Tuesday, January 31, 2012

FATCA Compliance (Notice 2011-53) and QIs

Qualified Intermediaries that need to renew their QI agreements during the period January to June 2012 were granted a postponement under Notice 2011-53 to accomplish their registration as Participating Foreign Financial Institutions (PFFI) for compliance with the Foreign Asset Tax Compliance Act.

QI’s must register and receive a QI/PFFI agreement in order to retain their QI status.

The “What’s New” section of the QI home page contains Notice 2011-53 and QI’s should pay particular attention to Parts II and IV of the Notice. Once the registration portal is online all Qualified Intermediaries, Withholding Foreign Partnerships and Withholding Foreign Trusts must register on the portal and receive a PFFI agreement to continue in good standing.

Puerto Rico Offers Income Tax Holiday to New Resident Investors

Puerto Rico recently approved Legislation, which grants substantial income tax benefits to individual investors not previously resident of Puerto Rico.

These individuals can benefit from total income tax exemption through year 2035 on their worldwide income consisting of interest and dividends, including dividends from qualifying registered investment companies, and interest, finance charges, dividends and partnership profits from entities under the Puerto Rico International Banking Center Act.

In addition, long-term appreciation in the value of securities occurring prior to establishing Puerto Rico residency, if recognized after ten years of Puerto Rico residency and before January 1, 2036, is subject to a five percent tax. Moreover, long-term appreciation in the value of securities occurring after establishing Puerto Rico residency is totally exempt from tax, if recognized before January 1, 2036.

This only applies to an individual who is domiciled in Puerto Rico, who has been present in Puerto Rico for a period of 183 days during the calendar year and who has not been resident of Puerto Rico for the last fifteen years and become resident no later than December 31, 2035.

Friday, January 27, 2012

Adviser Convicted of Using Fake Financial Instruments to Pay Taxes

A Massachusetts financial adviser who allegedly submitted more than $2.2 million in fake financial instruments called “bills of exchange” and checks drawn on a closed bank account to pay his tax bills is convicted by a jury in federal court on 17 counts of tax crimes and contempt.

The DOJ reported on their website January 25,2012 that a jury convicted Attleboro, Mass., licensed stockbroker, insurance agent and financial advisor Kevin P. Mahoney today on tax and contempt of court charges, the Justice Department and Internal Revenue Service (IRS) announced. Trial began on Jan. 23, 2012, before U.S. District Judge Joseph Tauro, sitting in Boston. Mahoney was charged with one count of corruptly endeavoring to obstruct the administration of the Internal Revenue laws, eight counts of contempt of court and eight counts of filing false tax returns. He was convicted of all counts.

The evidence at trial showed that Mahoney had failed to pay all of his taxes for the years 1996 through 2001, leading the IRS to assess Mahoney for taxes, interest and penalties for some of those years. Mahoney had attempted to pay these tax-related debts by submitting to the IRS more than $2.2 million in fake financial instruments called Bills of Exchange and checks drawn on a closed bank account.

In addition, after filing for bankruptcy, Mahoney caused a worthless promissory note made by another individual to be submitted to the IRS as purported payment for approximately $805,000 in taxes that Mahoney owed to the IRS.

Just when I thought that I had heard it all?

IRS Doubles Threshold for Automatic Installment Payment Plans!

The IRS released SBSE Memorandum (SBSE-05-0112-013), Streamlined Installment Agreements (IA), on January 20, 2012. It provides interim guidance memorandum and is issued to Collection Field function employees to implement policy changes to Streamlined Installment Agreements. These changes are effective immediately and will be placed into the next revisions of the IRMs 5.14.5 and 5.14.10.

The primary changes to the Streamlined IA criteria are:
·       The dollar threshold increases from $25,000 to $50,000 aggregate unpaid balance of assessment(SUMRY balance); and,

·       The timeframe to full pay increases from 60 months to 72 months.

Based on these new criteria, when working accounts where the aggregate unpaid balance of assessment (SUMRY balance) is $25,000 or less, the ONLY criterion that changes is that the taxpayer now has 72 months instead of 60 months to full pay.

·        All of the other criteria remain the same:

o   CSED protected

o   Type of Entity


Out of Business BMF

BMF Income Tax ONLY (Form 1120)

o   No lien determination required

o   No managerial approval required

o   No CIS required

However, when working accounts where the aggregate unpaid balance of assessment (SUMRY balance) is $25,001 - $50,000, the streamlined IA criteria become more specific.

The criteria for these accounts are:

o   Payable within 72 months

o   CSED protected

o   No lien determination or managerial approval required

        Type of Entity


        Out of Business Sole- Proprietors

o   Agreement must be established as a Direct Debit Installment Agreement (DDIA); and

o   Ability to pay verified by securing a Collection Information Statement (CIS) per IRM and IRM 5.15.1 or use of the Streamlined IA Calculator (SLIAC).

