The IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown. The Department of Justice said the IRS summons seeks records of FCIB’s United States correspondent account at Wells Fargo and that the summons will allow the IRS to identify US taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used FCIB’s Wells Fargo correspondent account.

It appears that the IRS investigation is based on the information obtained in the Offshore Voluntary Disclosure programs, which offered an amnesty for taxpayers who voluntarily confessed ownership of, and paid taxes and penalties on previously undisclosed offshore accounts. The disclosure program has generated responses from 129 customers at FirstCaribbean, opening the door for a further investigation into the bank’s records.

Steven T. Miller, acting commissioner of the IRS, said the investigations won’t end in the Caribbean. “Our work here shows our resolve to pursue these cases in all parts of the world,” he said.

Former IRS Attorneys of Holtz, Slavett & Drabkin are ready to assist taxpayers with issues related to foreign accounts. To schedule a consultations, please call us at (310) 550-6200.

GAO, however, said that according to its analysis, some taxpayers are making “quiet disclosures” to the IRS, reporting for the first time offshore accounts that could appear to the IRS as newly opened accounts, instead of voluntarily entering the amnesty program.    Taxpayers making so called “quiet disclosure” filings, would hope to avoid paying any delinquent taxes and penalties, unless otherwise audited.  In its analysis of tax filings from 2003 through 2008, GAO said it found “many more potential quiet disclosures than IRS detected.”  From 2007 through 2010, the IRS estimates taxpayers reporting foreign accounts nearly doubled to 516,000, GAO said.  It raised a concern that the IRS has not researched whether sharp increases in taxpayers reporting offshore accounts for the first time is due to efforts to circumvent monies owed, thereby missing opportunities to help ensure compliance. “Taxpayer attempts to circumvent taxes, interest, and penalties by not participating in an offshore program, but instead simply amending past returns or reporting on current returns previously unreported offshore accounts, result in lost revenues and undermine the programs’ effectiveness”, GAO concluded.

GAO recommended that IRS: (1) use offshore data to identify and educate taxpayers who might not be aware of their reporting requirements; (2) explore options for employing a methodology to more effectively detect and pursue quiet disclosures and implement the best option; and (3) analyze first-time offshore account reporting trends to identify possible attempts to circumvent monies owed and take action to help ensure compliance. IRS agreed with all of GAO’s recommendations.

This report illustrates potential risks of quiet disclosures and government’s intentions to continue fighting offshore tax evasion. Those taxpayers, who still have undisclosed foreign accounts, should consult with tax attorneys to discuss all the available options and evaluate risks of each course of action. Former IRS Attorneys of Holtz, Slavett & Drabkin, APLC, are available to answer your questions. You may contact us to schedule a consultation at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Certified Tax Specialist, Former IRS Attorney

The change of position appears to affect clients with the so called “back-to-back” loans, when account holders obtained loans secured by the secret bank accounts, and the borrowed funds were used in the United States without disclosing the source.  This fact situation is similar to the recently announced plea deal in United States v. Sperling.

In a plea deal with prosecutors, Zvi Sperling, an Israeli-born Los Angeles businessman, admitted to hiding $4 million in unreported corporate profits in an account at Israeli “Bank A”–an account he opened around 2001 and owned through a front Island of Nevis corporation. According to the statement of facts in his plea deal, he then tapped into that money through loans from Bank A’s Los Angeles office.

Gary M. Slavett, LL.M., J.D.

The Franchise Tax Board issued a Notice of Proposed Assessment to our client proposing a capital gain from the sale of real property (plus penalties).  While title to the real property was in the name of our client, our client merely held title for the benefit of a non-profit organization.  A protest was filed and the Franchise Tax Board (“FTB”) issued a Notice of Action denying our protest.  Despite the fact  that our client was holding the property as a nominee, the FTB argued that our client was responsible for the capital gains tax because our client was on title and signed all purchase and sale documents.   We filed an appeal with the State Board of Equalization.  After the parties filed briefs, a hearing was held in Culver City before the five elected members of the State Board of Equalization (“SBE”).  The members of the SBE, in a unanimous decision, held that our client was not liable for the capital gains tax and thus reversed the FTB’s assessment in full.  In addition to holding that our client did not owe any additional taxes to the FTB, the SBE further ruled that our client was entitled to an additional deduction and thus entitled to a refund from the FTB.

Former IRS Attorneys at Holtz, Slavett & Drabkin are prepared to answer your questions about Franchise Tax Board assessments and appeals before the State Board of Equalization.  You can reach us at (310) 550-6200.

The Inter-Government Agreement (IGA) is the latest in a series between the United States and other countries designed to carry out the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010.  In signing the pact, Switzerland joins Britain, Denmark, Ireland and Mexico as countries that have finished FATCA IGAs with the United States.

