Sen. Carl Levin Statement on Swiss Rejection of UBS Settlement
WASHINGTON (June 8, 2010) – Sen. Carl Levin, D-Mich., made the following statement today regarding the Swiss rejection of the UBS settlement:
“The U.S.-Swiss treaty that was rejected today by the Swiss lower house would have allowed UBS to provide the names and account information for U.S. clients suspected of opening Swiss accounts to evade U.S. taxes. Rejection of the treaty is an international embarrassment that can be laid at the feet of Swiss legislators who are willing to continue to allow their banks to facilitate U.S. tax evasion.
“It was two years ago, in July 2008, that the United States first issued a summons to UBS to get the names of an estimated 52,000 U.S. clients with hidden Swiss accounts that had not been reported to the IRS. The Swiss government intervened to block the summons and prevent disclosure of the names. After a year of delay, in August 2009, a settlement was reached in which the United States agreed to give up its right to all 52,000 names in exchange for getting prompt access to information on key accounts, estimated at 4,450 or less than ten percent of the total. Now the Swiss, despite multiple U.S. concessions and having strung out the UBS case for two years, have failed to live up to their end of the bargain.
“The United States should reject any further attempts by the Swiss to delay the UBS case. It is time to move forward with the summons in court and force UBS to provide the names and account information for all 52,000 suspected U.S. tax cheats.
“This travesty underscores the need for legislation that I’ve introduced which, among other measures, would empower the U.S. Treasury Secretary to take action against any foreign bank or jurisdiction that impedes U.S. tax enforcement by, for example, prohibiting U.S. banks from accepting wire transfers or honoring credit cards from the foreign bank facilitating U.S. tax evasion.”
FBAR Filing 2010 Updates
In March 2010, the IRS suspended TD F 90-22.1 (FBAR) filing requirements for persons other than U.S. Citizens and domestic entities (including those “in and doing business in the U.S.”). (IRS Announcement: 2010-16)
On 8/7/09, IRS Notice 2009-62, extended the deadline for filing FBAR’s for 2008 (and prior years) for persons with signature authority (but no financial interest) in foreign financial accounts until June 30, 2010.
In March 2010, the IRS extended the 2008 FBAR filings due June 30, 2010 until June 30, 2011 (for FBAR filings due for 2010 and prior years) for “persons with signature authority” (but no financial interest) in foreign financial accounts, defined as including: “Those in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund (including mutual funds). (IRS Announcement: 2010-23)
Summary of HIRE and Foreign Account Tax Compliance Act
On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (“HIRE”) Act (P.L. 111-147) (The “Act”) which included the Foreign Account Tax Compliance Act containing new foreign account tax compliance rules.
Under the Act, new reporting and disclosure requirements for foreign assets will be phased in between 2010 – 2013:
1. Foreign Institutional Reporting: Foreign Institutions have new reporting and withholding obligations for accounts held by U.S. Persons (generally effective after 12/31/12, commencing 1/1/13).
2. Foreign Financial Assets ($50,000): Individuals with an interest in a “Foreign Financial Asset” have new disclosure requirements. If foreign financial assets are valued in excess of $50,000, the U.S.
Taxpayer must attach certain information to their income tax returns for tax years beginning after March 18, 2010. (U.S. Taxpayers are not required to disclose interests that are held in a custodial account with a U.S. financial institution).
The penalty is substantial ($10,000, plus additional amounts for continued failures, up to a maximum of $50,000 for each applicable tax period). The penalty may be waived if the individual can establish that the failure was due to reasonable cause and not willful neglect.
3. 40% Penalty: A 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset understatement. Applicable assets are those subject to mandatory information reporting when the disclosure requirements were not met. The penalties are effective for tax years beginning after March 18, 2010.
4. 6 Year Statute of Limitations: Statute of limitations re: omission of income in connection with foreign assets: The statute of limitations for assessments of tax is extended to six (6) years if there is an omission of gross income in excess of $5,000 attributable to the foreign financial asset. The six year statute of limitations is effective for tax returns filed after March 18, 2010, as well as for any other tax return for which the assessment period has not yet expired as of March 18, 2010.
5. Passive Foreign Investment Companies: The Act imposes an information disclosure requirement on U.S. Persons who are PFIC shareholders.
A PFIC is any foreign corporation if:
a. 75% or more of the gross income of the corporation for the taxable year is passive income; or
b. The average percentage of assets held by such corporation during a taxable year which produce passive income or which are held for the production of passive income are at least 50%.
6. Foreign Trusts with U.S. Beneficiaries: The Act clarifies if a foreign trust is treated as having a U.S. Beneficiary, an amount accumulated is treated as accumulated for the U.S. Person’s benefit even if that Person’s trust interest is contingent. The Act clarifies that the discretion to identify beneficiaries may cause the trust to be treated as having a U.S. Beneficiary. This provision is effective after March 18, 2010.
7. Rebuttable Presumption/Foreign Trust – U.S. Beneficiary: The Act creates a rebuttable presumption that a foreign trust has a U.S. Beneficiary if a U.S. Person directly or indirectly transfers property to a foreign trust (unless the transferor provides satisfactory information to the contrary to the IRS). This provision is effective for property transfers after March 18, 2010.
8. Uncompensated Use of the Foreign Trust Property: The Act provides that the uncompensated use of the foreign trust property by a U.S. Grantor, a U.S. Beneficiary (or a U.S. Person, related to either of them), is treated as a distribution by the trust.