Streamlined IAs may not be granted where the first payment on the agreement is a lump sum payment that is made to pay down the balance to meet the $50,000 or less aggregate unpaid balance of assessment (SUMRY balance) threshold.
Taxpayers must meet the $50,000 aggregate unpaid balance of assessment (SUMRY balance) threshold at the time the Streamlined IA is granted. However, for a Streamlined IA, taxpayers with a liability greater than $50,000 can be considered if they pay down the liability to $50,000 or less prior to the agreement being granted.

If you have IRS tax liabilities of $50,000 or less and would like an Installment Payment Plan contact us for a FREE confidential consultation regarding your options please call Marini & Associates, P.A. at 888-8-TAXAID or go to our website www.TaxLaw.ms.

Thursday, January 26, 2012

Swiss Bank Clariden Leu to Turn in Its U.S. Clients

 Switzerland's oldest private bank Clariden Leu has informed some of its U.S. clients that it has been ordered to turn over their names, and offshore bank account information to the IRS.
Clariden Leu posted a notice on its website dated Nov. 29, 2011 to that effect.

This is bad news for U.S. offshore account owners who have not previously made a voluntary disclosure to the IRS. Such individuals run the risk of the IRS filing criminal tax fraud charges against them, or criminal charges related to willful FBAR violations. Alternatively, only civil tax fraud or other penalties may be involved, but the FBAR penalties alone could far exceed the balances in the offshore accounts.

The notice refers to a U.S. treaty request apparently covering U.S. beneficial owners of beneficial accounts at Credit Suisse AG, Neue Aargauer Bank AG, and Clariden Leu.

In November Credit Suisse announced that it is in the process of integrating Clariden Leu's operations into Credit Suisse. The treaty request appears to be limited to U.S. account holders who hold their accounts through "domiciliary companies."

The notice also points out that although the account holders have appeal rights to the SFTA (Swiss Federal Tax Authority) attempts to block the turnover of information to the IRS may require compliance with 18 USC Section 3506. That section provides that:
"...any national or resident of the United States who submits, or causes to be submitted, a pleading or other document to a court or other authority in a foreign country in opposition to an official request for evidence of an offense shall serve such pleading or other document on the Attorney General at the time such pleading or other document is submitted."
The notice correctly observes that anyone in this situation should consult with a qualified attorney concerning any obligations under Section 3506.

If you have undisclosed offshore financial accounts, and would like a FREE confidential consultation regarding your options please call Marini & Associates, P.A. at 888-8-TAXAID or go to our website www.TaxLaw.ms.

Swiss deal with United States?

"We hope to conclude the negotiations in 2012," Eveline Widmer-Schlumpf journalists after talks with U.S. Treasury Secretary Timothy Geithner at the World Economic Forum.

Widmer-Schlumpf said Switzerland was already discussing possible fines its banking industry will have to secure a global civil settlement with U.S. authorities.

It is also trying to get the U.S. Department of Justice to drop criminal probes of 11 banks, including Credit Suisse and Julius Baer.

White House Tax Plan Designed to Keep Companies in U.S.

A White House proposal that would require U.S. multinational corporations to pay a minimum tax on their overseas profits is designed to make the corporate system fairer and discourage companies from moving to lower-tax jurisdictions.

The new tax would be designed to prevent other countries from attracting American businesses through low tax rates and the savings would be invested in cutting taxes in the United States, according to a fact sheet released by the White House.

The plan also will include a revenue-neutral package of measures that officials say will support manufacturing while discouraging outsourcing and encouraging“insourcing.”

The provisions include:

1.     Ending the tax deduction for moving expenses for companies that move overseas 
2.     Support to cover moving expenses for companies that close production overseas and bring jobs back to the United States
3.     Reinstating the expired Section 48C Advanced Energy Manufacturing Tax Credit
4.     Closing a loophole that allows companies to shift profits overseas (raises $23 billion): Corporations right now can abuse the tax system by inappropriately shifting profits overseas from intangible property created in the United States.
5.     Making companies pay a minimum tax for profits and jobs overseas through eliminating tax incentives to ship jobs offshore by ensuring that all American companies pay a minimum tax on their overseas profits. (possibly a minimum tax on foreign Trade or Business Income?) and
6.     Cracking down on overseas tax avoidance and loopholes, includes signing into law the Foreign Account Tax Compliance Act (FATCA), which targets tax evasion by U.S. citizens holding investments in foreign accounts, as well as measures to crack down on abuse of foreign tax credits through games that allowed multinational companies to inappropriately reduce the amount of taxes they paid here at home.

For a text of the fact sheet released by the White House go to BNA: http://op.bna.com/dt.nsf/id/emcy-8qupfa.

Wednesday, January 25, 2012

Ex-bank employee fined $25,000 for SAR disclosure

On December 15, 2011, the Financial Crimes Enforcement Network (“FinCEN”) assessed a $25,000 civil money penalty against a bank employee for unlawfully revealing the existence of a Suspicious Activity Report (“SAR”) to the subject of the SAR (“CMP”). FinCEN determined that the bank employee violated the Bank Secrecy Act (BSA) and its implementing regulations by willfully disclosing the existence of a SAR to a person involved in the reported transaction.

