 million or more. Sure, those are just allegations. But informants “often provide extensive documentation to support their claims,” the Whistleblower Office noted in a report. The Treasury Inspector General for Tax Administration, in a separate report, added up all the 2008 tips and found that $65 billion in unreported income was alleged.
The slow-moving IRS has yet to pay any bounties under the new scheme, which the Inspector General report said still had “deficiencies” in its execution. But the government itself is already reaping big rewards.
In June 2007 Bradley C. Birkenfeld–motivated in large part, he now acknowledges, by the new reward law–came to U.S. officials with documents in hand and laid out how his former employer, UBS AG, helped wealthy Americans hide money offshore. So far the investigation he triggered has produced a $780 million payment to the U.S. government from UBS, Switzerland’s largest bank; an unprecedented agreement by the Swiss to finger 4,450 U.S. taxpayers with secret UBS accounts; and criminal investigations of more than 150 American UBS clients. That, in turn, helped pressure 14,700 taxpayers to make “voluntary” disclosures of previously undisclosed offshore kitties during a special program earlier this year, yielding extra billions in tax for the Treasury. “The entire game has changed on international tax evasion,” crows IRS Commissioner Douglas Shulman.
Click link above for complete article.
FBARs and Offshore Hedge Funds
The California Tax Lawyer (Summer 2009 Edition) published my article: FBARs and Offshore Hedge Funds. Please see copy below.
FBARs and Offshore Hedge Funds
After the landmark agreement between the U.S. and Swiss government over secret UBS Swiss bank accounts held by U.S. citizens, the IRS is now focusing on hedge funds in the Cayman Islands. Recently, IRS officials advised that certain U.S. investors in off-shore hedge funds must file a FBAR.
On June 12, 2009, an IRS official stated that the term “financial interest” (which requires a FBAR filing) includes hedge funds that “function as mutual funds.” It appears the IRS and Justice Department will identify U.S. taxpayers who evade U.S. taxes by investing with off-shore hedge funds. The IRS and Justice Department are pressing foreign financial institutions to provide them with information about Americans with “foreign, secret bank accounts.”
Senate Finance Committee Chairman Max Baucus (D., Mont.) has introduced legislation that would require an FBAR to be filed with a tax return. It would also require U.S. financial institutions to report to the IRS transfers of money into any foreign financial account. This would make it possible for the IRS to have information about the creation of a foreign account at the beginning.
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