The use of the trust property is treated as a distribution to the extent of the fair market value of the property’s use to the U.S. Grantor/U.S. Beneficiary, unless the fair market value of that use is paid to the trust.
The loan of cash or marketable securities by a foreign trust, or the use of any other property of the trust, to or by any U.S. Person is also treated as paid or accumulated for the benefit of the U.S. Person. This provision applies to loans made and uses of property after March 18, 2010.
9. Reporting Requirements, U.S. Owners of Foreign Trusts: This provision requires any U.S. Person treated as the owner of any portion of a foreign trust to submit IRS-required information and insure that the trust files a return on its activities and provides such information to its owners and distributees.
This new requirement imposed on U.S. Persons treated as owners is in addition to the current requirement that such U.S. Persons are responsible for insuring that the foreign trust complies with its own reporting obligations. This provision is effective for taxable years beginning after March 18, 2010.
10. Minimum Penalty re: Failure to Report Certain Foreign Trusts: This provision increases the minimum penalty for failure to provide timely and complete disclosure on foreign trusts to the greater of $10,000 or 35% of the amount that should have been reported.
In the case of failure to properly disclose by the U.S. Owner of a foreign trust of the year-end value, the minimum penalty would be the greater of $10,000 or 5% of the amount that should have been reported.
This provision is effective for notices and returns required to be filed after December 31, 2009.
UBS and The IRS - What’s Next (Summary)
In February 2009, UBS AG, Switzerland’s largest bank, entered into a deferred prosecution agreement with the U.S.:
1. Admitting guilt on charges of conspiring to defraud the U.S. by impeding IRS tax collection.
2. Paid $780 million in fines.
3. Agreed to provide the identities and account information of U.S. Taxpayers with “cross-border” UBS accounts.
To date, UBS has supplied the IRS with the names of 323 Americans who wired money from their U.S. accounts to Switzerland. By August 2010, UBS has agreed to disclose an additional 4,450 U.S. Taxpayers with cross-border UBS accounts.
The Swiss Government has issued an edict mandating that UBS cease and desist “turning over” the identities of U.S. Taxpayers to the IRS. UBS has proposed a course of conduct which insulates itself from conflicts with the Swiss legislature and the U.S. authorities.
UBS has proposed to send to each U.S. Taxpayer a USB stick (i.e., a flash drive) with their “cross-border” UBS bank account records. Once the USB stick is sent to the U.S. Taxpayer, the IRS may commence a civil tax audit, subpoena the USB sticks and obtain all tax information sought from UBS.
U.S. Taxpayers with unreported foreign bank accounts (and income) are subject to IRS civil tax audits with civil penalties (monetary penalty, only) and criminal tax prosecutions (monetary penalty and jail).
The IRS, under a civil tax audit:
1. May summon evidence which support culpability for a crime (e.g., tax evasion) and civil penalties (e.g., 75% fraud penalty).
2. May trigger investigation into money laundering (i.e., when U.S. Taxpayers attempt to repatriate into the U.S., funds from undisclosed foreign bank accounts, they may be culpable for money laundering).
3. Use evidence obtained under a civil tax audit to support a subsequent criminal prosecution (including culpability for 3rd party co-conspirators for obstructing tax collection and conspiracy).
H.I.R.E. and the Foreign Account Tax Compliance Act
On Thursday, March 18, 2010 President Obama signed the Hiring Incentives to Restore Employment Act (H.R. 2847). Included in the bills’ provisions is the Foreign Account Tax Compliance Act.
This Act requires foreign entities to provide U.S. Tax Withholding Agents with the name, address and Tax Identification Number of any U.S. Individual who is an account holder or a substantial owner of a foreign entity, i.e., owns more than 10% of:
1. the foreign corporation’s stock;
2. the profits or capital interest of a foreign partnership; or
3. holds more than 10% of the beneficial interest in a foreign trust (or is the trust grantor).
U.S. Tax Withholding Agents are required to report foreign account tax compliance to the U.S. Treasury Department. Publicly held corporations are exempt from the reporting requirement.
Foreign entities, who fail to report the required information will be required to withhold tax at the rate of 30% on payments made to U.S. Taxpayers.
IRS Audits for Wealthy on the Rise
In 2009, the IRS increased its audits of Taxpayers with $1 million income (and over):
1. $1M - $5M Up 45%
2008: 12,746
2009: 18,585
2. $5M - $10M Up 17%
2008: 1,784
2009: 2,090
3. $10M (or more) Up 9%
2008: 1,347
2009: 1,473
In 2009, the IRS created a new “Global High Wealth Industry Group” to examine tax-avoidance vehicles (e.g., sophisticated financial, business & investment vehicles for tax avoidance).
Under the 3/25/10 Healthcare and Education Reconciliation Act of 2010 (HR 4872) a new “investor tax”: “3.8% Medicare tax” on investment income: the lesser of:
1. Net Investment Income for the Tax Year.
2. Excess over $200,000, individual’s modified adjusted gross income.
In 2010, $1M + Earners Tax Risks:
1. 2010 (Forward) Increased Risk of Tax Audits.
2. Increased Taxes (3.8% Medicare Tax for these Investors with over $200,000 in adjusted gross income.
Please see: 4/4/10 Article from Investment News
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.
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