The CMP reinforces the strict obligation to maintain the confidentiality of SARs as well as any information that would reveal the existence of a SAR. Specifically, FinCEN stated that “all employees, agents, and individuals who are privy to the information contained in the SAR should be aware of-and held to- the obligation to maintain confidentiality with respect to such information. This obligation extends beyond the SAR itself, to any information that would reveal the SAR’s existence.” In addition, the CMP highlighted that the unauthorized disclosure of a SAR may also result in criminal penalties.

Tuesday, January 24, 2012

How Much Taxpayer Information is Currently Being Exchanged?

PALO ALTO—U.S. participation in exchange of information agreements does not mean that the Internal Revenue Service automatically releases taxpayer information to any nation that requests it, Douglas O'Donnell, IRS assistant deputy commissioner (International), said Jan. 20.

“Every country that's on the receiving end of a specific request is paying very close attention to the narrative of the story that is being told by the requesting jurisdiction,” he told attendees at the 2012 Pacific Rim Tax Institute. That way, he said, countries “know whether they have met the standard to request the information.”

Since the Group of 20 launched its global initiative in 2009 to safeguard the international financial system through improved transparency, more than 700 additional EOI agreements have been signed and 81 nations—including the United States—have undergone peer reviews, O'Donnell said.

On Friday, October 7, 2011 WASHINGTON—The U.S. Senate Permanent Subcommittee on Investigations released tax data in a report it commissioned from the U.S. Government Accountability Office (GAO) disclosing a mixed record on the use of tax treaties to combat offshore tax abuse.

“The good news in the GAO report is that the IRS has set up automatic information exchange arrangements with 25 countries and is getting a stream of 2.1 million data items per year on U.S. taxpayers with offshore income. The bad news is that, aside from the automatic information, the IRS initiates only a couple hundred specific requests for taxpayer information per year from other countries.

143 Agreements with 90 Countries. The United States had tax treaties, tax information exchange agreements (TIEAs), or mutual legal assistance treaties (MLATs) that include tax matters, with 90 foreign jurisdictions. Of those jurisdictions, 37 are in Europe; 18 in the Asia-Pacific region; 16 in the Caribbean; 12 in North or South America; and 7 in Africa or the Middle East. Because the United States has more than one type of agreement with some jurisdictions, GAO identified a total of 143 agreements authorizing tax information exchanges.

Automatic Data Exchanges. Tax information exchange partners may choose to provide information to each other on a regular or routine basis, through what is referred to as an automatic exchange of information. The GAO report found that in 2010 alone, as a result of automatic data exchange arrangements with 25 foreign jurisdictions, the IRS received about 2.1 million data items from those countries, while providing about 2.5 million data items to them. Automatic information exchanges typically provide data on wages, interest, dividends, or other forms of income paid to persons from a specified country.

Specific Data Requests. One-time only tax information requests made by either the IRS to another country, referred to as outgoing requests, or by a foreign country to the IRS, referred to as incoming requests. The number of these outgoing and incoming requests was relatively small compared to the number of data exchanges taking place on an automated basis. Over the five year period from 2006 to 2010, GAO found that the IRS initiated a total of about 900 tax information requests to other countries, ranging from a low of 165 to a high of 236 requests made in a single year. Each request can refer to one or multiple taxpayers. GAO’s figures indicate that, on average over the five years, the IRS sent less than one specific request for taxpayer information per day to a foreign country.

During the same five-year period, outside of the automated process, foreign jurisdictions made a total of about 4,200 specific tax information requests to the IRS, resulting in more than four times as many incoming as outgoing requests. These figures indicate that, on average over the five-year period, the 90 jurisdictions collectively made about 840 requests per year, or less than 3 requests per day to the United States.

Of the 900 outgoing requests and 4,200 incoming requests, 711 involved a single foreign jurisdiction, which was not named in the report due to IRS confidentiality rules. The request activity was concentrated among a small group of countries, with the ten most active countries making roughly 68% of the outgoing and incoming requests. The ten countries were also not named due to IRS confidentiality rules.

Spontaneous Tax Information Exchanges. Foreign jurisdictions made about 300 spontaneous disclosures of taxpayer information to the IRS per year, meaning the information was provided outside of any automatic or specific request process. The IRS made about 10 spontaneous disclosures of taxpayer information per year to other countries. GAO stated those numbers fluctuated widely by year.

Responding to Requests. Most requests took between 50 and 200 days to complete, although some took much less time and others much longer. On average, the IRS was 17% faster than other countries in completing requests.

Corporate records, tax return data, bank records, public records, and third-party interviews were the most frequent types of information requested.

Taxpayer Names. As a general rule, the IRS and its tax information exchange partners do not make or respond to information requests lacking specific taxpayer names or other specific taxpayer identifiers, such as account numbers. The United States had made a recent policy change to support information requests that identify a specific group of persons under investigation, even when those persons’ names are unknown.

