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What the non-tax lawyer should know about tax procedure.
Jeffrey B. Kahn, Esq. - Board Certified Tax Lawyer
Law Offices of Jeffrey B. Kahn, P.C.
Walnut Creek - San Francisco - San Jose - Los Angeles - San Diego - Orange County
Jeffrey B. Kahn Is the principal of the Law Offices Of Jeffrey B. Kahn, P.C. headquartered in Walnut Creek and with four offices in the Bay Area and seven offices in Southern California. He is a Member of the California and Florida Bars and is Board Certified in Tax Law by the California and Florida Bars who practices in the areas of tax and estate planning, resolution of tax controversies and general business transactions. He earned his LL.M. degree in Taxation and J.D. degree from the University of Miami School of Law, and his B.B.A. degree from Florida International University. He has taught classes in the areas of taxation and estate planning as an adjunct Professor for Nova Southeastern University School of Business and Entrepreneurship and he holds a Florida Certified Public Accountant license.
I. Voluntary Disclosure.
A. General Principles.
1. The Voluntary Disclosure Practice is longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice. Once IRS Criminal Investigation has determined preliminary acceptance into the voluntary disclosure program, the case is referred to the civil side of IRS for examination and resolution of taxes and penalties.
2. The Internal Revenue Manual ("IRM") which establishes policies and guidelines for IRS agents nationwide, makes it plain that the disclosure must be both voluntary and timely before the IRS will consider it favorably (IRM section 22.214.171.124). In addition, the taxpayer must show a willingness to cooperate with the IRS in determining his or her correct tax liability and make good-faith arrangements to pay all outstanding taxes, interest and applicable penalties. The taxpayer doe snot have to file complete returns and make full payments at the time of the voluntary disclosure; he or she has to make the IRS comfortable that both will happen.
3. The disclosure must be made before the taxpayer has come to the attention of the IRS through independent means. If the taxpayer is the subject of a civil or criminal investigation by the IRS - even if the taxpayer does not know it - it is too late to make a voluntary disclosure to the IRS. If the taxpayer's tax issue have been brought to the attention of the IRS through a third party, such as an informer or the media, it is too late. This category of "informants" includes the taxpayer’s bank. If the taxpayer deals with large amounts of currency the bank may well have a filed Currency Transaction Reports or Suspicious Activity Reports with the IRS. The IRS considers these reports on a par with informants. Conversely, if the IRS is examining a widely promoted scheme in which the taxpayer participated, but the taxpayer himself or herself has not yet come to the attention of the IRS, the disclosure still may be timely.
B. Undisclosed Foreign Bank Accounts
1. The Bank Secrecy Act requires that a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.
2. The FBAR covers a calendar year and must be filed no later than June 30th of the following year and includes any interest a U.S. person has in:
- Offshore bank accounts
- Offshore mutual funds
-Offshore hedge funds
-Offshore variable universal life insurance policies
- Offshore variable annuities a/k/a Swiss Annuities
- Debit card and prepaid credit card offshore accounts
3. The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government includes a fine of not more than $500,00 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.
4. The Department of Justice started pressuring Swiss Banks including UBS and Credit Suisse to reveal bank account information on their account holders who are U.S. citizens or U.S. residents. Information from the Swiss Banks and other European Banks has now been flowing to IRS and is being used by IRS to uncover taxpayers who have not disclosed foreign income and foreign accounts. The IRS is now aggressively supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, with a new emphasis in Asia, India, Israel and the Middle East pressuring banks like HSBC and others to reveal U.S. account holder information.
5. The IRS has established a Special Unit to disseminate bank information received from foreign banks and compare it to the forms and information reported by U.S. taxpayers on their tax returns. In addition, this Unit is able to review previously filed FBAR’s to determine whether all income was reported on each income tax return. Starting in 2011, taxpayers who have foreign assets will be required to disclose those assets with the filing of their Federal Individual Income Tax Return. This reporting will serve as an additional tool for this Unit.
6. Following the mandate of the Foreign Account Tax Compliance Act (FATCA), US tax authorities and foreign governments have entered into dozens of agreements known as Intergovernmental Agreement (IGA) on the sharing of financial data about citizens. FATCA, made law in 2010 as part of a crackdown on tax dodging by wealthy Americans, requires foreign financial institutions to disclose to the IRS more about Americans’ Offshore accounts. Banks and other institutions are affected by the law, which Treasury is implementing through a series of bilateral IGA’s. Completed or interim pacts are in place with just about all the foreign countries that have financial relationships with the U.S. If a foreign firm falls to comply with FATCA, it could be frozen out of U.S. capital markets.
7. On January 9, 2012 the IRS announced the terms of its Third Voluntary Disclosure Initiative (the “Third Initiative”), also known as the Third IRS Offshore Voluntary Disclosure Program.
The third Initiative requires that taxpayers:
- File 8 years of back tax returns reflecting unreported foreign source income
- Calculate interest each year on unpaid tax;
- Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
- Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.
In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue:
- Charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and
- Other fraud and filing penalties, including IRC Sec. 663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and file a TD F 90-221, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or %50 of the foreign account balance).
8. Additionally, starting with the 2011 Tax Return Filing Season: U.S. taxpayers who have an interest in foreign assets with an aggregate value exceeding $50,000 must include new Form 8938 (Statement of Specified Foreign Financial Assets) with their Federal income tax return . This reporting will serve as an additional tool for the IRS to determine prior noncompliance of taxpayers who have undisclosed foreign accounts or unreported foreign income. The new Form 8928 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foregin Bank and Financial Accounts). Failing to file after IRS notification. A 40% penalty on any understatement of tax attribute to no-disclosed assets can also be imposed.
9. New Streamlined Procedures Announced June 18, 2014. Qualified taxpayers who can demonstrate they were non-willful in failing to report worldwide income and disclosing foreign accounts would be subject to a 5% penalty based upon the highest balance of the account in the past six years and if the taxpayer was not a U.S. resident in at least one of the last three years, there is no penalty imposed. For a taxpayer to qualify for this new procedure, it does not matter how much there is unreported income and undisclosed assets, but the taxpayer must show that he or she did know they had to report worldwide income and disclose foreign accounts AND they should not have known they had to report worldwide income and disclose foreign accounts.