The U.S.-Swiss agreement requires Swiss banks to sign up directly with the U.S. Internal Revenue Service, while giving the banks a way to avoid violating Swiss financial secrecy laws.   The Swiss deal does not require Swiss banks to automatically give the IRS account-holder information if the U.S. client refuses to cooperate, however, the IRS can still get that information via Swiss government authorities. The Swiss pact excludes Swiss social security, pension funds and some insurers from FATCA.  The Swiss deal is not reciprocal, meaning the IRS will not provide Switzerland with information about Swiss citizens’ accounts in U.S. banks.

FATCA requires foreign financial institutions to tell the U.S. Internal Revenue Service about Americans’ offshore accounts worth more than $50,000. FATCA was enacted after a Swiss banking scandal showed U.S. taxpayers hid millions of dollars overseas.  FATCA imposes steep penalties beginning in 2014 on financial institutions that do not comply with the law. Banks and other financial institutions failing to comply could be frozen out of U.S. financial markets.

Luxembourg, Austria, Japan and Italy are believed to be working on separate IGAs with the United States.

According to the Government’s Indictment and forfeiture Complaint, Wegelin and at least two other Swiss banks used Wegelin’s Correspondent Account to covertly launder U.S. taxpayers’ funds from their undeclared accounts in Switzerland.  As stated in the papers filed with the district court, the IRS has reason to believe that these funds were transferred in a manner designed to reduce the risk of detection by U.S. authorities, so that the account holders could continue to avoid paying taxes due and owing to the IRS.

The Court granted the IRS permission to serve what is known as a “John Doe” summons on UBS. John Doe summonses are used by the government to obtain information about possible tax fraud by individuals whose identities are unknown. This John Doe summons directs UBS to produce records identifying U.S. taxpayers with accounts at Wegelin and other Swiss banks that used Wegelin’s Correspondent Account.

“Today’s summons is the latest step in our efforts to identify and prosecute U.S. taxpayers who think they can evade their legal responsibility to pay taxes by secreting their money away in anonymous offshore accounts at Wegelin and other banks,” Preet Bharara, U.S. District Attorney for the Southern District of New York, said in a statement.

As we discussed in many of our posts, federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. A willful failure to report a foreign account can result in a penalty of up to 50 percent of the amount in the account at the time of the violation.  Former IRS Attorneys of Holtz, Slavett & Drabkin, APLC are available to meet with you and answer your questions about foreign bank accounts and reporting requirements. To schedule a consultation, please call (310) 550-6200.

We are proud to announce that all three principles of Holtz, Slavett & Drabkin, APLC — David Holtz, Gary Slavett and Igor Drabkin — were named as 2013 Southern California Super Lawyers in Tax Law.  Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high-degree of peer recognition and professional achievement. The selection process is multi-phased and includes independent research, peer nominations and peer evaluations. Each year, only 5% of the lawyers in the state receive this honor.

Congratulations to our founding members on this recognition.

The 2012 OVDP was announced in January of 2012, encouraging taxpayers with undisclosed offshore (non-US) accounts to come forward and get into compliance. In comparison to prior offshore amnesty programs, the maximum penalty was raised to 27.5% of the highest account balance during the eight-year period preceding the disclosure.  One of the major complaints of the program was that penalty presumed willfulness. Many taxpayers and practitioners viewed the penalty as too harsh because willfulness, especially in the case of FBARs, is the government’s burden to prove. The 2012 OVDP attempted to address the criticism by providing taxpayers who have reasonable cause for their failure to file certain tax returns an opportunity to subsequently opt out of the civil settlement structure.  According to the FAQ announced by the IRS, opting out of the civil settlement structure does not affect the status of a taxpayer’s voluntary disclosure under Criminal Investigation’s Voluntary Disclosure Practice so long as the taxpayer is fully cooperative in the examination process, by providing all requested foreign records and submitting to interviews as requested, and as long as no new issues are uncovered that were previously not disclosed.

The NTA’s criticisms of IRS’s handling of offshore voluntary disclosures include the following:

Participants who “opt in—opt out” disadvantaged. Taxpayers who follow an “opt in—opt out” path in offshore voluntary disclosures (i.e. taxpayers who opt in to OVDP but subsequently opt out of the program’s civil penalty structure) are generally subject to extended resolution times over smaller amounts when compared to traditional offshore voluntary disclosure participants, the report said.

The average time to resolve OVDP submissions for taxpayers who elected to remain within the program’s civil settlement structure was about 300 days. For participants who opted for the path envisaged under FAQ 51.1, however, the average resolution time (if the case has been closed at all) was approximately 550 days.

Therefore, the OVDP process burdens taxpayers eligible for a reasonable cause exception (e.g. more compliant taxpayers) by processing participants not eligible for the exception (e.g. presumably less compliant taxpayers) through the program more quickly, the report said.

Participants eligible for FAQ 51.1 relief usually involved smaller amounts (compared to participants who did not qualify for such relief), usually averaging about $15,000. The prolonged time for settlement generally meant that such participants incurred significantly higher representation fees compared to those who did not seek to opt out of the civil penalty structure.