Monday, January 23, 2012

Romney offshore accounts contain up to $32 million.

The Miami Hearld reports that Republican presidential candidate Mitt Romney owns investments worth between $7 million and $32 million in offshore-based holdings, which are often used legitimately by private equity firms to attract foreign investors. Such offshore accounts also can enable wealthy investors to defer paying U.S. taxes on some assets.

The six Romney offshore holdings are in investment funds run by Bain Capital, the private equity powerhouse he led in the 1980s and 1990s. The six funds are listed only by name and a range of amounts in Romney's financial records, but the Cayman addresses are in other corporate documents filed with the U.S. Securities and Exchange Commission and in foreign investment portfolios.
Five of the Cayman-based funds are included within a blind trust for Romney's wife, Ann, and worth between $2.8 million and $7.6 million.

A sixth fund, called Bain Capital Investment Partners Trust Associates lll, is part of Romney's IRA retirement account and worth between $5 million and $25 million.

Using offshore funds to attract foreign investors is a legitimate and standard business practice. Increased foreign investment in a U.S. fund based abroad could increase financial returns for American investors. Offshore funds offer advantages for U.S. investors looking to diversify their portfolios and for foreign investors seeking to avoid U.S. reporting and tax-withholding requirements.

Romney's taxpaying strategy may become clearer when he makes his 2012 tax returns available in April as he has promised.

Posting Supplied by Kevin E. Packman, Partner at Holland & Knight.

Friday, January 20, 2012

IRS's Right to Examine a Taxpayer's E-Mails

A recent advisory issued by the Chief Counsel's Office of the Internal Revenue Service ("IRS") sets forth the IRS's position on the procedures that its agents must follow in order to obtain a taxpayer's e-mails from his or her Internet service provider ("ISP").  

In I.R.S. Chief Counsel Advisory("I.R.S. C.C.A.") 2011-41-017 (July 8, 2011), the IRS interpreted provisions of the Internal Revenue Code relating to examination of a taxpayer's records, the Stored Communications Act ("SCA"), and a decision by the U.S. Court of Appeals for the Sixth Circuit, and concluded that there are certain restrictions on the ability of an IRS agent to issue a summons to a taxpayer's ISP, seeking the contents of a taxpayer's electronic communications. 

The Sixth Circuit, relying on the Fourth Amendment to the U.S. Constitution, recently held that since an Internet "subscriber enjoys a reasonable expectation of privacy in the contents of emails that are stored with, or sent or received through, a commercial ISP,  the government may not compel a commercial ISP to turn over the contents of a subscriber's emails without first obtaining a warrant based on probable cause."United States v. Warshak, 631 F.3d 266, 288 (6th Cir. 2010). 

However, the Chief Counsel also advised that with respect to the "contents" of a taxpayer's e-mails or other electronic communications that are more than 180 days old, there is a "warrantless" administrative summons procedure described in 18 U.S.C. § 2703(c)(2) that can be followed by an IRS agent in order to obtain such communications from the taxpayer's ISP.

Furthermore, the Chief Counsel noted that various federal courts "have recognized that a warrant is not required by the Constitution for a government entity to require an electronic communications provider to produce a customer's non-content information regarding an electronic communication."

The above-described rulings by the IRS provide up-to-date guidance as to the IRS's position on the procedures that an IRS agent must follow in order to review the content of a taxpayer's e-mails or other electronic communications. 

However, it should be noted that under I.R.C. § 6110(j)(3), the Chief Counsel's Advisory "may not be used or cited as precedent."

Wednesday, January 18, 2012

What Type & Form of Disclosure is Necessary to Avoid Penalties?

Revenue Procedure 2012-15 updates Rev. Proc. 2011-13, 2011-3 I.R.B. 318 and identifies circumstances under which the disclosure on a taxpayer’s income tax return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under section 6662(d) of the Internal Revenue Code and the purpose of avoiding the tax return preparer penalty under section 6694(a).
Revenue Procedure 2012-15 will appear in IRB 2012-7 dated Feb. 13, 2012.

Supreme Court Denies Review of Sixth Circuit's Decision that Property Held as Tenants By the Entirety is Subject to Forced Sale!

The U.S. Supreme Court denied review on Jan. 17 of the court of appeals ruling that a Michigan woman who did not owe unpaid taxes to the United States but owned a home with her tax delinquent husband as tenants by the entirety could not prevent the government from selling the property in a tax lien foreclosure (Barczyk v. United States, U.S., No. 11-710, cert. denied 1/17/12).
In U.S. v. Barczyk , No. 10-1498 (6th Cir. 8/17/11), the Sixth Circuit found that the federal government could force the sale of real property held as tenants by the entirety where only one spouse was delinquent and that the sale proceeds should be distributed equally between the federal government and the non-delinquent spouse. Accordingly, not only can joint creditors reach property held as tenants by the entirety, the federal government can also force a sale of property held as tenants by the entirety that is subject to a federal tax lien even if only one spouse is delinquent.
Advisors often recommend that married couples own their residence as tenants by the entirety because of the creditor protections afforded. However, in advising clients, it is important to note that joint creditors can always reach property held tenants by the entirety. Additionally, in light of the decisions in Barr and Barczyk, clients should also be advised that in the event that a tax lien is imposed on either spouse, the federal government can force a sale and that regardless of relative contributions to the purchase of the home or life expectancy, a non-delinquent spouse will receive only 50% of the proceeds of sale.
For more details on this matter go to: http://www.bna.com/us-barczyk-sixth-n12884903539/

Tuesday, January 17, 2012

Florida Poised to Pass an Internet Sales Tax?

