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Following the comments made last week by the U.S. Ambassador to Canada David Jacobson, the Internal Revenue Service posted on its website Information for U.S. Citizens or Dual Citizens Residing Outside the U.S. The fact sheet largely confirms that no penalties will be imposed on late returns where no tax is due and failure to file required bank account information will also be forgiven for “reasonable cause.”

It should be noted that the IRS does not grant a blank forgiveness of the penalties, but discusses what may constitute “reasonable cause”.

With respect to a failure to file or failure to pay, reasonable cause is based on a consideration of all the facts and circumstances.  Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them.  In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

• The reasons given for not meeting your tax obligations;
• Your compliance history;
• The length of time between your failure to meet your tax obligations and your subsequent compliance; and
• Circumstances beyond your control.

Reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances.  Among the facts and circumstances that will be considered are:

• Your education;
• Whether you have previously been subject to the tax;
• Whether you have been penalized before;
• Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
• The level of complexity of a tax or compliance issue.

You may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement.

If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty.  Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation.  See 31 U.S.C. § 5321(a)(5).  Note that this penalty is applicable only in cases in which there is willful intent to avoid filing.  Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.  There is no penalty in the case of a violation that IRS determines was due to reasonable cause.

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account.  There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause.  No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.  As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause.  No single factor is determinative.

Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter.  See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).  The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate.  Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.

If you have questions about FBARs and reporting obligations of US taxpayers, Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you. We can be reached at (310) 550-6200.

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Gary M. Slavett, J.D., LL.M., Former IRS Attorney

On August 25, 2009, the IRS updated its FAQs to the Offshore Voluntary Disclosure Program (“VDP”) to include additional information regarding UBS Account holders and their eligibility to participate in the offshore VDP.

As part of the agreement with the Switzerland government and UBS announced by the IRS and Department of Justice on August 19, 2009, UBS will be sending notices to account holders indicating that their information may be provided to the IRS under the agreement.  The question is whether this notification by UBS to the account holder will disqualify the account holder from the offshore VDP.  Recently added IRS FAQ 52 provides that if an account holder receives notification from UBS before September 23^rd, this notification will not by itself disqualify the account holder from making a voluntary disclosure under the offshore VDP by the September 23^rd deadline.   The FAQ warns that many of these notices will be not be sent by UBS to account holders until after September 23^rd, and that the September 23^rd offshore VDP deadline applies to all UBS account holders even if they have not received a notice by that date.

Former IRS Attorneys at Holtz, Slavett & Drabkin are ready to answer your questions and can be contact at (310) 550-6200.

Author:  Gary M. Slavett J.D., LL.M., Former IRS Attorney

Igor S. Drabkin, J.D., Former IRS Attorney

The United States government has been pressing UBS AG, one of the Switzerland’s largest banks, to release the names of a reported 52,000 wealthy Americans with accounts at the bank. Federal authorities suspect that some U.S. taxpayers may be using accounts at UBS to evade taxes. A civil case brought by the United States against UBS has been pending in the South District of Florida.  According to various press reports in the United States and Switzerland, it appears now that the Swiss banking powerhouse has reached a settlement with the U.S. in which data regarding approximately 5,000 American clients of the bank would be handed over to the federal authorities. These UBS clients would likely include the largest accounts.  A Justice Department lawyer with DOJ’s Tax Division, Stuart D. Gibson, announced the deal was agreed to on July 31 at a telephonic status conference. Final details of the settlement must be agreed to by Aug. 7 in order to head off a trial now scheduled to begin on Aug. 10. Does it meant that this is the only names that will be released or just a first step in the process of disclosing additional names and information? At this point, we just can say that time will tell, and that taxpayer with offshore bank accounts may want to consult with a tax attorney.

Former IRS Attorneys of Holtz, Slavett & Drabkin are ready to answer your questions and can be reached at (310) 550-6200.

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

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.

According to court documents and statements made in court, on or about Oct. 14, 2008, Chernick electronically filed a U.S. Individual Income Tax Return Form 1040 for tax year 2007, which failed to report that he had an interest in or a signature authority over a financial account at UBS AG, one of Switzerland’s largest bank. He also failed to report income earned on the UBS account. The UBS account was opened in the name of Simba International Ltd., a nominee Hong Kong corporation.

