Articles Posted in FBAR Violations

Relief from penalties for failure to file Foreign Bank Account Reports (FBAR), TD F 90-22.1 for non-resident U.S. persons with offshore bank accounts was first announced by the IRS on June 26, 2012 with further guidance promised before the procedure’s September 1st effective date. On Friday Aug. 31, 2012 with minutes to spare, the IRS announced the new “Streamlined” Filing Compliance Procedures for Non-Resident, Non-Filer U.S. persons. Those who qualify will only have to file tax returns for three years (rather than eight under the Offshore Voluntary Disclosure Program (OVDP)), and no FBAR penalties, or other penalties will be imposed. They will have to fill out a questionnaire, and answer such loaded questions as “Did you know you had a Report of Foreign Bank and Financial Accounts (FBAR), Form TD F 90-22.1, filing requirement when you failed to file an FBAR?” and “If you used a tax professional, did you disclose the existence of the accounts/entities you hold outside your country of residence to your tax professional?”

Who Is Eligible?
To qualify the taxpayer:

• Must have lived outside the United States since Jan. 1, 2009;
• Cannot have filed a U.S. tax return during the same period; and
• Must present a “low level compliance risk.

How is Compliance Risk Determined?
The tax due for 2009, 2010, and 2011 must be less than $1,500 in each year. However, even if the tax due meets this low level if any of the following factors are present then the compliance risk rises, and the taxpayer may not be eligible to participate. The factors are:

• If any of the returns submitted through this program claim a refund;
• If there is material economic activity in the United States;
• If the taxpayer has not declared all of his/her income in his/her country of residence;
• If the taxpayer is under audit or investigation by the IRS;
• If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
• If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
• If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
• If there is U.S. source income; or
• If there are indications of “sophisticated tax planning or avoidance.”

Taxpayers who meet all of these requirements will be few and far between. For example, consider a U.S. citizen who has emigrated to Israel. Generally new Israeli residents are granted a 10 year exemption from taxes for any income including interest or dividends generated outside of Israel. It would therefore not be surprising if such an individual invested outside of Israel. Yet that person would be excluded from the new IRS streamlined program since they have accounts outside their country of residence.

The requirement that excludes someone from participation if they are claiming a refund seems punitive. Why should someone have to forego a legitimate refund just to be free of FBAR penalties?

Why should persons with offshore bank accounts who filed tax returns be treated worse than those who didn’t file any tax returns at all? For that matter why should someone with U.S. source income (perhaps social security or pension income) not be able to obtain relief?

Note that a person who became aware of the FBAR requirements for offshore bank account owners, and filed a timely and accurate return for 2010 or 2011 may be barred from participating in the program based upon the literal requirements.

Do You Need A Reason Not to Participate in the Streamlined Compliance Procedure?

According to the IRS:

• The new procedure provides no protection from the risk of criminal prosecution
• Once a submission is made if the IRS determines that the Streamlined Compliance Procedure is not appropriate, the taxpayer may not participate in the Offshore Voluntary Disclosure Program (OVDP)

For these reasons the Streamlined Compliance Procedure is extremely risky for taxpayers who meet the guidelines for the 2009 through 2011 period, but have substantial offshore compliance issues in prior years.

Once again tax attorneys will be working full time to guide their clients through another thicket of IRS rules which seem only to reinforce the notion that the IRS is not serious about providing FBAR relief to those taxpayers who legitimately lost their way.
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Willful failure to file a Form TD F 90-22.1, or Foreign Bank and Financial Accounts Report, more commonly known as an FBAR is a criminal violation of the Bank Secrecy Act. Luis A. Quintero, a former UBS Client, found that out first hand when he was sentenced recently to four months imprisonment.

In 2004, Quintero formed two corporations, each with an offshore bank account opened at UBS AG of Switzerland. By the end of 2006, the total aggregate balance in the two accounts was over $4 million. He then transferred approximately $2.4 million from the accounts to the accounts of U.S. corporations he controlled. Although Quintero knew he had to file an FBAR and had previously filed the Form TD F 90-22.1 relating to bank accounts in Mexico in the name of one of his U.S. companies, he decided against filing it.

As part of an agreement and in order to avoid prosecution for helping taxpayers commit tax fraud, UBS provided the American government with the identities of certain U.S. customers. It is not clear from the Department of Justice press release whether Quintero was one of the UBS customers whose names was turned over to the IRS.

The IRS requires a U.S. citizen with an offshore bank account containing an aggregate value of more than $ 10,000 to file the FBAR. Those who have not filed the Form TD F 90-22.1 in the past, but wish to do so to comply with tax laws may be eligible to participate in the Offshore Voluntary Disclosure Program (OVDP). By voluntarily disclosing Swiss or other foreign bank accounts, participants may be subject to lower penalties rather than all possible penalties were imposed after a tax audit by the IRS. On the other hand depending upon the situation many taxpayers may wish to take the risk of an IRS audit because the penalties could, with proper representation by a tax attorney, turn out to be lower than under OVDI.

In addition to the four months in prison, the court sentenced Quintero to three years of probation with 250 hours of community service and a $20,000 criminal fine. Quintero also paid $2 million in civil penalties for failing to file the FBAR. The penalty appears to be equal to 50% of the balance in his offshore accounts.
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Some FBAR (Foreign Bank Account Report) relief was announced on June 26th for offshore account holders who currently live outside of the U.S. The program will not take effect until September 1st, and the details have not yet been finalized. Taxpayers who qualify will file delinquent returns for the past three years, and FBARs for six years. Payment of any tax due, plus interest must be submitted at the same time.

