IRS Identifies Gift Tax Non-Filers Using State Property Records

According Forbes, Josephine Bonaffini, the Federal/State Coordinator for the IRS Estate and Gift Tax Program, between sixty percent and ninety percent of taxpayers fail to file a gift tax return despite having engaged in a transaction requiring a return.

Although gift tax audits are historically rare, the IRS has examined hundreds of taxpayers in the last two years whom the IRS suspects made large gifts, yet failed to file the appropriate returns.

Borrowing from techniques long employed to identify noncompliant taxpayers in the income tax context, the IRS is using records obtained from third parties—namely, land records maintained in state and county offices—to root out intra-family land transfers for little or no consideration.

According to Bonaffini, in the past two years, 323 taxpayers have been audited for failure to file gift tax returns relating to gifts of real property, 217 cases were still under examination, and another 250 cases were being researched to determine whether to conduct gift tax audits. At the time, the IRS had determined that ninety-seven taxpayers had violated gift tax reporting requirements by failing to file, and just twelve cases resulted in assessment of tax and penalties.

The recent flurry of gift tax compliance activity took many in the tax community by surprise. The compliance initiative received no appreciable public attention until the recent dispute in California federal court where the District Court for the Eastern District of California, refused to enforce the IRS' John Do Summons against the California Board of Equalization (“BOE”) where it refused to voluntarily turn over this requested information. The court’s denial of the government’s petition may embolden additional states to refuse the IRS’s request for records.

As National Debts Pile Up, Tax Evaders Face Greater Scrutiny

NY Times-London - Disputes are raging from Athens to Washington about how to reduce government debt without further damaging already weak economies.  But there is at least one thing on which global leaders seem to agree: cracking down on tax havens and tax evasion would help. 

Tax evasion and compliance was on the agenda of the meeting of the Group of 20 countries in Cannes amid hope that the economic crisis has given policy makers new impetus to push for a coordinated attempt to hunt for some of that offshore wealth. 

Assets held offshore by individuals worldwide have probably almost doubled from $11.5 trillion six years ago, according to the Tax Justice Network, a nongovernmental organization. 

Efforts to go after tax evaders range from investing in technology and hiring tax officers to working with the O.E.C.D. to reach agreements governing tax havens. 

Whatever steps are taken, policy makers agree that it takes international cooperation and initiatives by individual countries to reduce tax evasion.

Willful Failure to File FBARs - What if you Really Did not Know?

BNA - Over the past three years, the U.S. government has intensified its pursuit of taxpayers who fail to pay taxes on money held in foreign bank accounts; this includes a massive increase in criminal investigations and prosecutions.

While “willfulness” is generally recognized to be a high legal standard requiring proof that the accused acted in conscious violation of a known legal duty, IRS's published guidance and filed actions suggested the IRS believed it could do more with less.

But two recent cases—an FBAR case out of the U.S. District Court for the Eastern District of Virginia and patent infringement case out of the U.S. Supreme Court—call both assumptions into significant question.

FBAR enforcement will continue to be a powerful tool for IRS. But in cases where knowledge is a contested issue, the government will have to do more than it has previously done. Cases based upon what a taxpayer should have known or could have discovered based on knowledge of a substantial risk will not satisfy the standards established by Williams and Global-Tech.

If you really did not know, you really did not know.

IRS On Track to Issue Proposed Rules, Draft Bank Agreement Under FATCA

Internal Revenue Service is “on track” to issue proposed regulations on the Foreign Account Tax Compliance Act (FATCA) around the end of the year, a top IRS international official said Nov. 17.

IRS Large Business & International Division Deputy Commissioner (International) Michael Danilack said if the guidance does not come out by Dec. 31, he expects it will be issued shortly thereafter.

Danilack said that along with the regulations, IRS hopes to issue a draft agreement for foreign financial institutions that want to start reporting U.S.-owned accounts to U.S. tax authorities under FATCA. The law requires such reporting or banks may face a 30 percent withholding tax.

The IRS official said if the draft agreement does not come out together with the rules, it will be issued soon after that guidance is released. He said IRS is envisioning a system where banks will be able to apply online and will be immediately given an identification number. “We're in very good shape on that,” Danilack said.

In another key point, the official said he expects that there will be bilateral agreements between the United States and other countries on the implementation of FATCA.