According to court documents, beginning in the mid-1970’s, the defendant set up a Hong Kong corporation and opened offshore bank accounts in order to conceal from the IRS commissions paid to the defendant for toy sales. In total, Chernick was the beneficial owner of approximately $8 million in offshore assets which were maintained in accounts in the name of nominee entities, including Simba, at UBS and other Swiss banks.

According to court documents, in 2000, UBS entered into an agreement to begin providing the IRS with certain information relating to accounts in which the beneficial owner was a U.S. citizen. Around the same time, one of Chernick’s Swiss bankers left UBS for a smaller, less known Swiss bank. This banker told Chernick he had left UBS, in part, because the smaller bank would not be subject to Washington’s scrutiny and could not be pressured by the U.S. government to disclose certain information to American authorities. Following this banker’s advice, Chernick agreed to invest some of his assets with the smaller Swiss bank.

According to court documents, from 2002 through 2008, Chernick discussed his offshore accounts with this former UBS banker and other Swiss financial service providers. These meetings took place in the United States at various locations, including hotels in New York City. During these meetings, Chernick, the Swiss bankers and Swiss financial service providers would discuss Chernick’s investments held in his offshore accounts, as well as the payment of fees for banking services rendered by Hong Kong and Swiss financial service providers. In July 2008, despite Chernick’s concerns about the ongoing investigation into the activities of UBS, a Swiss financial service provider convinced Chernick not to disclose his offshore accounts, not to file amended returns, and not to pay to the IRS any additional taxes that were due and owing.

According to court documents, in order to have access to the millions of dollars Chernick concealed offshore, he utilized credit cards linked to his offshore Swiss bank accounts which he used to make large purchases while traveling abroad. Additionally, with the assistance of Swiss bankers and other financial service providers, Chernick set up a sham $700,000 loan between Simba and a second Hong Kong entity in order to repatriate funds into the United States to purchase property adjacent to his home in New York.

“Americans who have concealed assets offshore have until September 23 to voluntarily come clean with the IRS and take advantage of the reduced penalties connected with the current offshore initiative,” said John DiCicco, Acting Assistant Attorney General for the Tax Division. “Failure to come forward and to disclose offshore assets exposes these Americans to increased penalties and possible criminal prosecution.”

Judge Cohn scheduled sentencing for Oct. 30, 2009. Chernick faces a maximum sentence of three years in prison.

“As the investigation into offshore tax evasion continues, the United States will continue to vigorously pursue new leads and evidence as they are uncovered,” said Jeffrey H. Sloman, Acting U.S. Attorney for the Southern District of Florida. “Those who enable and commit tax evasion risk substantial monetary penalties and incarceration.”

In February 2009, UBS entered into a deferred prosecution agreement in which the bank admitted helping U.S. taxpayers hide accounts from the IRS. As part of the agreement, UBS provided the U.S. government with the identities of, and account information for, certain U.S. customers of UBS’s cross-border business.

“This is an important victory for America’s taxpayers who play by the rules and have no tolerance for those who shirk their tax responsibilities. Today’s action is also part of a much larger and coordinated effort by the Administration to aggressively find and crack down on tax evaders hiding their wealth overseas. For those still hiding in this shadowy world, it is time to come in and get right with your government or face stiff criminal and financial penalties,” said IRS Commissioner Doug Shulman.

In June 2009, UBS client Steven Michael Rubinstein, a Boca Raton accountant, pleaded guilty to filing a false tax return. In April 2009, another UBS client, Robert Moran, a Ft. Lauderdale yacht broker, pleaded guilty to filing a false tax return.

Acting Assistant Attorney General DiCicco and Acting U.S. Attorney Sloman commended the investigative efforts of the IRS agents involved in this case. The prosecution is being handled by Senior Litigation Counsel Kevin M. Downing and Trial Attorney Michael P. Ben’Ary of the Tax Division, and Assistant U.S. Attorney Jeffrey A. Neiman.

U.S. citizens who have an interest in, or signature or other authority over, a financial account in a foreign country with assets in excess of $10,000 are required to disclose the existence of such account on Schedule B, Part III of their individual income tax return. Additionally, United States citizens much file a Report of Foreign Bank and Financial Accounts, or F-Bar, with the United States Treasury, disclosing any financial account in a foreign country with assets in excess of $10,000 for which they have a financial interest in or signature authority, or other authority over.

Posted By: Gary M. Slavett, J.D., LL.M., Former IRS Attorney

If you have any questions, please call (310) 550-6200.