Our tax attorneys see a big problem in this program because the IRS has stated that filing under this program provides no protection from possible criminal tax prosecution! All submissions will be reviewed by the IRS, but the degree of review will depend upon “level of compliance risk” as determined by the IRS. Those who are deemed to present low compliance risk will not have FBAR, tax fraud or other penalties asserted against them. However, those that are deemed to have a higher compliance risk will be subject to more thorough review, and possibly a full audit extended beyond the three year of tax returns that are filed. Of course with that tax audit may come full blown FBAR penalties, and no resort to the 27.5% ceiling available for 2012 Offshore Voluntary Disclosure Program(OVDP) filers. As regular readers of our tax problem attorney blog know maximum penalties can include willfulness penalties of up to 50% of the account balance, and civil fraud penalties of 75% of any tax due.

Compliance risk will be determined assessed based upon information provided on the returns filed, and “certain additional information” that will be required as part of the submission. According to the IRS website if there are no “high risk factors” and there is less than $1,500 in tax due in each of the three years then the taxpayer will be treated as low risk, and qualify for the non-assertion of penalties. Risk level will according to the IRS rise with the taxpayers ‘ income and assets, indications of “sophisticated tax planning” or tax avoidance, or if there is “material economic activity” in the U.S.

Interestingly the procedure appears to apply only to persons who did not file a tax return. Thus a person who at least filed a U.S. tax return, but failed to file FBARs, and who also did not report all offshore income would not be able to take advantage of this program.

There is no indication that the program will be retroactive. Therefore taxpayers who entered an earlier disclosure program and paid penalties of up to 25% on their offshore accounts are not entitled to a refund even though they would have qualified under the new program.

It may be that the IRS cures some of the apparent flaws before the program goes live. In any event, it means that a sophisticated analysis will need to be done to determine if one should wait until September 1, 2012 to enter the new program, or enter the 2012 Offshore Voluntary Disclosure Program immediately, or take some other action such as filing a quiet voluntary disclosure. What is increasingly clear is that no action is not an option.

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FBARs (Foreign Bank and Financial Accounts Report Form TD F 90-22.1) are due June 30th. If you or your clients have $10,000 or more in offshore financial accounts and are U.S. citizens, residents and/or U.S. based entities, use this form to report a financial interest in or signatory authority over foreign accounts. In recent years, the IRS has increased enforcement of this required disclosure, and penalties for failure to file the FBAR include hefty fines and in some cases jail time.

To ensure compliance, it is critical you complete the TDF 90-22.1 as soon as possible since, unlike other IRS documents, the FBAR form must be received (not just postmarked) by the Saturday, June 30th deadline. Normally under the tax law if documents are due on a weekend the due date rolls over until the following business day; however, those rules don’t apply to FBARs so it appears that it will be necessary to mail the FBAR via overnight delivery service on the 28th so it arrives by the 29th. That being said the IRS FBAR hotline has informally advised our tax attorneys that FBARs postmarked by the 29th will be considered as timely. Failure to file on time could mean large penalties, and no extensions can be requested.

Some individuals with foreign bank accounts might have skipped filing FBAR forms in the past. If that includes you or your clients, you may wish to consider the Offshore Voluntary Disclosure Initiative (OVDI), which was created to gain compliance from taxpayers, who wish to comply with tax laws regarding their offshore accounts. The IRS declared its offshore voluntary program a big success in 2009 and 2011. In 2009 alone, the IRS collected $3.4 billion.Those who willfully fail to file an FBAR are subject to penalties as high as 50 percent of the total balance of the account. Each year of non-compliance results in a separate violation and penalty, i.e. multiple 50% penalties are possible. Under that scenario penalties can actually equal 300% of the offshore account balances.

Through OVDI, some taxpayers may be eligible for penalties as low as five percent, although most will be stuck with a 27.5% penalty. In order to participate in the program, taxpayers must file all original and amended returns (including payment of back taxes and interest) for up to eight tax years. For more details see our article here.

If someone wants to obtain the benefits of the Offshore Voluntary Disclosure Initiative, he or she cannot simply make a “quiet disclosure,” meaning they cannot simply file the FBAR and amend other tax returns. Those individuals who make “quiet disclosures” risk being investigated, and subject to large civil FBAR penalties, but may be protected from criminal tax exposure.

However, every case is different, and only a complete investigation of all the facts by a qualified tax lawyer can help a taxpayer make the right choice.
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Lichtenstein tax authorities have notified Liechtensteinische Landesbank AG (LLB)’s U.S. clients with offshore accounts of at least $500,000 that their information is subject to being turned over to the IRS according to a report in Bloomberg.com. Apparently the IRS has made a so-called group request to LLB for these accounts to obtain the names of individuals it suspects of tax evasion, and FBAR (Foreign Bank Account Report) related crimes.

According to a spokesman for LLB quoted in the article, changes in Lichtenstein law allow the IRS to make group requests without providing the names of the specific individuals that the IRS is seeking. The spokesman also stated that in the Liechtenstein group request, U.S. authorities are also targeting lawyers, accountants, financial advisers, asset managers and those responsible for professional asset protection, who “conspired “with U.S. taxpayers to commit tax evasion, or other crimes. Apparently the IRS may be seeking information all the way back to 2001.

LLB is Lichtenstein’s second largest bank. Tax problems for offshore bank account holders in Lichtenstein date back to 2008 when information stolen from LGT Group was used by German authorities to prosecute tax fraud. The fallout extended to U.S. depositors at LGT who were investigated by the IRS. Since then the IRS has promoted several voluntary disclosure initiatives to attempt to convince U.S. persons who failed to file FBARs to settle up with the IRS. To date those programs have resulted in over 30,000 individuals making voluntary disclosures of the offshore bank accounts to the IRS. These programs have been accused by some tax lawyers as being too much stick, and not enough carrot.