IRS will spend money to punish but not educate FBAR violators. The NTA stated that IRS was not doing enough to educate U.S. citizens abroad about their FBAR filing obligations. The report noted that IRS had not conducted an in-person presentation about the FBAR filing requirements in foreign countries, even if the foreign country had a tax attache and a significant number of U.S. persons with filing requirements. “This approach sends the message that IRS will spend resources to punish, but not to educate, U.S. citizens abroad,” the NTA said.

Additionally, the report found that IRS had discontinued an initiative to send letters to taxpayers who had filed an FBAR in a prior year but not in the current year to remind them that they may still have a filing requirement (FBAR Stop Filer Program). IRS also halted its FBAR Compliance Initiative Program that sought to educate individuals with offshore accounts who are most likely to have FBAR violations.

The NTA said that despite the fact that IRS has information regarding potential FBAR non-filers at its disposal, including from new Form 8939, it is unlikely that it will expand its self-correction options available to benign actors due to limited resources.

The NTA recommended that IRS send “soft” notices to educate individuals with foreign accounts about their FBAR and Form 8938 reporting requirements and encourage them to self-correct their inadvertent violations.

In response to criticisms, IRS said that it has educated persons with foreign accounts about their FBAR and Form 8938 reporting requirements by posting a comparison chart on IRS.gov that distinguishes between the requirements for the two forms. IRS said the chart had been publicized abroad through IRS Twitter account, overseas IRS tax attaches, and IRS National Public Liason’s practitioner email distribution list.

Contradictory treatment of Canadian RRSPs. The NTA said that persons with Canadian retirement accounts (commonly referred to as registered retirement savings plans or RRSPs) faced additional compliance burdens as IRS issued conflicting guidance about how to make a late election to exclude undistributed income from those plans.

Under Rev Proc 2002-23, 2002-1 CB 744, if a taxpayer does not make an election to exclude undistributed income from an RRSP by attaching it to a timely-filed U.S. income tax return, the election will be considered late. To rectify the situation, these taxpayers are required to obtain a private letter ruling to make a late election. According to the report, such rulings can cost anywhere between $728 to $4,500 and take as long as 149 days, on average, to process. The NTA noted, however, that IRM 21.5.3.4.9.1 (August 4, 2009) indicated that late elections would be processed without a ruling.

Under the 2012 OVDP, FAQ#54, IRS provided entirely different instructions for making the late election. Under FAQ #54, a taxpayer is required to provide a statement requesting an extension of time to make an election to defer income tax; Forms 8891 for each of the tax years and type of plan covered under the voluntary disclosure; and a dated statement signed by the taxpayer under penalties of perjury describing events that led to the failure to make the election and events that led to the discovery of the failure.

The NTA also suggested that IRS clarify how beneficiaries of Canadian retirement plans can file late or amended returns that elect to exclude undistributed income from those plans by issuing formal guidance to consolidate the seemingly inconsistent guidance.

Israeli Bank Leumi is pushing US clients to disclose tax information to US authorities.  Leumi is encouraging US clients to enter into the IRS Offshore Voluntary Disclosure Program, as the crackdown on off shore accounts expands to Israel.

The Offshore Voluntary Disclosure Program’s purpose is to give US citizens with previously undisclosed offshore accounts and income an opportunity to come clean. If US citizens do enter into the program and comply with all the requirements specified by the IRS, then they may receive in return a promise of no prosecution and “possibly” reduced fines and penalties.  Since 2009, over 38,000 US citizens with offshore accounts and undisclosed income have taken responsibility and enrolled in the Voluntary Disclosure Program.  The IRS has recovered approximately $5.5 billion as a result of the Offshore Voluntary Disclosure Programs.

Bank Leumi, apparently under pressure from the US, stated that they would help their US clients in this process, with assistance in gathering information and documents that are in the banks possession and are required by the Offshore Voluntary Disclosure Program.  They have also setup a hotline to assist with various questions.  Bank Leumi and two other Israeli banks, Bank Hapoalim and Mizrahi-Tefahot, are in the crossfires and are currently under investigation by the U.S. Justice Department.  The expansion of the international banks’ compliance and their encouragement to their clients to participate in the IRS Voluntary Disclosure is also attributable to the upcoming full implementation of FATCA (Foreign Account Tax Compliance Act)  in 2014, and a requirement is that foreign institutions assist US clients in compliance with US tax laws.

Account holders are feeling the pressure from banks to provide Forms W-9 with the identity information because FATCA requires foreign financial institutions to collect and turn over data on US clients with accounts of at least $50,000, or to withhold portions of client accounts and send the money to the IRS.   In March 2012, Bank Leumi requested that clients submit Forms W-9, sign declarations stating that accounts complied with US tax law, and include in the declarations that they “explicitly waive banking secrecy/consent to such disclosure.”.

Clients with foreign bank accounts, including accounts in Israel, are encouraged to see a competent tax attorney to discuss possible options and solutions.  Our Former IRS Attorneys are available to consult with you regarding offshore accounts, Offshore Voluntary Disclosure Program and FATCA requirements.  Please contact us at (310) 550-6200 to schedule a consultation.