According to an estimate by the National Conference of State Legislatures, Florida is projected to lose more than $1.4 billion in revenue in 2012 due to the online sales tax loophole. Florida policymakers are considering an “e-tax” law.

If any of the pending online sales tax bills make their way through the redistricting-focused legislative session this year, Florida would join the growing group of states that collect sales taxes on all Internet retailers.

As the law currently stands, only companies with a physical presence (a store, or warehouse) in Florida must pay the state’s 6 percent sales tax.

Trade groups representing business interests have converged on the Capitol this year to push for bills that would pressure online retailers on taxes.

At least three different e-tax bills are in play in Tallahassee — although it will be tougher to pass many laws this year, due to a budget shortfall and the once-a-decade task of redrawing the state’s political districts. There are also small-government activists who claim the bills would create a de facto tax increase on consumers at a time of high unemployment and economic hardship.

Since 1993, the department has run a program where it randomly inspects records of large trucks shipping goods along Florida’s major interstate highways. The department will then a letter to a Florida Resident Purchaser asking them to pay on their out of state purchase. Current law requires consumers to self-enforce the sales tax on their online purchases, but hardly anyone does so.

In Florida, the push to collect taxes from Internet retailers started nearly 10 years ago, but several bills have died in the Legislature. But this may change in Florida, as states across the country seek to boost local businesses and increase tax revenue by going after online retail giants like Amazon and Overstock.com.

After New York passed an online sales tax law in 2008, at least eight other states have followed suit, including five in the past year. This month, Indiana’s government inked a deal with Amazon in which the retailer will begin collecting sales tax in 2014.

Gov. Rick Scott said he could sign an e-tax bill if it included an equal-sized tax cut. One idea is an additional or expanded sales tax holiday for shoppers.

For more on this go to: http://www.miamiherald.com/2012/01/16/2592761/tallahassee-battle-lines-drawn.html

IRS Recently Revised Form 2848 - Power of Attorney

The IRS recently revised Form 2848, Power of Attorney and Declaration of Representative, and instructions. While the instructions to the revised form do not preclude using the prior version of the form, it is recommended that Tax professionals familiarize themselves with the revised form and begin using it.

Notable changes to Form 2848 include:

Part I -- Representatives/Notices and communications

 Line 2 of Form 2848 is to identify those individuals who are being authorized to represent the taxpayer. The information set forth on Line 2 includes the representative’s name, address, and other contact information. In addition to providing each representative’s Centralized Authorization File (CAF) number, the form now requests the preparer tax identification number (PTIN), where applicable.

In addition, Line 2 contains check boxes whereby two representatives  may receive copies of notices and other written communications. If the boxes are not checked, then the representatives will NOT receive copies of notices and other written communications the IRS sends to the  taxpayer.

Part I -- Acts authorized/Receipt of refund checks

Line 5 of the Form 2848 sets forth the authorized actions of a representative. The Form 2848 also contains certain actions that are not authorized to be undertaken by the representative unless specifically authorized by the taxpayer.

The actions that require specific authorization include substituting representatives, allowing the IRS to disclose tax return information to third parties, or signing certain returns. The revised Form 2848 contains boxes a taxpayer can check to indicate the taxpayer’s authorization for the representative to perform these actions.

Line 5 also makes clear that the representative is not authorized to receive or negotiate any amounts paid to the client in connection with representation, including refunds by either electronic means or paper checks.

Part I -- Identification/Signature of taxpayer 

Provides that if a joint return has been filed, each spouse must execute his or her own power of attorney

on a separate Form 2848 to designate a representative, even if the same representative is being appointed.

Part II -- Declaration of Representative  

 A new designation “(i)” has been added for “Registered Tax Return Preparer.” Additionally, the designations for student attorneys and student certified public accountants (CPA) have been combined into one designation “(k).”

The representative is also required to provide in addition to his or her licensing jurisdiction, the “License/Bar or Enrollment Number” where applicable.

The updated Form 2848 and corresponding instructions are posted on the IRS website.

Monday, January 16, 2012

Groupons...anotheir State Sales Tax Headache

The Groupon and other online voucher sites have created some interesting tax consequences.

How much is the sales price and who should pay it?

Florida seems to have taken the position that the merchant is responsible for tax on the original price of the goods the purchaser of the voucher is entitled to receive.