Switzerland Eases Rules on Account Data Transfer for U.S. Clients of Swiss Banks

The government of Switzerland has agreed to ease existing rules on the transfer of information on secret Swiss bank accounts of U.S. clients in a further effort to diffuse tensions with the United States over funds hidden away in Swiss banks.

The Swiss government announced Nov. 16 that the Federal Council, the government’s executive arm, adopted amendments to a June 1998 ordinance on the implementation of an existing 1996 U.S.-Swiss double taxation agreement.

The amendments will allow U.S. requests for information on U.S. clients suspected of tax fraud to be made under the existing 1996 treaty based on “certain patterns of behavior” rather than requiring the identification of the U.S. taxpayer.

The decision follows the Nov. 8 admission by Swiss tax authorities that they had received a U.S. request for administrative assistance in suspected cases of tax fraud, based on the 1996 double tax agreement. A spokesman for Credit Suisse, Switzerland’s second largest bank, confirmed the same day that the bank was ordered by Swiss tax authorities to hand over information with regard to accounts of domiciliary companies belonging to certain U.S. persons as beneficial owners.

Is Domestic Asset Protection Dead?

There has been quite a bit of buzz about a recent bankruptcy case involving an Alaska asset protection trust. However, the case merely confirms a weakness in the use of domestic asset protection trusts that was obvious even before this case.  

Domestic asset protection trusts (DAPTs) promise the holy grail of creditor protection - a trust where the settlor/grantor can transfer assets to, be a discretionary beneficiary of. but still have the assets of the trust be protected from the settlor's/grantor's creditors. Alaska, Delaware, and Nevada are three popular jurisdictions for these trusts.

There are open questions about the effectiveness of the trusts for creditor protection purpose, including enforceability across state lines under the U.S. Constitution. A major issue is the 10 year voidability provision of 11 U.S.c. Section 548(e) that entered the U.S. Bankruptcy Code in 2005.

In Battley v. Mortensen, a bankruptcy court in Alaska found that a transfer to a DAPT could run afoul of 11 U.s.e. Section 548(e), even though the debtor was solvent at the time of creation of the trust.
The court noted:  

"when property is transferred to a self-settled trust with the intention of protecting it from creditors, and the trust's express purpose is to protect that asset from creditors, both the trust and the transfer manifest the same intent. In this case, I found that the trust's express purpose could provide evidence of fraudulent intent."

Since a debtor can be placed in bankruptcy by his creditors on an involuntary basis, one cannot simply avoid this exposure by not filing for bankruptcy protection.

The result in Mortensen is clear: Domestic Asset Protection Trusts don’t protect assets from creditors for the first ten years after the trust is settled.

As we have been advising clients for years, only a Foreign (Non US) Juridiction can provide certainty of your asset protection solutions.  With Domestic Asset Protection, you never KNOW that you do not have it until, a US Judge decides that you do not have it!

Swiss Parliament Approves Amended U.S.-Switzerland Tax Treaty

A Swiss parliamentary committee Nov. 10 gave its go-ahead to proposed amendments to a new U.S.-Swiss double taxation treaty that would make it easier for U.S. authorities to seek information on secret bank accounts held by U.S. taxpayers with Swiss banks.

The amendment allows for the handover of files on suspected tax offenders to the U.S. in cases where the U.S. authorities don’t know the identities of American holders of Swiss bank accounts and are basing requests for information merely on certain patterns of behavior.

According to the amendment, Switzerland will only grant administrative assistance in cases where the U.S. tax authorities produce clear evidence of a suspected offense, Eugen David, the president of the committee, told reporters in the capital, Bern. In addition, they must detail the pattern of behavior and explain why they need the information.

There must be evidence of wrongdoing by the Swiss bank where the U.S. client had the account and the mere fact that a U.S. citizen had an account with a Swiss bank isn’t sufficient, David said.

The Council of States decided on Sept. 21 to send the amended treaties back to the foreign affairs committee. The upper house “wants to wait until the Federal Council makes clear progress towards a comprehensive solution to the tax dispute with the United States.”

For more information go to: http://www.businessweek.com/news/2011-11-10/swiss-parliament-panel-approves-amendment-to-tax-deal-with-u-s-.html