As a secondary issue, there may be some escheat / unclaimed property issues you or your client may not be aware of or never even imagined.

For more information go to Florida Tax Law Blog

Another Exception To Disregarded Entity Treatment

A new exception now has been added to the list.
Under final regulations issued under Section 881, the IRS can treat a disregarded entity in a financing structure as a person separate from its owner (that is, as a non-disregarded entity), in determining whether a financing arrangement exists that should be recharacterized under the multiple-party financing rules of Code §7701(l) and Treas. Regs. §1.881-3.

These rules allow the IRS to disregard the participation of one or more intermediate entities in a financing arrangement and recharacterize the financing arrangement as a transaction directly between other parties. It will often be applied where intermediate entities are employed by taxpayers to obtain treaty or other tax benefits that would not be available if a financing transaction was directly conducted between the ultimate lender and borrower.

T.D. 9562, 12/08/2011; Reg. § 1.881-3

Friday, January 13, 2012

Moving Accounts To Non Complying Banks -2012's Loophole?

Great article by Dick Harvey on FATCA. Will taxpayers defeat FATCA by moving their foreign accounts to foreign banks which don’t care if they can’t sell US securities? They may decide not to cough up the names and SSN’s of their “U.S. persons.” Those banks will be known as NP-FFI’s: non-participating foreign financial institutions.
Offshore Accounts: Insider’s Summary of FATCA and its Potential Future

Since its signing by President Obama on March 18, 2010, the Foreign Account Tax Compliance Act (FATCA) has been criticized by many in the financial community. As one of the architects of FATCA, the purpose of this article is to: (i) describe my perception of the origins of FATCA, (ii) discuss selected issues, and finally (iii) make recommendations that may ultimately be helpful to insuring FATCA’s success in both the short and long-run.

The article is written for several audiences. The entire article should be of interest to students and academics. For tax professionals and my former colleagues in government, the recommendations in Section 4 should be of most interest.

Since 2007 the US has made significant progress in addressing offshore accounts through a combination of tools, including the threat of FATCA. FATCA was a bold, unilateral action by the US intended to ultimately provide transparency surrounding offshore accounts of US taxpayers. However, FATCA will take time to successfully implement and there will be growing pains.

The long-term success of FATCA may depend upon whether the US can convince other countries to adopt a similar system, or better yet, join with the US in developing a multilateral FATCA system. Thus, as the IRS and Treasury implement FATCA they need to focus on the long-term goal. In the short-run various compromises will need to be made to ease the initial implementation of FATCA. Some of those potential compromises are discussed in this article. In addition, a multilateral FATCA system and the related benefits are discussed.

Finally, financial institutions worldwide should seriously consider attempting to help forge an international consensus. Although financial institutions will clearly incur substantial costs from FATCA, those costs may pale in comparison to the future costs that could be incurred over the next 5 to 20 years as other countries implement their own specific systems. It would be substantially cheaper for financial institutions if there is one global standard, rather than ultimately building separate FATCA type systems for each country.

Number of Pages in PDF File: 27
Keywords: FATCA, Offshore Accounts, Foreign Account Tax Compliance Act, Qualified Intermediary, and Voluntary Compliance Initiative

Thursday, January 12, 2012

Tax Court: State Law Protects Spouse Who Has Funds Seized From Joint Account

A Massachusetts woman whose joint bank account was seized by the Internal Revenue Service is entitled to an innocent spouse relief refund because state law says she owns half of the funds in the account, the U.S. Tax Court held Jan. 11 (Minihan v. Commissioner, T.C., No. 26595-09, 138 T.C. No. 1, 1/11/12).

Writing for the court, Judge David Gustafson explained that under Massachusetts law, petitioner Ann Marie Minihan had a half ownership interest in the joint account with her then spouse, John Minihan Jr., and she had a right to bring a post-seizure action under Internal Revenue Code Section 6015(g)(1) to establish her rights in the seized property and seek a judgment against the seizing creditor for the amount of the joint account that she owned.

Gustafson ruled Ann Marie's “refund claim is a post-levy assertion of her rights in the levied property and an avenue for her to recover what may belong to her.” He said “[t]he money in the joint account came from the sale of the couple's long-time marital house, in which they had made a home together during almost two decades of marriage.”

Tax Evasion Sharpen IRS Focus on International Issues

The Internal Revenue Service is increasing its efforts to tackle international issues involving employee benefit plans as more business is done globally and as tax evasion through the use of offshore accounts grows, speakers said Jan. 11 at a benefits conference.

“Experts estimate that Americans now have $1 trillion—trillion with a ‘t'—in assets offshore and illegally evade $40 [billion] to $70 billion in U.S. taxes each year [through] offshore tax dodges,” said Monika A. Templeman, director of IRS employee plans examinations, Baltimore. “That, in conjunction with all the legitimate business that's happening globally, makes international a very pressing area,” she said.

Other issues that have arisen as the global economy continues to grow include noncompliance and confusion, Templeman said. “There are language issues and all sorts of things that have barriers that we need to overcome to make sure we really have that transparency, and the fast pace of the global economy really requires us to have a fast pace of change servicewide,” she said.

The panelists spoke during the Washington update session at the American Society of Pension Professionals and Actuaries' Los Angeles Benefits Conference.

Wednesday, January 11, 2012

National Taxpayer Advocate battles IRS on terms of offshore voluntary disclosure program

The National Taxpayer Advocate (NTA) has issued a Taxpayer Advocate Directive (TAD), followed by ensuing correspondence between IRS and the NTA, alleging unfair treatment of certain participants in the 2009 offshore voluntary disclosure program (OVDP). According to the NTA, a memo issued by IRS on March 1, 2011 was inconsistent with earlier guidance from 2009 regarding examiners' discretion to settle cases and the applicability of the 20% offshore penalty for nonwillful violations.

The NTA characterized the memo as essentially presuming that all taxpayers who avail themselves of the OVDP are tax cheats, and thus was a switch from IRS's more nuanced original position. According to the NTA, this left those who were merely trying to correct honest mistakes, who were perhaps encouraged to participate in the program based on the earlier guidance, effectively unable to pursue a reasonable cause defense.

Background on the OVDP. The first OVDP was announced by IRS in 2009 and applied to those that voluntarily and timely disclosed unreported offshore income for 2003 - 2008. In February of 2011, IRS unveiled a second OVDP to give taxpayers with undisclosed income from hidden offshore accounts for the 2003 - 2010 period the chance to get current with their taxes. The 2011 OVDP was originally available through Aug. 31, 2011 but was extended through Sept. 9, 2011. It carried higher penalties than the original disclosure program but the penalties could be mitigated under certain circumstances (see Federal Taxes Weekly Alert 09/01/2011 for details.) IRS also recently announced a new program that carries a slightly higher penalty (see article in yesterday’s Newsstand e-mail about the reopening of the latest offshore voluntary disclosure program).

If the taxpayer enters into the OVDP, and finds the offshore penalty to be unacceptable, that he must indicate in writing the decision to withdraw from or opt out of the program. Once made, this election to opt out is irrevocable, and the taxpayer's case will be handled under the standard audit process. The opt-out option may reflect a preferred approach in instances where the results under the applicable voluntary disclosure program appear too severe given the facts of the case. To the extent that issues are found upon a full scope examination that were not disclosed by the taxpayer, those issues may be the subject of review by Criminal Investigation (see article on 2011 Offshore Voluntary Disclosure Initiative FAQ #51, covered in Federal Taxes Weekly Alert 02/10/2011.)

Background on Taxpayer Advocate Directives. The National Taxpayer Advocate (NTA) has the power to issue Taxpayer Advocate Directives (TADs) to mandate changes in IRS administration or procedure. This authority is intended to resolve any potential disagreements with other IRS operations. (IR 98-30)

The authority to issue TADs applies to changes recommended to improve operations or grant relief to groups of taxpayers, or to all taxpayers. The action must be needed to protect taxpayers' rights, prevent undue burden, ensure equitable treatment, or provide an essential service. A TAD will not be issued to interpret tax law.

Generally, the NTA first issues a Proposed TAD to the chief of the responsible area, with a set response date. That chief may agree to the proposed action, submit a counterproposal, or explain why the action cannot take place. The NTA may accept the response or work with the chief toward a solution. The NTA can issue a TAD if not satisfied with the outcome. The only way to appeal a TAD is for the Chief Officer of the function involved to go to the IRS Deputy Commissioner. The NTA can also issue an expedited TAD without first giving a proposed directive if it determines that a problem is immediate and has a significant impact on taxpayers. (IR 98-30)

The issue. FAQ #35, which was released by IRS in June of 2009 in association with the 2009 OVDP, asks whether examiners will have any discretion to settle cases. The answer reads as follows:

“Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes. If the taxpayer disagrees with the IRS's determination, as set forth in the closing agreement, the taxpayer may request that the case be referred for a standard examination of all relevant years and issues. At the conclusion of this examination, all applicable penalties, including information return penalties and FBAR penalties, will be imposed. If, after the standard examination is concluded the case is closed unagreed, the taxpayer will have recourse to Appeals.”

On Mar. 1, 2011, an IRS memo limited the instances in which examiners should exercise discretion in imposing a less-than-20% penalty. According to the NTA, this shifted position effectively negates the consideration of whether “taxpayers in the 2009 OVDP would pay less under existing statutes on the basis of non-willfulness or reasonable cause.” Rather, such taxpayers could either agree to pay more than they believed they owed, or withdraw from the program and potentially face stiff civil penalties and seek criminal prosecution.

The NTA argues that, under FAQ #35, “total penalties that would otherwise apply” should mean the total penalties that would be imposed after a standard examination; otherwise, taxpayers could be possibly subjected to excessive civil penalties and criminal prosecution and perhaps be worse off than if they hadn't entered the OVDP.

The TAD and its progeny. In Taxpayer Advocate Directive 2011-1, dated Aug. 16, 2011, the NTA directed that the Commissioners of the Large Business and International (LB&I) and the Small Business/Self-Employed (SB/SE) divisions take the following actions within 15 business days and, within 10 business days, provide the NTA with a written response describing the planned actions and any intent to appeal:

1.    Disclose the Mar. 1, 2011 memo for OVDP examiners that addresses the use of discretion in 2009 OVDP cases on irs.gov (whether or not it is revoked, see (2), below).

2.    Revoke the Mar. 1, 2011 memo and disclose such revocation.

3.    Direct all examiners that, when determining whether a taxpayer would be liable for less than the offshore penalty under “existing statutes” as required by FAQ #35, they should not assume the violation was willful unless the taxpayer proves it was not. Direct them to use standard examination procedures to determine whether a taxpayer would be liable for a lesser amount under existing statutes (e.g., because the taxpayer was eligible for the reasonable cause exception) without shifting the burden of proof onto the taxpayer.

4.    Commit to replace the Mar. 1, 2011 memo and all OVDP-related FAQs on IRS.gov with guidance published in the Internal Revenue Bulletin, incorporating comments from the public and internal stakeholders (including the NTA). It should reaffirm that taxpayers accepted into the 2009 OVDP will not be required to pay more than the amount for which they would otherwise be liable under existing statutes, as currently provided by FAQ #35, and direct OVDP examiners to use standard examination procedures to make this determination.

5.    Allow taxpayers who agreed to pay more under the 2009 OVDP than the amount for which they believe they would be liable under existing statutes the option to elect to have IRS verify this claim (using standard examination procedures), and in cases where IRS verifies it, offer to amend the closing agreement to reduce the offshore penalty.

In other words, the NTA asserted that IRS failed to properly implement FAQ #35, which practitioners had interpreted as suggesting that an examiner could consider a taxpayer's argument that his noncompliance was not willful or was otherwise deserving of reduced or no penalties. In turn, this resulted in inequitable treatment of taxpayers, in that it fails to distinguish between true tax evaders and those who made honest mistakes.

In their response dated Aug. 30, 2011, Heather C. Maloy and Faris R. Fink, the respective Commissioners of the LB&I and SB/SE divisions, agreed to disclose the Mar. 1, 2011 memo referenced in (1) but otherwise appealed the TAD. In contrast to the NTA's characterization of “total penalties that would otherwise apply,” the Commissioners argued that the relevant comparison should only involve “issues that can be resolved using the information available during the certification of the voluntary disclosure.” They claimed that the OVDP language makes clear that otherwise applicable mitigation standards weren't intended to apply during a verification exam.

In her Sept. 22, 2011 response to the appeal, the NTA re-asserted her primary concerns with the 2009 OVDP. She stated that, without FAQ #35, the OVDP penalty structure essentially assumes that all participants are tax evaders hiding money overseas, and doesn't account for those who are seeking to correct honest mistakes. She further expressed skepticism at IRS's “opt-out” option described in a June 11, 2011 memo, which provides that those who opt out will be subject to a complete examination of all relevant years and issues, then subject to all applicable penalties. In the end, the NTA characterized IRS's actions as a miscommunication and called on IRS to create a “fair process” to evaluate willfulness and reasonable cause, with the burden of proof on IRS.

On Oct. 14, 2011, Steven T. Miller, Deputy Commissioner for Services and Enforcement, sent a memorandum to the NTA agreeing to request (1) and rescinding actions (2) through (5). He stated that the relief generally sought by the NTA was provided in the existing opt-out procedures, which expressly state that it may be preferable for certain taxpayers to opt out of the 2009 or 2011 OVDP.

Decision now lies with the Commissioner. Deputy Commissioner Miller's memorandum now elevates the issue to IRS Commissioner Doug Shulman. It remains unclear how he will respond, although his public pronouncements on the OVDP have been overwhelmingly positive to date, including the recently issued IR 2012-5.

Documents related to this article can be accessed at the following links:

·        The Mar. 1, 2011 memo can be viewed at http://www.irs.gov/pub/irs-drop/ovdi_memo_use_of_discretion_3-1-11.pdf.

·        IRS's Frequently Asked Questions (FAQs) on the offshore voluntary disclosure initiative can be viewed at http://www.irs.gov/newsroom/article/0,,id=210027,00.html.

·        LB&I's and SB/SE's appeal of the Taxpayer Advocate Directive can be viewed at http://www.irs.gov/pub/irs-utl/sb_lbi_appealtad_2011-1.pdf.

·        The National Taxpayer Advocate's response to the Appeal can be viewed at http://www.irs.gov/pub/irs-utl/ntamemo_appealtad2011-1.pdf.

·        The Deputy Commissioner's partial rescission of the Taxpayer Advocate Directive can be viewed at http://www.irs.gov/pub/irs-utl/dcir_memo_tad_2011-1.pdf.

Source RIA Newsstand 1/11/2012.